How to Know About Roth IRA Withdrawal Rules
A Roth IRA is a great choice of investment vehicle towards saving for your retirement. The Roth IRA allows you to contribute up to $5,000 per year starting in 2008 ($6,000 if you are over 50), which will increase by about $500 per year with some adjustment for cost of living increases. If you have earned income each year, and you don't make over the adjusted gross income limits, you'll be able to make Roth IRA contributions each year. You can also select a wide variety of investments, such as mutual funds, stocks, bonds and certificates of deposit, to place your Roth IRA funds. Roth IRA's do have some limitations on accessing your money if you need to withdraw it early. Here's how to know what the Roth IRA withdraw rules are.
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Instructions
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Understand that you can withdraw your contributions at any time without a penalty. This means that whatever amount you contributed to the Roth IRA, you can withdraw. If you contributed $4,000 in 2006 and $4,000 in 2007, you could take out $8,000 in 2008 and there would be no penalty and no tax consequences.
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Know that if you withdraw any of your earnings before you hold the IRA account for five years, you may be subject to penalties and taxes. If the withdraw is from a converted traditional IRA, you won't owe taxes, but you will owe penalties.
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If you hold the Roth IRA account for at least five years, there are three ways to withdraw money and not have to pay taxes or penallties on it. The first is reaching the age of 59 1/2. The second way to withdraw with no penalties or taxes is if you die or are disabled. This means that the person who receives your estate with the Roth IRA can use the money with no penalty or taxes. Or, if you become disabled, you can withdraw the money. The third way to withdraw penalty and tax free is for use of a first time home purchase up to $10,000. This means you can withdraw up to $10,000 towards your home purchase.
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If you hold the Roth IRA account for over five years, there are some withdraws that are not subject to penalties, but are subject to taxation on the earnings portion only. These are called penalty exceptions. There are a few of these. One is for unreimbursed medical expenses over the 7.5 percent of adjusted gross income requirement. You can withdraw the money, but only the amount over the 7.5 percent requirement. So, if you have medical bills over the 7.5 percent of your agi of $5,000, you can withdraw this amount and only pay taxes on the earnings.
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A second penalty exception is qualified higher education expenses. Qualified higher education expenses include tuition, books, fees, supplies and equipment needed for attendance at an eligible higher education institution. Certain room and board expenses can also qualify, if the student attends college at least half time.
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A third penalty exception for withdrawing funds early from your Roth IRA is to pay medical insurance premiums after you lose your job.
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Other penalty exceptions include distributions that are part of substantially equal periodic payments, money taken by an IRS levy of the Roth IRA qualified plan or a qualified reservist distribution.
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For more information, you can read IRS Publication 590, viewable online at the site listed in the resources.
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Tips & Warnings
The penalty on early or nonqualifying withdraws from your Roth IRA is a 10 percent additional tax on the money you withdrew, in addition to the regular taxes that would be owed on the withdraw.
If you make a withdraw from your Roth IRA that is a penatly exception, you will not have to pay taxes on the portion that was your original contribution to the IRA.
For more information, you can read IRS Publication 590, viewable online at the site listed in the resources.
Think carefully before you withdraw money from your Roth IRA. You can only contribute a certain amount to your Roth IRA each year, so you may never be able to catch up and get the same amount of money back into your Roth IRA to benefit you the most in retirement if you withdraw funds.
