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A Few Key Exceptional Roth IRA Withdrawal Rules That Might Assist You To Take Money Out Of A Roth IRA
Roth IRAs are controlled by the IRS; as such there are a lot of Roth IRA withdrawal rules that must be followed before you take money from your account.
Here we'll discuss Roth IRA distributions; when they could be taken, when and if they're taxable, when and if penalties might apply, and any exceptions to Roth IRA withdrawal rules.
Generally, distributions that are considered "qualified" and distributions that represent contributions you made to the Roth IRA are not taxable. Additionally, Roth IRA funds which are transferred from one account to another (Roth IRA ), are also not taxable.
But, Roth IRA withdrawals that are not "qualified" or isn't a return of your original contributions may be subject to taxes and/or penalties.
Roth IRA Contributions Can Be Withdrawn Tax Free at Anytime
Let's discuss about return of contributions first. What this means is that you can get the contributions made to your Roth IRA out at anytime, for any reason, without taxes or fines. Most people are unaware of this rule, and it is a vital one. The ability to get your contributions out tax and penalty free makes the Roth IRA a very flexible investment vehicle.
The ability to get your contributions out at anytime means you could use your Roth IRA as an emergency fund, to save for college expenses, or for any financial objective. Let us hope Congress doesn't ever change this rule!
Qualified Distribution Rules for Taking Earnings From a Roth IRA
While you are able to get your contributions out at any time without worrying about paying taxes and/or penalties, this isn't correct for the earnings on your contributions. To get the earnings out of your Roth IRA without paying taxes or penalties, you should follow the "qualified distribution" rules.
Therefore what is a qualified Roth IRA distribution? Based on the IRS, a qualified distribution is a Roth IRA withdrawal that:
1. Is made 5 years after the Roth IRA is setup and contributed to, or
2. Is made:
- Once you reach age 59 1/2,
- Since you're disabled,
- To a beneficiary (or your estate) after your death, or
- Meets the first time home buyer exception (more information later)
Any withdrawals that meet the requirements above won't be subject to income taxes. However, if you take a distribution that's not considered a qualified distribution, you may have to pay a 10% penalty on the amount withdrawn.
Exceptions to the Early Withdrawal Penalty
If you take a withdrawal from a Roth IRA that doesn't represent your original contributions, or is not a "qualified" distribution as defined earlier, then you might be subject to a 10% penalty (the IRS calls this extra tax). Thankfully, there are many exceptions to the 10% early withdrawal penalty.
Following are several situations in which the 10% early withdrawal penalty may not apply:
- You are age 59 1/2 or older,
- You're disabled,
- You qualify as first time home buyer (distributions of up to $10,000 can be taken penalty free to be used towards the purchase of your first home),
- The distributions are part of a series of substantially equal payments (i.e., these payments must usually last for 5 years or until you reach age 59 1/2, whichever is longer),
- You are using the withdrawal to pay for significant un-reimbursed medical expenses, or
- The distribution is being used to pay qualified higher education costs.
There are some other exceptions, but these are the major ones.
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