Roth IRA Withdrawal Education For Newbies

Here’s everything you need for your Roth IRA withdrawal education. (Another word for ‘withdrawals’ that you’ll come across frequently is ‘distribution.’ We’ll be using the two words interchangeably.)

If you’re 59 and-a-half or older

59 and-a-half is the magic age for IRA withdrawals. In a Roth IRA, once you’re 59 years, 6 months, and 1 day old, you can take all your money out without incurring any taxes or penalties. Yaaay! Let’s go to Europe!

*Read The Fine Print*

The account has to be at least 5 years old before it qualifies for tax-free distributions.

So if you opened the account on your 55th birthday, you reach the magic age 4 and-a-half years later. But your Roth IRA is only 4.5 years old on that day. You have to wait an additional 6 months to qualify for tax-free withdrawals.

If you’ve reached the magic age, that’s all the Roth IRA withdrawal education you need : ) Have fun in Europe!

If you’re younger than 59 and-a-half

If you haven’t reached the magic age, your IRA withdrawal education needs to cover a little more stuff. Let’s distinguish between contributions and earnings, because they’re treated differently for tax purposes.

  • Contribution – when you physically deposit money into your account
  • Earnings – additional money that’s in your account from your investments

Here’s an easy example that will illustrate the difference:

  • You put $4,000 in your Roth IRA at the beginning of 2007.
  • You invested the whole thing in Apple Computers (AAPL).
    • It was $85/share
    • Your $4,000 bought you 47 shares ($4,000 invested/$85 per share = 47 shares)
  • By the beginning of 2008, Apple was selling for $180.
  • You’re satisfied with Apple’s performance and decide to sell your shares.
  • You sell your 47 shares at the market price of $180 per share and your account is now worth $8,460 ($180 * 47 shares = $8,460)
    • Sweet! Let’s go to Europe!
    • Hold on, let’s finish your Roth IRA withdrawal education first : )
  1. 2007 Contribution = $4,000 (what you put in)
  2. Ending Balance = $8,460
  3. Earnings = $4,460 (Balance minus Contributions)

In a Roth IRA, you’re able to withdraw your contributions at any time without any taxes or penalties. But your earnings must remain in the account until you reach the magic age, or else they may be subject to taxes and penalties.

So in our example from above, you can perform a roth ira withdraw up to $4,000 from your Roth IRA. But if you withdraw $5,000, then any amount over what you’ve contributed ($1,000 in this case) will be subject to taxation and penalty.

Advanced IRA Withdrawal Education–Exceptions to the Rule

There’s always exceptions : ) The following are situations where you can withdraw your earnings before you reach the magic age, without being subject to taxes and penalties:

  1. Higher Education. You can use your earnings without being penalized to go to a qualified college or university. You can also use your earning to fund an immediate family member’s expenses. This includes tuition, books, room & board, or any other qualified expenses.
  2. First-time Home Purchase. You’re able to distribute up to $10,000 of earnings from your Roth IRA to buy a home. You can only do this once penalty-free.
  3. Medical Expenses. You may use earnings to pay medical insurance premiums if you’re receiving unemployment for at least 12 weeks. Also, you may take penalty-free distributions to cover expenses that were not covered by your insurance.
  4. Disability. Although you can withdraw from your IRA if you’re disabled, the qualification guidelines are pretty strict. (i.e. You can’t claim disability for even the severest of toe-stubs : )
  5. Death. Let’s not shoot for this one.
*Read The Fine Print*If you withdraw earnings from your Roth, even if you qualify for one of these situations, it’s still penalized if your Roth IRA is less than 5 years old.

My best advice

If you haven’t reached the magic age, try not to make any withdrawals from your IRA. If you absolutely have to, don’t remove any more than what you’ve contributed.

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