2009 November | IRA Rules

Archive for November, 2009

Roth IRA Withdrawal Rules

November 30th, 2009

Roth IRA Withdrawal Rules lay out the circumstances when a Roth IRA account owner may withdraw money from his or her Roth IRA account. As discussed in the Roth IRA distributions section of this IRA Rules website, there are three Roth IRA Tax Rules on funds withdrawn from a Roth IRA individual retirement account.

Ordering Rules for Non-Qualified Distributions of Roth IRA Withdrawal Rules

There are specific ordering rules in the Roth IRA Withdrawal Rules that affect:

the type of asset(s) removed from the Roth IRA in a non-qualified distribution and, in turn,
whether the distribution will be taxable and/or subject to penalty.

If the Roth IRA individual retirement account is a combination of both regular (annual) IRA contributions and conversion amounts, for tax purposes, under the Ordering Rules of Roth Ira Withdrawal Rules, distributions from the Roth IRA account will be considered ordered as follows:

First, Regular (annual) Roth IRA contributions may be removed from a Roth IRA individual retirement account any time, for any reason, tax and penalty free.

Next, conversions will not be taxed a second time; however, if the non-qualified Roth IRA distribution is taken less than five years after the year of the conversion, the 10% premature distribution penalty will be assessed, unless a Life Event Exception applies.

Last, earnings will be taxed and subject to a 10% premature Roth Ira Distribution penalty, unless a Life Event Exception applies.

The three Roth Ira Distribution scenarios wrap up the Roth Ira Rules.

Life Event Distributions for tax free and penalty free Roth IRA Distributions under the Roth Ira Withdrawal Rules

Earnings may be distributed from a Roth IRA account under the Roth IRA withdrawl rules before reaching age 59½, without the 10% premature distribution penalty, if it is used for one of the following Life Event Roth IRA withdrawl rules exceptions:

Purchase of a first home, up to $10,000 lifetime maximum

Qualified Higher Education Expenses

Medical Expenses that exceed 7.5% of A.G.I.

Payment of health insurance premiums during long-term periods of unemployment

Substantially Equal Payments Under Section 72(t)

Disability

Death

Roth Ira Withdrawal Rules of five-year holding period

Roth Ira Rules has a special rule regarding the holding period of a Roth IRA account. The Five-Year Holding Period is considered to begin on January 1st of the year for which the IRA owner makes the first contribution of any type (including conversions) to any Roth IRA account and ends at the end of five full calendar years. Once the Five-Year Holding Period has been satisfied with respect to any Roth IRA contribution, it is deemed to be satisfied for all later Roth IRA contributions.

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Withdrawal From Ira For Education

November 21st, 2009

Question: Roth IRA or 529 investment account?

I am 32, divorced and have two kids (one 9, one 11). I have begun putting about 6K into my 401K this year. I am planning to put about 3000 per year into a 529, but am wondering if I am better off contributing to a Roth IRA instead. I know with the Roth IRA, you can withdrawal for higher education without penalty for the amount you put in since it was already taxed. If I put it into a 529, it would be pretax, but I would pay a 10% penalty if my children either got a scholarship to school or did not attend for whatever reason. As bad as taxes are now, I figure they will be worse 10 years from now.

I guess you can’t roll a 529 into a Roth IRA, can you? If not, which do you think I am better off with.

Theoretically, my ex and I would be going half in so we should be ok (unless they want to go to Harvard – then all bets are off. Ugh.)

Answer: Do you know that this is actually a trick question? (as there is no “yes” or “no” answer for this.) The answer depends on your situation. And to understand the answer, you MUST understand the difference between the two plans. Specifically:

* same: contributions to both are after-tax (different from 401K, for example)

* different:
– Roth’s contribution is tax-free; however, Roth’s gain is taxable as income until your later years (after 59.5 yr-old)
– 529 plan’s contribution & gain are both tax-free, as long as you use both for college education. Otherwise, the gain might be taxed as income or penalty might kick in.
– Roth eligibility depends on your income; 519 plan does not (but it has cap on maximum contribution, annual as well as lifetime, depend on the plan.)

There are also many other differences, but you can see that from the above, decision might be a bit tricky. For some folks whose kids will need the money when they are 59.5 yr-old or older, Roth IRA can be a powerful vehicle to prepare for both your retirement and your kids’ college fund. But your situation is not that (you are 32 now and will be around 40-45 when your kids go to college.) So my recommendation is to actually not confuse between the two. Going half/half is possibly the right advice for you at this time. If you can max out your Roth contribution and put the remaining in 529 plan, it will be the best .