Here's a summary of the changes. New Ordering Rule for Roth Withdrawals. When it revised the rules, Congress decided not to require separate Roth accounts for annual contributions and rollover contributions. As a result, an ordering rule for distributions is needed to apply the tax rules discussed later in this letter. These amounts always come out tax and penalty free.
Withdrawals next come from rollover contributions to the account, if any.
From each rollover contribution, withdrawals come first from the taxable amount, then from the nontaxable amount if any. The rules for withdrawals consisting of taxable rollover contributions are complicated and are explained later in this letter. Withdrawals of nontaxable rollover contributions come out tax and penalty free. After all the contribution dollars have been taken out, subsequent withdrawals consist of earnings accumulated in the Roth account. Four-Year Spread of Income from 1998 Rollovers Now Optional.