Are you considering a contribution to a Roth IRA or a conversion of some or all of the funds in a traditional IRA to a Roth? The Roth offers the appeal of 100% tax-free distributions in the future, usually in retirement. But the tax exemption isn’t automatic—not by a long shot. What’s more, if you’re below a certain age threshold, you may be slapped with an extra tax penalty on top of the regular income tax you’ll owe on nonqualified distributions.

Fortunately, you probably have more leeway than you think. In fact, under the “ordering rules” established under IRS regulations, most of the payout of a nonqualified Roth distribution may be tax-free anyway—maybe even all of it!

Basic rules: There’s no current tax break for contributing to a Roth or converting traditional IRA funds into a Roth. However, qualified distributions from a Roth IRA existing for at least five years are 100% exempt from federal income tax. For this purpose, qualified distributions include those made in the following situations:

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After attaining age 59½;

Made due to death or disability; or

Used to pay qualified homebuyer expenses (up to a lifetime limit of $10,000).

The problem for some taxpayers is that they have to keep their hands off the Roth money for at least five years. To add insult to injury, you’re hit with the 10% penalty tax if you’re under the magic age of 59½. But you have an ace up your sleeve: Roth payouts are taxed under favorable ordering rules.

Specifically, the IRS says that funds are treated as being distributed from a Roth IRA in the following order.

1. Roth IRA contributions. This means you can withdraw any amount you contributed tax-free in any event.

2. Contributions from converting a traditional IRA into Roth status (i.e., “taxable conversion contributions”). These may be withdrawn tax-free even if they are part of a nonqualified distribution, but the 10% penalty tax generally applies to withdrawals within five years, unless you’re age 59½ or older.

3. Contributions from converting nontaxable traditional IRA balances into Roth IRA status (i.e., “nontaxable conversion contributions”). Such contributions may also be withdrawn on a tax-free basis subject to the 10% penalty.

4. Earnings within the Roth IRA. These amounts are taxable when withdrawn unless they meet the definition of qualified distributions. In addition, the 10% penalty tax applies to withdrawals made before age 59½.

As you can see, federal income tax on a distribution isn’t triggered until you’ve worked your way through the first three categories. For many individuals with a sizeable amount in a Roth, distributions won’t be taxable at all, even if funds are withdrawn within five years of setting up the account.

Final words: Keep these ordering rules in mind when you have to make Roth withdrawals earlier than expected. The tax damage may be nominal or nonexistent. Your professional advisor can provide additional guidance if needed.