And rightfully so.
The hard part is starting up and sticking to a retirement investing plan. Pulling the money out is easy.
But there are some rules you should be aware of. If you are near retirement, I recommend you spend some money on a independent, fee-only financial advisor, who can explain your Roth IRA withdrawal options to you. In the mean time, I’ll present these 5 facts about Roth IRA withdrawals (or distributions) for you to be aware of:
1. You Can Withdraw Contributions at Any Time
One of the reasons the Roth IRA is so popular is because it’s flexible. You’re putting after-tax dollars into the account as annual Roth IRA contributions, and so you get to take those funds out when you please. There is no penalty or tax payment due on contributions withdrawn from a Roth IRA at anytime. For this reason, people use Roth IRAs to save for retirement, a house down payment, college tuition, and other things. In my opinion that’s a misuse of the account, but I don’t blame people for doing it.
2. You Can Withdraw Earnings at Any Time (but you will likely pay penalties and taxes)
Earnings (the money your contributions make) in a Roth IRA are growing tax-free. A nice benefit. So, the IRS has some rules about what you can do with those earnings. The rules are quite complicated. More complicated than the other Roth IRA rules. So sit back and get ready to have your mind blown. Okay, it’s not that bad. If it’s too complicated for you, then just remember what I’ve said above: Roth IRA earnings shouldn’t be touched unless you have some good reason which will help you avoid taxes and penalties. It is, after all, a retirement account. Leave it alone.
3. Retirement or Disability Provides a Clear Path to Tax and Penalty Free Earnings Withdrawal
If you reached retirement age (59.5) and/or you are disabled, you can take your earnings tax and penalty free. These are called “qualified distributions.” You are considered at the end of your earning stage of life and the IRS says you’ve earned your reward: tax free earnings. Congrats! Keep in mind there is a “5 year rule” to be aware of here. Your initial contribution to a Roth IRA needs to have been made 5 or more years prior to the time you withdraw for retirement.
4. First Homes, College, and Hardships Allow for Penalty Free Earnings Withdrawal
If you have an exception, you can take Roth IRA earnings withdrawals without having to pay the 10% penalty. These exceptions include all sorts of things related to health and hardship. See IRS Pub 590 for more. They also include an exception for your first home (up to $10K) and any college expenses (unlimited). Remember, although you can avoid the 10% penalty, you’ll still have to fork over the taxes for these withdrawals.
5. Withdrawals Aren’t Required Until You Die
Unlike some other retirement accounts, the contributions and earnings in a Roth IRA aren’t required to be withdraw at a certain time. You can keep the funds in there till you die. When you die, the funds must be withdraw similar to a Traditional IRA, which is to say they are to be distributed before 5 years after your death.
On that positive note, this sums up my 5 points on Roth IRA withdrawal. Do you have anything to add? Share it in the comments below…
Sources: IRS Publication 590: Individual Retirement Arrangements and Roth IRA Withdrawal Rules.