Identification

• When you take an early Roth IRA distribution, contributions come out first. After the contributions have been withdrawn, contributions rolled into the account come out in the order they were added. Finally, earnings come out.
  
  

Significance

• The ordering rules matter because contributions can always be withdrawn tax-free and penalty-free. Withdrawals of rollover funds are subject to an early withdrawal penalty if taken out within five years of being added. Withdrawals of earnings are subject to income taxes and penalties unless an exception applies, such as medical expenses exceeding 7.5 percent of your adjusted gross income.
  
  

Misconceptions

• The ordering rules do not apply when you take a qualified distribution because all Roth IRA distributions, regardless of whether it comes from contributions, rollovers or earnings, comes out tax-free. Qualified distributions refer to money taken out after the Roth IRA has been open for at least five years and you are either at least 59 1/2 years old, permanently disabled or using no more than $10,000 for a first home purchase.