17 May How to Withdraw Money out of My Roth IRA?
If you’re like most, you’ve probably considered withdrawing money from your Roth IRA at some point in your life. Maybe you wanted to make a dent in your debt, help pay for your child’s college tuition, or make repairs on your house. When your retirement money is just sitting there, it’s tempting to withdraw money out of your Roth IRA to help you live right now, isn’t it?
But what would taking funds from your Roth IRA mean as far as penalties, taxes, and how much you would have to retire on in the end? In many ways, taking a distribution from your Roth IRA is similar to taking money out of your 401(k), but there are some differences too.
Defining the Roth IRA
A Roth IRA is an individual retirement account in which you deposit funds that have already been taxed. This means that when you begin taking distributions, you don’t have to pay taxes on that money. This can be an advantage in a couple of ways because, generally, you’re in a lower tax bracket when you deposit the funds than when you withdraw them, and this saves you money.
Withdrawing Money out of Your Roth IRA
When you withdraw money out of your Roth IRA after the age of 59.5, you get to keep every penny because Uncle Sam already taxed that money, and you avoid penalties because of your age.
Of course, you can take money from your Roth IRA any time you want, sometimes with penalties, sometimes without penalties. There are rules that say you must have been contributing to the Roth IRA for at least 5 years before making any withdrawals, even if it was converted from another retirement account.
If you’ve met this requirement, even if you’re under the age of 59.5, you can withdraw 100% of your contributions (not your earnings) from your Roth IRA without penalty.
For example, let’s say you’re 30 years old, and you opened your Roth IRA 6 years ago. You’ve contributed $5,000 per year, so $30,000 total. Your Roth IRA balance is now $50,000 because it is earning well. You could take a penalty-free distribution of $30,000 from your Roth IRA because it’s what you contributed, but you cannot touch the $20,000 in earnings without a penalty.
In some ways, the Roth IRA acts like a well-funded savings account after you’ve met the 5-year requirement.
Qualifying Reasons to Withdraw without Penalty
Sometimes, even if your Roth IRA hasn’t been open for at least 5 years, and you’re younger than 59.5 years old, you can still qualify to withdraw funds without paying the 10% penalty as long as you have a qualifying reason such as:
You want to buy your first home. Age doesn’t matter when you want to use funds from your Roth IRA for a house down payment or closing costs. However, the IRS limits the amount to $10,000, and you must use the money within a certain time frame as well.
You’re a beneficiary inheriting a Roth IRA. You don’t have to pay a penalty for withdrawing money from a Roth IRA that you’re inheriting from someone else, even if the deceased was younger than 59.5 years old at the time of death.
You’re totally disabled. Even if you are under 59.5 years old, you may be able to begin withdrawing money out of your Roth IRA if you’re disabled. Be prepared to provide documentation of your disabled status to your plan administrator if requested.
Withdrawing for Non-qualifying Reasons … Without Penalty
Despite what you’ve heard, the IRS isn’t completely heartless. Sometimes they allow you to take out funds from your Roth IRA without penalty, even for “non-qualifying” reasons. Here are some possible exceptions to the rules:
Out-of-pocket medical expenses – You might be able to avoid both the tax and early withdrawal penalties if you have medical expenses that exceed a certain percentage of your adjusted gross income.
Health insurance premiums during unemployment – If you’re without a job and are having trouble paying your health insurance premiums, you may be able to pay them by dipping into your Roth IRA. Of course, there are specific stipulations you must meet to take advantage of this option, so check with your financial consultant for details.
Higher education costs – Although there are limitations, you can partially fund your, your spouse’s, or your family members’ college education by withdrawing money out of your Roth IRA. Covered expenses include room and board, tuition and fees, and books and supplies. Students must be considered to be attending at least half-time to take advantage of this option.
Unpaid federal taxes – If you owe the federal government back taxes, then you can arrange for the IRS to take payments directly out of your Roth IRA without further penalty. But if you take money out of your Roth IRA to pay the IRS for your taxes, you’ll likely be required to pay the 10% withdrawal penalty.
Military – If you serve in the reserves, you can withdraw money out of your Roth IRA penalty-free while on active duty.
Conclusion
As you can see, it’s not always a bad idea to withdraw money from your Roth IRA, especially if there are extenuating circumstances going on in your life. However, remember that when you take money out of your retirement account, you end up with less to live on during your retirement years, and the whole idea of compounding earnings goes out the window.
Ultimately, the choice is yours; just be sure to speak with a qualified professional about the pros and cons if you’re unsure about what to do.
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