A Roth IRA is an account designed to help you save and invest for retirement. This type of retirement account is easy to set up and invest in, with many high-quality online brokerages such a ETrade offering Roth IRAs with low fees, and a variety of funds and assets to invest in.
While you may be dedicated to investing for the future, life has a way of handing you unexpected surprises, and you may need to withdraw money from your individual retirement account prior to turning 59½.
Do I pay taxes on a Roth IRA withdrawal of my original funds? If you find yourself in need of the funds in your Roth IRA due to an unforeseen emergency or disability, it is important to know that there is no withdrawal fees or tax penalties on money that you put into your Roth IRA, also referred to as contributions.
While your contributions can be withdrawn tax and penalty-free, things get a little bit more complicated with the distribution of earnings. You must meet certain requirements in order to realize the full benefit of this tax-advantaged account.
Do I Pay Taxes On A Roth IRA Withdrawal Of My Original Funds? Roth IRA Earnings Distribution
Earnings in a Roth IRA can be distributed tax and penalty-free as long as there is a “qualifying reason” for the distribution. These “qualifying reasons” include: reaching the age of 59½, disability, distributions will be used to pay for certain qualified first-time home buyer amounts, and the distributions were made to your beneficiary after your death.
You must also own the Roth IRA for a five-year “seasoning” period, before being allowed to make tax and penalty-free distribution withdrawals. Earnings distributed before the first day of the fifth year after your first Roth IRA was established will be taxed at your normal personal income tax rate.
There are additional exceptions to the 10% penalty, even if you do not have a “qualifying reason” for distributions, although you would still be required to pay ordinary income taxes. You can avoid this additional penalty if you have unreimbursed medical expenses that are greater than 7.5% of your adjusted gross income.
You can also avoid the 10% penalty if you continue to pay medical insurance premiums after becoming unemployed, the distributions are not greater than your qualified higher education expenses, or the distribution is due to an IRS levy of a qualified plan.
If the distribution is a qualified reservist distribution, is a qualified disaster recovery assistance distribution, or is a qualified recovery assistance distribution you may also be exempt from the additional penalties.
Roth Conversions And Distributions
Things get slightly more complicated if you have converted funds from a traditional IRA to a Roth IRA. Assuming the converted funds were taxed on the date of conversion, if your Roth IRA has passed the five year “seasoning” period distributions will be free from taxes, but will still be subject to the 10% penalty.
You will avoid this additional penalty if the distribution is for a “qualifying reason” or you meet one of the “other exceptions” outlined.
If you converted amounts that were not taxable due to a nondeductible IRA, you will not be subject to the 10% penalty on those amounts even if the “seasoning” period has not been met.
There are many reasons why you may need to access the funds in your Roth IRA, and your financial needs should be carefully weighed against potential taxes and fees associated with early withdrawals.