IRA Rules

Posts Tagged ‘borrowing’

Part 1 of Solo 401k vs. Self Directed IRA – Intro & Eligibility

Question: Can I use an early Roth withdrawal to pay the taxes on the rollover from an IRA into that ROTH?

I will be 70 and a half in 2012, and I rolled over a portion of my IRA into a ROTH mid 2010 to benifit from the 2-year rule that allows me to report the rollover as income split between 2011 and 2011. Now I want to use any of my RMDs from my IRA to pay toward the resulting taxes. THEN, considering the early withdrawal penalty of 10% on the ROTH is less than the Taxes on an IRA, I plan to pay the remaining taxes with withdrawals from the ROTH. Then after 2012, I plan to continue a systematic IRA rollover to that ROTH that when combined with any IRA RMDs keeps my yearly taxable income below that $250,000 level, and paying the taxes this way. Eventually the 10% penalty goes away.

Answer: I really don’t get the aim of this exercise.

You said “considering the early withdrawal penalty of 10% on the ROTH is less than the taxes on an IRA”

But the money you put into the Roth this year is getting taxed in 2011 and 2012, and seeing how you aren’t looking at a long-term growth window (like a 22 year old right out of college) you lose the main benefit – long term tax free growth. On top of that, you pulled money out when you didn’t need to during a down market, meaning you won’t benefit as much from the hopeful rebound in the coming years.

Worse yet, you’ve now increased your taxable income over the next 2 years, which might put you in a higher tax bracket (unless you would be at the highest rate anyway, which would be even worse, because you accelerated income in a higher bracket when you could wait it out, take it as needed, and keep taxes low as possible).

I would probably go talk to some sort of financial adviser and get this whole thing sorted out. You still have time to have the Roth conversion reversed (“recharacterized”) so you won’t get dinged on taxes

Retirement Savings – What is a Roth IRA?

Question: What are the rules for a hardship withdrawal from someones’s IRA that exempts someone from paying the 10%…?

withdrawal ffee?
How about unemployment as a hardship?

Answer: It depends on your definition of hardship. Most people don’t qualify.

Disability.
Medical expenses in excess of 7.5% of AGI.
Premuims to pay health insurance if unemployed.
Education expenses, purchase new home.
Paying an IRS levy.
Qualified distributions due to Midwest disaster.

Investing & Retirement Funds : What Are 401k Hardship Withdrawals?