The CARES Act made no changes to Roth IRA withdrawal ordering rules. A tax-free qualified distribution from a Roth IRA is possible if the Roth IRA owner has had a Roth IRA open for at least 5 years and one of the following events has occurred: attainment of age 59 ½, disability, first-time home purchase or death. If these requirements are met, then the CRD would be completely tax-free, and no taxes would be owed on the “growth.” If the above requirements for a tax-free distribution have not been satisfied, the individual will have a non-qualified distribution which follows certain ordering rules. Thus, the first dollars withdrawn from a Roth IRA are deemed to come from Roth IRA contributions, which have already been taxed. Once the contributions are withdrawn, the next dollars out come from conversions, which will also be tax free since the tax was paid upon conversion.
However, If the converted amount hasn’t been held for 5 years, withdrawals of those funds, while tax free, can be subject to a 10% penalty if taken before age 59 ½. Distributions that are CRDs will not be subject to the 10% tax.
Once the converted funds are exhausted, the last funds available for withdrawal will be earnings; earnings are subject to BOTH income tax and 10% premature distribution penalty when withdrawn before the 5 years and age 59 ½. Here, the distributions that are CRDs are not subject to the 10% premature distribution penalty and income tax liability may be spread over three years.