Roth IRA Withdrawal Rules

Categories: Retire

Roth IRAs which I wrote about a few days ago are good for supplementing one’s retirement and growing tax-deferred until retirement. This article doesn’t cover the rules regarding IRAs that were converted into Roths.

The rules are quite a bit different, than they are for traditional IRAs withdrawals. The differences compel many to seriously consider Roth IRAs, since they have many tax advantages over them at retirement, however their are rules. Careful planning is important, so if someone wants to use the money for retirement or other needs they want to avoid tax penalties. Let me say at the outset that since planning for IRA distributions can be tricky, obtaining advice from a qualified financial expert would be a good idea.

At retirement, if the owner wishes to withdraw money from their non-tax-deductible, tax-deferred Roth IRA, all of the monies received are tax free. If they pull any funds out of the Roth IRA account before their age of 59½ or within 5 years of the contribution, they will have to pay a 10% tax penalty, there are exceptions and I will cover them in a moment.

Money can be left in the Roth IRA indefinitely until death, and then specific rules apply affecting the distribution, so unlike traditional IRAs (and most other accounts like 403b and 401k) the owner is NOT forced to make Minimum Required Distributions (RMD) by April 1st of the year following the year they reach 70 ½. Also, since ROTHs have no RMDs, there isn’t a 50% penalty for monies left in the account unlike traditional IRAs have.

Withdrawals prior to retirement can be done at any time, however there may be a tax hit. If someone wants to get to their Roth IRA prior to their age of 59 1/2 there is a 10% penalty on the growth only, and no tax on your contribution, since you made it with after tax/non-deductible payments. There are a few ways to avoid the penalty according to the IRS website:

  1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit
  2. Made because you are disabled
  3. Made to a beneficiary or to your estate after your death
  4. One that meets the requirements under first time home under exceptions (up to a $10,000 lifetime limit).

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