Sometimes people want to access Roth IRA funds for early retirement or other purposes. Maybe you’re one of them. If you have ever thought about taking money out of a Roth IRA, be sure to consult your financial advisor first before you make a move ⦠and keep the factors mentioned below in mind.
You can withdraw regular contributions tax-free, but not your earnings. This is a critical distinction, and many Roth IRA owners don’t seem to know about it.
When you withdraw assets from a Roth, there is a set order in which contributions and earnings must be distributed – the IRS ordering rules for distributions.1
So in other words, merely withdrawing your regular contribution will not trigger tax. But if your Roth has realized earnings from contributions, the earnings will be subject to income tax if they are withdrawn.
Is your withdrawal a qualified distribution? Here’s another important consideration. If you have owned your Roth IRA for less than 5 years and/or are younger than age 59½, you risk taking a nonqualified distribution if you withdraw money from it. You know what that means â a 10% penalty for early withdrawal in addition to taxes. (There are some exceptions to this outlined in IRS Publication 590, which is certainly worth reading.)1
If you have owned your Roth IRA for more than 5 years â¦
You can withdraw nontaxable conversions to your Roth IRA at any time.3
Watch the 5-year clock. Yes, how is the 5-year period preceding a qualified distribution measured? The clock starts on January 1st of the tax year of your initial contribution, conversion or rollover to a Roth IRA. For example, let’s say you opened up a Roth IRA account on January 1, 2007. On January 1, 2012, your Roth IRA will meet the five-year test.1
What if you have multiple Roths? Well, when it comes to distributions, the IRS has some aggregation rules for you.You will have to figure out the taxable amounts withdrawn, distributions and contributions using a little addition. You must â¦
There are additional rules for recharacterized contributions that end up in a Roth IRA.
If all this makes you want to talk to a financial advisor or accountant, before you take money out of your Roth IRA ⦠well, that is a wise step to take. Confer with the financial or tax advisor you know and trust.
This does not constitute an endorsement by John Jastremski, The Retirement Group or the author of the book. The opinions expressed are solely those of the author and may or may not be a representative opinion of The Retirement Group or John Jastremski.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
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Citations.
1 irs.gov/publications/p590/ch02.html#en_US_publink10006523 [12/4/09]
2 investopedia.com/ask/answers/179.asp?viewed=1 [12/4/09]
3 smartmoney.com/personal-finance/retirement/nine-frequently-asked-questions-about-iras-7950/ [1/21/09]
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We are a group of financial professionals who focus entirely on retirement planning and the design of retirement portfolios for the corporate transitioning employee.
John Jastremski is a Representative with QA3 Financial and may be reached at The Retirement Group 800-900-5867
