What Happens If I Sell My Roth IRA?
The phrase "sell my Roth IRA" refers to one of two transactions. The first is liquidating an investment within the IRA, to either change investments, or prepare for a distribution -- the second type of transaction. The first keeps money in the Roth IRA, while the second is the method of removing assets from the IRA, typically for retirement income purposes.
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Keeping Money In
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There are some investors who don't see the purpose of keeping money in a Roth IRA once they retire. After all, the distributions after age 59 1/2 are tax-free, so there's no tax liability to worry about. However, keeping the money in the IRA allows the assets to continue to grow tax-free. This is important to consider, especially if you're considering changing investments. Remember that you can conduct a tax-free transfer from one IRA custodian to the other, and change the investment, without losing the tax-free benefit. The only way you could get tax-free growth outside the IRA, is with low-yield municipal bonds. There are many more options with different IRA custodians like banks, brokerage firms and insurance companies, offering different investments such as bonds, stocks, mutual funds, and even real estate.
Roth Distribution
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If a distribution is what you intend, you're taking money out of the IRA. Of course, you'd first have to sell an investment in the IRA to have cash to distribute. For example, if you have $15,000 in your Roth IRA invested in mutual funds, and you need to get $3,500 in cash, you need to liquidate some of your mutual funds. You don't need to liquidate all -- only what you need. Then you fill out a distribution form. As long as you've owned the IRA for at least five years and are at least 59 1/2, the distribution is tax-free.
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Taxable Distribution
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There are situations where distributions coming out of the Roth IRA are not tax-free. The IRS states you must be 59 1/2 and own the IRA for five years before you can take a tax-free distribution. So if you open an IRA at age 60, your tax-free distributions won't start until age 65, when you have satisfied the five-year requirement. Any distributions taken before these thresholds are met, are taxable. But what gets taxed? The principal money and your contributions are after-tax dollars; they won't get taxed again. The earnings, however, will. The earnings distributions are added to gross income, with a 10 percent penalty added.
Considerations
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There are some early distribution exceptions allowed by the IRS for a Roth IRA. "Exception" means you're taking an early distribution, but without the 10 percent penalty; however, you still add the earnings to gross income. One exception is the ability to buy, build or remodel your first home. The key condition to qualify for the exception is "first home." Based on the IRS regulations of this exception, buying a first home actually refers to having not owned a residence in the previous two years. As you begin the escrow or construction process of the first home, you can take out $10,000. The home can be for yourself, a child or grandchild. You have unlimited access to pay college expenses for yourself, a child or a grandchild as well.
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