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Some Of The Key Exceptional Roth IRA Withdrawal Rules Which May Assist You To Take Money Out Of Roth IRA
Roth IRAs are governed by the IRS; as such there are numerous Roth IRA withdrawal rules that must be followed before you take money from your account.
Here we will discuss Roth IRA distributions; when they could be taken, when and if they are taxable, when and if penalties might apply, and any exceptions to the Roth IRA withdrawal rules.
In general, distributions that are considered "qualified" and distributions which represent contributions you made to the Roth IRA are not taxable. Additionally, Roth IRA funds which are transferred from an account to another (Roth IRA ), are also not taxable.
However, Roth IRA withdrawals that are not "qualified" or is not a return of your original contributions may be subject to taxes and/or fines.
Roth IRA Contributions Can Be Withdrawn Tax Free at Anytime
Let's discuss about return of contributions first. What this means is that you could get the contributions made to your Roth IRA out at anytime, for any reason, without taxes or penalties. Most people are unaware of this rule, and it's an important one. The ability to get your contributions out tax and penalty free makes 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 costs, or for any financial objective. Let's hope Congress doesn't ever change this rule!
Qualified Distribution Rules for Taking Earnings Out of a Roth IRA
While you are able to get your contributions out at anytime without worrying about paying taxes and/or penalties, this isn't correct for the earnings on your contributions. To get the earnings from your Roth IRA without paying taxes or penalties, you should follow the "qualified distribution" rules.
So what is a qualified Roth IRA distribution? According to the IRS, a qualified distribution is a Roth IRA withdrawal that:
1. Is made 5 years after the Roth IRA is set up 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 death, or
- Meets the first time home buyer exception (more information later)
Any withdrawals that meet the requirements above will not be subject to income taxes. However, if you take a distribution that is not considered a qualified distribution, you may need 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 isn't a "qualified" distribution as defined earlier, then you might be subject to a 10% penalty (the IRS calls this additional tax). Thankfully, there are several exceptions to the 10% early withdrawal penalty.
Following are several situations in which the 10% early withdrawal penalty might 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 could be taken penalty free to be used towards the purchase of your first home),
- The distributions are a part of a series of substantially equal payments (i.e., these payments must generally last for 5 years or until you reach age 59 1/2, whichever is longer),
- You're using the withdrawal to pay for huge un-reimbursed medical expenses, or
- The distribution is being used to pay qualified higher education costs.
There're some other exceptions, but these are the main ones.
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