IRA Rules

Posts Tagged ‘roth ira withdrawal rules’

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discussed in the Roth IRA distributions section of this IRA Rules website, there are three Roth IRA Tax Rules on funds withdrawn from a Roth IRA individual retirement account.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: 

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: 

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.

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: Non-deductible contributions to a regular IRA, do I pay taxes on them again upon withdrawal?

My income doesn’t allow me to contribute to a Roth IRA nor make deductible contributions to a regular IRA. So after funding my 401K I also make a contribution to my regular IRA. When I withdrawal from that in future years, do I have to again pay taxes on my original contributions?

Answer: No, but make sure you keep good records so you can tell which money is which if you mix them. I would keep them in their own account.

In 2010 they can be converted to a ROTH no matter what your income. Read publication 590 for the details at IRS.GOV.

Roth IRAs