Do You Know Roth IRA Withdrawal Rules?

Roth IRAs are one of the most popular retirement savings options.

They are also one of the most flexible.

However, there may come a time when you need to withdraw the funds.

To make sure that you don’t get a rude shock with penalties and taxes, you need to be familiar with Roth IRA withdrawal rules.

This means your Roth IRA withdrawals must be qualified distributions, or those which are tax-free and penalty-free.

What are Roth IRA qualified distributions?

According to Roth IRA withdrawal rules, you can withdraw the principal any time, without paying penalties.  Generally, you cannot withdraw the earnings without penalty before you are 59 ½ years old, but you can at any point after you are 59 ½, provided your earnings have been in your account for at least 5 years.

There are also exceptions to these rules that your financial advisor can tell you about. In short, you can withdraw funds from your Roth IRA as long as the withdrawal amount is less than or equal to the amount you have contributed. For one thing, it is your money, and since your Roth IRA is funded with after tax dollars, you have already paid tax on it. Only your earnings or gains are taxed, not your contributions.

Here’s an example: Suppose you contributed $5000 to your Roth IRA last year. This year, you need the $5000. In the meantime, your $5000 has grown ten percent to $5500. You can withdraw the initial $5000 contribution without tax or penalty at any time. If you withdraw the $500 in earnings, you will incur an early withdrawal penalty of ten percent as well as the tax you ordinarily pay on that amount.

Remember, your Roth IRA earnings need to be in your account at least five tax years to enable you withdraw the money tax- and penalty-free after you are 59 ½.

In another example, suppose Jack opened his Roth IRA in 2007 when he was 58 years with an initial investment of $5000. In 2009, when he is 60 years old, he cannot withdraw the investment gains on his $5000 contribution without incurring taxes. Why? Because the five-year period is not yet over. He will have to wait until 2012 to withdraw his gains without paying taxes and penalties. Jack has until April 15, the tax deadline, to contribute to his Roth IRA. That is why he has to wait until 2012.

Exceptions to the early Roth IRA withdrawal rules

Do the above Roth IRA withdrawal rules mean you cannot touch your gains before you are 59 ½ or before the five-year rule without paying taxes or penalties? No. There are exceptions.

There is no penalty or tax if you a) die and your beneficiary closes your account; b) are disabled; c) need to withdraw the funds for medical expenses; d) buy your first home; or e) use it for higher education or various other situations. To take advantage of one of these exceptions, you should talk to an investment consultant first to avoid being hit with taxes or penalties.

Is there an order in which you take your Roth IRA withdrawals in order to avoid tax and penalty? Yes - first, withdraw your regular contributions, then conversion or rollover contributions (first in, first out) and, finally, earnings or gains.

The flexibility of a Roth IRA withdrawal is in its tax-free and penalty-free contributions.

Just because this is possible, however, does not imply that you should withdraw funds.

It is not just about saving on your taxes or avoiding penalties - it is also about affecting the long-term growth of your retirement funds.

With a Roth IRA, you are also able to spread out your tax liabilities.

Always think twice about your long-term financial goals before choosing a Roth IRA withdrawal.

Return from Roth IRA Withdrawal to Roth Ira


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