Roth IRA Withdrawal Rules You Need to Know

Roth IRA Withdrawal Rules You Need to Know
A Roth individual retirement account is a vehicle for retirement. Unlike many other types of retirement accounts that allow you to defer taxes on your contributions, all contributions to Roths are after taxes. This provides some advantages when it comes to rules for withdrawals. Here are the most important rules you need to know.

Early withdrawals
One of the biggest advantages to Roth IRAs when it comes to withdrawals is that you can withdraw the money you have put in without penalty at any time. When you put your money in a traditional IRA or in a 401k, you usually can’t remove any of it until age 59 1/2 or you will face a penalty of an additional 10 percent in taxes on top of whatever income taxes you owe that you haven’t paid. There are some exceptions to this rule. With a Roth, however, because you have already paid taxes on your contributions, the money is yours, so you face no penalties for withdrawing it. That rule only applies to the money you have put in. If you take out any investment earnings, then you face the same 10 percent penalty. For example, if you have contributed $30,000 to a Roth and it has grown to $45,000, you can take $30,000 out at any time tax- and penalty-free. If you take out $35,000, however, you would face a 10 percent penalty on the additional $5,000, unless it qualified for an exemption.

Regular withdrawals
Once you hit age 59 1/2, you can start withdrawing money from an IRA for any reason without penalty. The big advantage of a Roth is that, because you have already paid taxes on the contributions, all withdrawals once you reach age 59 1/2 are tax free. That can be a huge advantage depending on what your tax bracket is. For example, say you put $5,000 a year for 25 years, but due to paying 20 percent in taxes up front, you only put $4,000 a year into the Roth. You would have $100,000 tax free at retirement not counting growth. The same $5,000 tax deferred in a traditional IRA would be worth $125,000. If you then had to pay that same 20 percent in taxes to withdraw that, it would be $25,000, leaving you with the same $100,000. Where you win with a Roth is if your tax bracket is higher at retirement than it was for most of your lifetime.

Required minimum distributions
Another advantage when it comes to withdrawing from a Roth IRA is the lack of a requirement to make required minimum distributions. With a traditional IRA, the government requires you to take out a certain amount of money at age 70 1/2, regardless of whether you want or need the money. If you don’t, you can face tax penalties of as much as 50 percent. This is largely to prevent wealthy people from stashing money in tax-deferred investment vehicles and then allowing the money to pass to heirs tax-free. With a Roth IRA, however, you have already paid taxes on the money, so the IRS doesn’t care what you do with it. You can leave the money in the account for as long as you want, and when you die, the IRA can pass to your heirs.

There are definite advantages to investing in a Roth IRA when it comes to withdrawals. It is easier to withdraw the money early, and you don’t ever have to withdraw it if you don’t want to.

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