Roth IRA Withdrawal Rules: The Basics

by kristine on February 12, 2011

Understanding Roth IRA Withdrawal Rules

Roth IRAs are very flexible investment vehicles that offer tremendous tax benefits as well, making them a popular choice for people saving for retirement.

If you’re not familiar with a Roth IRA, basically they are individual retirement accounts that allow you to save for retirement outside of an employer sponsored retirement plan, such as a 401K or 403B.

Traditional IRA Vs. Roth IRA

There are two main types of IRAs: traditional and Roth.  The main difference between the two is how your contributions are treated and how distributions are taxed.  With traditional IRAs, you get a tax deduction for contributions you make, however withdrawals are taxed at your ordinary income tax rate when taken.  Roth IRAs on the other hand, do not offer a tax deduction when you make contributions, but qualified distributions are tax-free.

Two Basic Roth IRA Withdrawal Rules You Should Know

Roth IRA Withdrawals are Tax-Free (if Qualified)

Perhaps the greatest feature of the Roth IRA is that you do not have to pay taxes on withdrawals, assuming they meet the qualified distribution rules below.  Once you open and contribute to a Roth IRA, your earnings in that Roth IRA grow tax-free.  This is very powerful – imagine how much tax free income you could generate if you opened a Roth IRA at an early age and continued to add to that account each year?  You could have several hundred thousand dollars of tax-free earnings by time you retire!

In order for a distribution to be “qualified” you must be age 59 ½ or older when you take the money out, and the withdrawal must be five years after you opened and made contributions to the account.  Withdrawals taken after you turn age 59 ½ will not be considered qualified if the account has not been open for five years.

Your distribution may also be qualified if you are disabled, or if you are the beneficiary of a Roth IRA owner taking a distribution after they have passed, or if you are using the money to pay for qualified first time homebuyer expenses.  There are other exceptions to the qualified distribution rule.

Roth IRA Contributions Can Be Taken Out At Any Time, Tax-Free

In addition to qualified distributions, you can always get your contributions out tax free at any time for any reason.  This fact is not very well known, but it’s a huge advantage that Roth IRAs have over other retirement accounts.

The ability to get your contributions out tax-free at any time is a very important benefit.  This makes Roth IRAs very flexible accounts that can be used not only for retirement, but for other financial goals such as saving for college or an emergency fund.

While Roth IRAs are very flexible investments, you should understand the Roth IRA withdrawal rules before you invest to make sure you get most out of your Roth IRA.

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