The Roth is a popular retirement arrangement with several advantages over traditional ira’s. Money contributed is taxed as earned income but is tax free when taken out, and making a roth ira withdrawal is simple when compared to other plans.
Contributing
This article is really about making withdrawals, but just to review the contribution rules:
-Contribute up to $5,000 maximum per year if under age 50; $6,000 if over age 50.
-A maximum earnings of $166,000 for couples who are married and file a joint return for income taxes; maximum earnings of $100,000 for singles, and for singles filing as head of household, $114,000.
-Contributions cannot be overlapped; if the five or six thousand is not used in one year, the balance can not be contributed in the following year.
Taking Distributions
A qualified distribution from the Roth account is one in which the account holder is at least 59 ½ and has had the account opened for at least five years. There is no age limit at which the holder is required to take out money. Other qualified payments include distributions made to the designated beneficiary after the death of the owner, to the account owner if they become disabled, and for use to buy a new home.
Unqualified distributions are subject to a 10% penalty; and note, any money taken out before the waiting period of five tax years has expired will be considered a non-qualified distribution, and subject to a 10% penalty. There are exceptions to this, however. One can withdraw funds from their Roth ira account if they are part of the original contribution.
For example, if the original amount was $10,000, and the interest earned was $1200, the $10,000 can be withdrawn at any time, tax and penalty-free; the interest earnings would be subject to the regular distribution rules. This amount is free and clear because the original amount has already been taxed.
Penalties and Multiple Accounts
For holders of more than one Roth ira withdrawals must be made in a specific order. This is specifically listed as:
First: Distributions from non-taxable contributions in a year which are not funds converted from another account.
Second: From contributions converted from other accounts, in the order they were converted.
Third: From the interest earnings.
Any amount withdrawn before the age of 59 ½ and the five tax year waiting period is subject to the 10% penalty. Other than the exceptions listed above, here are a few more:
-To pay for medical expenses not covered or reimbursed by insurance.
-To make tax bill payments owed to the IRS.
-To cover insurance premiums on medical expenses if the owner has been receiving unemployment insurance for at least 12 weeks.
Always consult with a professional before assuming you are eligible to make an early withdrawal without penalty. Ideally, the money will be left to grow until you are at least of the minimum age for distribution, and the funds have sat for five tax years. Under these terms, you are free to take out any and all of the money, tax and penalty free.
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