Ira Roth Withdrawal

To withdraw from his Roth IRA, one needs to fulfill two conditions - the first one being the requirement that one must have attained the age of 59 1/2 years, while the other one is that the Roth IRA needs to be funded at least for five tax years. Withdrawals prior to attaining age of 59 1/2 year or 5 years mandatory contributions are categorizes as early withdrawals. Roth IRA owners may lucratively see their Roth IRA funds when in need of money, but the fact that is needed to be kept in mind is that an early withdrawal attracts some penalties.

Early withdrawals from a Roth IRA that are unqualified are subject to income taxes as well as the Roth IRA early withdrawal penalty. The penalty is 10% of the investment gains withdrawn from the Roth account. It should be well understood that one can withdraw his original Roth IRA contributions any time tax-free and penalty-free, but owe income taxes and a 10% early withdrawal penalty on the earnings (investment gains).

One needs to be careful enough not to confuse the early withdrawal penalty with the taxes imposed on a non-qualified withdrawals. A non-qualified distribution imposes an ordinary income tax on the distribution, but the early withdrawal penalty will be imposed in addition to that tax.

Suppose one opens a Roth IRA and contribute $3,000, and never makes any additional contributions. After 15 years, the Roth IRA become worth $10,000. Suppose the account owner wishes to close the account. The owner does not owe any taxes or penalties on $3,000 (original contribution) of the $10,000. The remaining $7,000 which purely is an investment gain, is subjected to income taxes and a 10% Roth IRA early withdrawal penalty. So for a tax rate of 25%, the owner owes $1,750 in income taxes as well as a $700 early withdrawal penalty, totalling to $2,450 of the $10,000 going to taxes and penalties.

There may be several reasons that can lead to an early Roth IRA withdrawal. Sudden money crunch due to unavoidable situations in life make it necessary to withdraw these funds early. People sometimes are also urged to withdraw early to pay for their non reimbursed medical bills or to clear any other types of debts. However, there are certain conditions described by the federal laws that save one from the early withdrawal penalties. First-time home purchase, higher education expenses, health insurance for the unemployed, or cases where the account owner becomes disable are certain exceptions that do not impose the early withdrawal penalties.

Even in conditions when one is badly in need of money, a better option is to withdraw the original contribution to the Roth IRA rather than withdrawing the contribution gains. Since one is allowed to withdraw his original contribution any time without any penalty or tax as contributions to a Roth IRA on an after-tax basis, doing this will save one from the penalties. Also, at the time of considering an early withdrawal, one should always check if he qualifies for for a qualified distribution, which can help once escape the penalties.