If you have been investing in a Roth IRA, chances are you are familiar with their many benefits including tax-diversification and tax-free growth. These types of retirement funds have become a crucial aspect in peoples’ retirement planning.
Roth IRAs make it easy to withdraw funds in the event you need to access your capital prior to turning 59½. Fortunately, Roth IRA early withdrawal rules allow for tax and penalty free withdrawals of original contributions at any time and make Roth IRAs the most flexible account of its kind.
Roth IRA withdrawals are subject to a 10% early withdrawal penalty if you do not meet certain conditions when withdrawing earnings, so it is important to take that into consideration when accessing funds.
Roth IRA Early Withdrawal Rules
You can typically make penalty and tax-free withdrawals of your contributions to your Roth IRA at any time. Roth IRA early withdrawal rules state that you can not, however, withdrawal the earnings from the fund if you are younger than 59½, or have not passed the five year “seasoning” period without incurring a 10% penalty.
Provided you have had the Roth IRA for five years or more, and you are over the age of 59½ you can usually withdraw earnings with no penalties. Of course, there are exceptions to these rules, and you should always consult with a trained financial adviser such as the retirement specialists at ETrade before withdrawing funds from your Roth IRA.
Qualified And Non-Qualified Distributions For Roth IRAs
Before making any withdrawals or receiving distributions from your Roth IRA account, it is crucial to understand the difference between qualified and non-qualified distributions. A qualified distribution will be penalty and tax-free provided it meets the five year requirement for Roth IRAs.
This is an important point, as penalties and fees can seriously eat away at any gains your investments may have made. If you make a non-qualified distribution you may trigger both IRA early withdrawal penalties as well as taxes, eroding the value of the funds in your individual retirement account.
In many cases, withdrawals made after you have reached the age of 59½ from your Roth IRA are tax and penalty-free as long as the five year “seasoning” period has passed for gains on investments. You may also qualify for penalty and tax-free withdrawals if you have become disabled, or are purchasing a first home.
If you pass away you can also will the Roth IRA to your heirs, who will be able to benefit from its tax-advantaged status. There are rules and limits to qualified distributions, and a high quality online brokerage such as ETrade will have up-to-the-minute information concerning Roth IRA rules and regulations.
Withdrawals that do not meet the requirements of a qualified distribution are considered non-qualified distributions. These withdrawals on the Roth IRA may be subject to ordinary income-tax, as well as a penalty for early withdrawal.
There are additional conditions that can be met in order to realize the tax benefits of a Roth IRA, and it is always a good idea to consult with an adviser before withdrawing funds from your Roth IRA.
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