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Roth IRA Distribution Rules

Roth IRA Distribution

Roth IRA Distribution Rules

When you reach retirement, it’s time to pay attention to the Roth IRA distribution rules. A Roth IRA is a great way to save for retirement since all distributions after age 59 1/2 are tax free. Here we’ll talk about the rules surrounding you Roth IRA distribution, along with some other helpful advice.

Why Choose a Roth IRA?

As we just mentioned, the main advantage is that all qualified distributions from a Roth IRA are tax-free! To that point, the account must be opened for at least five years and you must be age 59 1/2 or older. Unlike a traditional IRA, where taxes are deferred until retirement, you fund a Roth with after-tax contributions. Therefore, there is no upfront tax break. However, we think that the tax-free withdrawals will appeal to most people.

Roth IRAs have the same contribution limits as a traditional plan. For 2019, you can contribute up to $6,000 if you are under age 50. For those who are 50 or older, you can contribute another $1,000, for a total of $7,000. This amount is the total you can contribute across all your IRAs, not on an individual basis. Lastly, you must have earned income to contribute to an IRA. If your annual income is less than the maximum, then that’s the most you can contribute for the year.

One other thing that differs is that there are income restrictions for Roth IRA contributions. Basically, if you earn too much money, you cannot directly contribute to one. See the chart:

If your filing status is…And your modified AGI is…Then you can contribute…
married filing jointly or qualifying widow(er)< $193,000up to the limit
> $193,000 but < $203,000a reduced amount
> $203,000zero
married filing separately and you lived with your spouse at any time during the year< $10,000a reduced amount
> $10,000zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year< $122,000up to the limit
> $122,000 but < $137,000a reduced amount
> $137,000zero

What are the Roth IRA Distribution Rules?

First off, any contributions you make to a Roth IRA can be withdrawn at anytime and for any reason. You will not face penalties or taxes. For example, if you contribute $1,000, and the account is worth $2,000 after a year, you may withdraw the $1,000 anytime. However, any earnings withdrawn that are not qualified will be taxed and penalized.

What Constitutes a Qualified Withdrawal?

Two things must be present for a Roth IRA distribution to be tax- and penalty-free:

  • You must be age 59 1/2 or older
  • The Roth IRA must be opened for at least five years

If you withdraw earnings before age 59 1/2 or the account is less than five years old, you will be subject to the a 10% early withdrawal penalty and owe taxes on the amount withdrawn. If are least age 59 1/2, but have not reached the five year holding requirement, you will be taxed. However, there will be no early withdrawal penalty.

Hardship Withdrawals

There are times that you may avoid the early withdrawal penalty. The most obvious one is to wait until you are age 59 1/2 to take a distribution. Other than that, there are hardship withdrawal rules.

If the account is less than five years old:

  • First-time home purchase
  • Qualified education expenses
  • You pass away or become disabled
  • Unreimbursed medical expenses or health insurance (if you are unemployed)
  • You make Substantial Equal Periodic Payments (SEPP)

Note: You will still owe taxes on the withdrawal

If the account is more than five years old:

  • First-time home purchase
  • You pass away or become disabled
  • Unreimbursed medical expenses or health insurance (if you are unemployed)
  • You make Substantial Equal Periodic Payments

Note: Your earning will not be taxed

Conversion Penalties

If you converted a traditional IRA into a Roth IRA, the withdrawal rules are a little bit different. Since taxes were paid when the conversion took place, you would not be subject to additional taxes on a withdrawal. However, you may be penalized if you take a distribution too early. The converted funds must remain in the Roth IRA for the five year holding period. If withdrawn early, you will be hit with a 10% penalty. This differs from regular contributions, which may be withdrawn whenever you like.

Conclusion

Roth IRAs are one of the best retirement vehicles around. While receiving an immediate tax deduction from a traditional IRA may be nice, the possibility of tax-free money during retirement is far superior. However, it’s important to know the Roth IRA distribution rules. The tax advantages disappear if you withdraw money without a hardship.

If you have any question about this, or any other Roth IRA rules, please contact us @ 800.472.1043. Thanks for reading!

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