IRA Rules

Posts Tagged ‘401k’

Question: Roth IRA Question regarding early withdrawal penalty.?

I had a retirement account through an employer that I converted to a Roth IRA when I left the company years ago. I now need to make an early withdrawal. I know my contributions can be withdrawn without penalty, but how about the employer contributions make when I still worked there? Can they be withdrawn without penalty as well? Any help would be greatly appreciated…

Answer: Your employer retirement account included contributions (yours and your employer match) plus earnings. When you converted that into a Roth IRA, on the date of conversion that account had the same amount of contributions and earnings. You paid income taxes on the entire amount converted at the time of the conversion.

Hopefully the Roth IRA that received the conversion does not contain other assets. I assume this is the case. Then you must keep that Roth IRA open for five years starting January 1 of the year you created the account. After that point, you can withdraw your original contributions (that came from your own contributions to the employer plan, and the employer contributions) without tax or penalty.

For converted Roth IRAs, all converted money must be in the account for five years before you can take anything out without penalty. This is quite different from Roth IRAs that were not created from a conversion.

If you have not kept the converted money in the Roth IRA for five years as defined above, then even if that Roth IRA has been open for five years (because it had older contributions in it before the conversion), you are going to pay a 10% penalty on any distributions of the converted contributions.

Question: Roth IRA? I had to make an early withdrawal?

I have recently lost my job and unemployment is not covering all the bills! I have had to take some money from my IRA and I am wondering about the penalty and amount I am going to have to pay when I file my taxes.

Answer: I assume this Roth IRA was not converted from another retirement investment.

Your original contribution can be taken out tax-free. If you are under age 59.5, your earnings are going to be taxed and there will be a 10% penalty added as well. Use Form 8606 with your tax return to figure the tax and penalty.

Retirement Plans & Investments : How to Roll Over a Traditional IRA to a Roth IRA

Question: Can your repay a withdrawal from a rollover IRA to avoid penalties?

I need to take some cash from my rollover IRA and was wonder what the rules are regarding repayment. If I take out $5000 but the put $5000 back in say the next 12 months, can I avoid penalties or at least avoid the income tax?

Answer: You didn’t state the reason for the withdrawal, so here’s some of your options:

Eight Ways to Avoid the 10% Early Withdrawal Fee on Your IRA

Many IRA owners are aware they can be hit hard with penalty fees if they withdraw money early. Fortunately, there are ways to avoid these fees if an emergency or other qualifying situation arises. Before we begin, let me say that even with these allowances, you should make every effort to avoid taking money out of your retirement accounts early, especially if you are young. By withdrawing money, you are losing decades of tax-free compounding which can cost you hundreds of thousands of dollars by the time you retire.

1. Permanent disability of IRA owner
Money can be withdrawn without penalty in the event the IRA holder becomes permanently disabled.

2. Death of IRA owner
It’s small consolation, but if you kick-the-bucket before you’re 59 1/2 years old, your estate won’t be hit with the 10% early withdrawal fee.

3. IraWithdrawals are used to pay non-reimbursed medical expenses
In the event of serious illness or injury that requires prolonged or expensive medical treatment, Uncle Sam will waive the early withdrawal fee on the condition that the expenses are in excess of 7.5% of your adjusted gross income.

4. Withdrawals used to help pay for first-time home purchase
Despite a lifetime limit of $10,000, this exemption can make it much easier for an IRA owner to buy a house.

5. Higher education costs
College can be expensive. Thankfully, certain higher education costs for you, your spouse, children or grandchildren can be withdrawn penalty-free. You may still owe federal income tax, however. For more information, read the Internal Revenue Service article, Notice 97-60 Using IRA Withdrawals To Pay Higher Education Expenses.

6. Money is used to pay back taxes to the IRS after a levy has been placed against the IRA
This is not the kind of exemption for which you want to qualify, but it may save you money if you find yourself in an uncomfortable position with the IRS.

7. Withdrawals used to pay medical insurance premiums
Out of a job? The rest of the world may be topsy-turvy, but rest assured, you won’t be penalized for using retirement money to pay your medical insurance as long as you have been on unemployment for longer than twelve weeks.

8. Made on or after the day the IRA owner turns 59 1/2
Once you have reached the qualifying age of 59 1/2, you can make penalty-free regular withdrawals upon which to live.

A Caveat
There is one catch to these qualifying exemptions; the holder of an IRA is subject to a five year waiting period (measured in tax, not calendar, years). An investor could not, for example, deposit $3,000 in their IRA this year and withdrawal it next year penalty-free even if it would otherwise qualify as an exemption.

Roth IRAs in 2010 Part 1