Roth IRA withdrawal and distribution rules
One of the advantages of a Roth IRA account is the Roth IRA withdrawal rules, which make it easier to get your contributions without penalty. Taking money out of a Roth IRA
can be easier than from a traditional IRA or 401(k) account due to the stricter withdrawal rules.
If you’re ready to start earning money with a Roth IRA account, we can help! At Credit Union of Southern California (CU SoCal), we make getting a Roth IRA account easier.
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Read-on to learn more about Roth IRA withdrawal rules, Roth IRA distribution rules and withdrawing from a Roth IRA.
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Contributions vs. earnings: understanding the difference
to a Roth IRA account are the funds you simply contribute or deposit into the account. Contributions are NOT tax-deductible.
are the funds that the account earns based on the interest rate of the investments you have selected for your account.
Roth IRA 5-year rule
Withdrawals may only be taken after a five-year waiting period after the first contribution. There is also a five-year rule that applies only to IRA conversions, such as a traditional IRA – to- Roth IRA rollover or conversion. This rule prevents people from rolling over or converting an IRA to avoid paying taxes on withdrawals, since Roth IRA withdrawal rules are somewhat more flexible than the rules of tradidional IRA withdrawals.
Withdrawal rules by age
Withdrawing contributions from a Roth IRA and withdrawing from a Roth IRA in general, is governed by the following rules.
Age 59 and under. You may withdraw any contributions you made to your Roth IRA tax- and penalty-free. However, if you withdraw any portion of the earnings you may have to pay taxes and a penalty.
- Account open less than five years. If you’ve had your account for less than five years, you would pay tax and 10% penalty on any earnings you withdraw. The IRS allows withdrawals for qualifying exceptions, which means you would avoid paying a penalty, but not the tax.
- Account open more than five years. In this case you would pay both tax and a 10% penalty on earnings. Exceptions may apply.
Over age 59 and one-half. According to the IRS withdrawals must be taken after age 59 and one-half.
- Account open less than five years. If your account is open for less than five years you will pay tax on earnings you withdraw, but pay no penalty.
- Account open more than five years. If you are age 59½ and have had your account for more than five years, you can withdraw both the contributions and earnings without paying taxes or a penalty.
All ages. Regardless of your age, you are allowed to withdraw your contributions at any time, penalty-free. Taxes and penalties would only apply to the earnings.
According to the IRS, to discourage the use of IRA distributions for purposes other than retirement, you'll be assessed a 10% additional tax on early distributions from traditional and Roth IRAs, unless an exception applies.
Generally, early distributions are those you receive from an IRA before reaching age 59 and one-half. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It's in addition to any regular income tax on that amount.
Withdrawing from a Roth IRA without tax and/or penalties may be possible if the following exceptions are met:
First-time home buyers. Not in excess of $10,000 used in a qualified first-time home purchase.
Higher education. Not in excess of your qualified higher education expenses.
Birth or adoption. Not in excess of $5,000 and the distribution is a qualified birth or adoption distribution.
You've become disabled. Any distributions made because you're totally and permanently disabled.
Unreimbursed medical expense (unemployed). Not in excess of certain health insurance premiums after you have received unemployment compensation for 12 consecutive weeks (or would have been eligible to receive unemployment compensation but for your self-employed status).
Are there required minimum distributions?
Distribution is another word for withdrawal from an account. Unlike Traditional IRAs, Roth IRAs have no requirements for minimum distributions. You can make contributions to your Roth IRA after you reach age 70 and one-half. And, you can leave amounts in your Roth IRA as long as you live.
Roth IRA vs. Traditional IRA: what's the difference?
There are several important differences between Roth and Traditional IRAs, including age requirements and income limits, when contributions are made and when distributions (withdrawals) can be taken without penalty.
When it comes to Roth IRAs vs. Traditional IRAs, the main difference is how and when you get a tax break; whether at the time contribution is made or, in retirement when the distribution is taken.
Learn more about traditional IRA vs. Roth IRA.
Is a Roth IRA right for me?
Choosing an IRA is largely dependent on three factors: your financial goals, your income, and your age. Because a Roth IRA account has specific income and age limits, a traditional IRA may be a better, more flexible option if you don’t meet the Roth requirements.
If getting a tax-deduction now is not a concern, then a Roth can be a good choice. Another advantage of a Roth IRA is that when you withdraw your money in retirement the earnings will be tax-free.
There are many factors to consider, including Roth IRA withdrawal rules and whether you may be withdrawing contributions from a Roth IRA.
You can open a Roth IRA at a credit union, bank, brokerage or and other financial institutions. Opening a Roth IRA is a simple process like opening any other financial acount. You will complete an application that includes your name, address and social secuirty number. You will also need to provide a government-issued proof of identification.
It’s a good idea to consult with a tax professional and financial advisor before making any investments.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
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Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.