Rules For Withdrawal Of A Roth IRA
Roth IRAs are similar in many respects to traditional Individual Retirement Accounts in that there are certain qualifications that must be met and guidelines followed to avoid any tax and early withdrawal penalties. Since the purpose of any return account is saving for the future, limitations are imposed on contributions and disbursements which must be understood to fully benefit from the tax exempt status of the account.
Unlike traditional IRAs or 401(k)s, contributions made to a Roth IRA are not tax deductible up front. While this may not sound like a benefit initially, any qualified disbursements made when funds are withdrawn from a Roth IRA are exempt from all Federal taxes including Social Security. A maximum annual contribution of $5,000, $6,000 after age 50, can be made if the amount contributed is at least equal to the earned income for that year. Since these contributions have already been taxed they can be withdrawn at any time from the retirement account without penalty. Income or withdrawal rules only apply to earnings or rollovers and transfers from other retirement accounts.
According to IRS guidelines, qualifying withdrawals can be made after the funds have been in an IRA for five full years. After the five year rule has been met then one additional condition must apply to avoid penalty and taxes. The account holder must be at least 59 1/2 or disabled, funds are used in the first time purchase of a home, or the account made payable to a beneficiary upon death. As long as the five year requirement has been met and one of the other conditions applies, withdrawals can be made from Roth IRA without any financial penalties.
Funds can also be rolled over or converted from a Traditional IRA to a Roth IRA. Since the funds and in a Traditional IRA have already received a tax benefit by lowering the account holders adjusted gross income in the year the contributions were made, those funds when converted to a Roth IRA will be taxed as ordinary income. As such, they'll be subject to Social Security and any other regular income requirements. Because of the possible tax burden and financial implications it is recommended to consult with an accountant or tax adviser prior to making early withdrawals or rolling over an IRA.
Only certain investments can be purchased from a Roth IRA. Self-directed Roth IRAs which are IRAs not managed by a financial institution must comply with certain federally mandated rules. Be sure to conduct thorough research to understand what may or may not be purchased with Roth IRA funds. An investment made that does not conform to Roth IRA guidelines may be subject to the 10% penalty for early withdrawal.
Roth IRAs are one of many different types of retirement accounts which offer significant advantages but often come with certain limitations. Speak with an investment professional and conduct research to make sure investment in a Roth IRA is appropriate for your financial goals and investment horizon.
