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A Few Of The Major Exceptional Roth IRA Withdrawal Rules Which Might Aid You To Take Money Out Of Roth IRA
Roth IRAs are controlled by the IRS; as such there're many Roth IRA withdrawal rules that should be followed before you take money out of your account.
In this article we will discuss Roth IRA distributions; when they could be taken, when and if they are taxable, when and if penalties might apply, and any exceptions to Roth IRA withdrawal rules.
Usually, distributions that are considered "qualified" and distributions that represent contributions you made to the Roth IRA aren't taxable. In addition, Roth IRA funds that are transferred from an account to another (Roth IRA ), are also not taxable.
However, Roth IRA withdrawals that are not "qualified" or isn't a return of your original contributions might be subject to taxes and/or penalties.
Roth IRA Contributions Could Be Withdrawn Tax Free at Any Time
Let's talk about return of contributions first. What this means is that you could get the contributions made to your Roth IRA out at anytime, for any reason, without taxes or penalties. Most people are unaware of this rule, and it is a crucial one. The ability to get your contributions out tax and penalty free makes the Roth IRA a very convenient investment vehicle.
The ability to get your contributions out at any time means you can use your Roth IRA as an emergency fund, to save for college costs, or for any financial objective. Let's hope Congress doesn't ever change this rule!
Qualified Distribution Rules for Taking Earnings From a Roth IRA
While you're able to get your contributions out at any time without worrying about paying taxes and/or fines, this is not true for the earnings on your contributions. To get the earnings from your Roth IRA without paying taxes or penalties, you should follow the "qualified distribution" rules.
So what is a qualified Roth IRA distribution? Based on the IRS, a qualified distribution is a Roth IRA withdrawal that:
1. Is made five years after the Roth IRA is setup and contributed to, or
2. Is made:
- When you reach age 59 1/2,
- Because you are disabled,
- To a beneficiary (or your estate) after death, or
- Meets the first time home buyer exception (more information later)
Any withdrawals that meet the requirements above will not be subject to income taxes. However, if you take a distribution that's not considered a qualified distribution, you might have to pay a 10% penalty on the amount withdrawn.
Exceptions to Early Withdrawal Penalty
If you take a withdrawal out of a Roth IRA that does not represent your original contributions, or isn't a "qualified" distribution as defined earlier, then you might be subject to a 10% penalty (the IRS calls this additional tax). Thankfully, there are many exceptions to the 10% early withdrawal penalty.
Following are some situations in which the 10% early withdrawal penalty may not apply:
- You're age 59 1/2 or older,
- You are disabled,
- You qualify as a first time home buyer (distributions of up to $10,000 could be taken penalty free to be used towards the purchase of your first home),
- The distributions are a part of a series of substantially equal payments (i.e., these payments must usually last for five years or until you reach age 59 1/2, whichever is longer),
- You are using the withdrawal to pay for huge un-reimbursed medical expenses, or
- The distribution is being used to pay for qualified higher education expenses.
There're some other exceptions, but these are the main ones.
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