Among retirement accounts, the Roth IRA is considered one of the most attractive for its tax advantages. Roth IRA contributions are made with after-tax dollars so qualified distributions are not taxed but what are the withdrawal rules for Roth IRA accounts?
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Roth IRA Withdrawal Rules
Roth IRA account holders over the age of 59.5 are permitted to withdraw earnings as long as the account has been held for at least 5 years. Under that age, withdrawals are permitted upon death, when disabled or when using up to $10,000 to build a first home.
Qualified withdrawals from Roth IRA accounts begin when you are aged 59.5 or older. For Roth IRA account holders under that age, withdrawals are permitted in certain circumstances, such as:
- When the Roth IRA account holder becomes disabled;
- When the Roth IRA account holder dies; and
- When building a first home, the Roth IRA account holder is permitted to withdraw up to $10,000 over a lifetime.
Roth IRA accounts must be held for at least 5 years before earnings withdrawals are permitted. Earnings may otherwise be subjected to a 10% penalty in addition to taxes owed.
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What Is The Required Minimum Distribution For A Roth IRA?
Roth IRA account holders are not subject to minimum required distributions, unlike 401(k) and traditional IRA account holders, who must begin taking distributions at age 70.5.
Unlike 401(k) and traditional IRA retirement accounts, Roth IRA account holders are not subject to required minimum withdrawals. The reason for this is that you already paid taxes to the IRS when making Roth IRA contributions whereas 401(k) and traditional IRA distributions are tax deferred and so the IRS mandates a withdrawal minimum at age 70.5 in order to ensure they receive tax payments.
The benefit of no required minimum withdrawal is that Roth IRA contributions can grow for as long as you wish. And if you choose to pass on the account to your heirs without ever taking withdrawals that too is permitted.
When Are The Rules When Taking Roth IRA Distributions?
The rules when taking Roth IRA distributions follow a strict order, beginning with direct contributions, then money converted to the Roth IRA account, and finally earnings on contributions.
The Internal Revenue Service has stipulated rules that follow a certain order when taking Roth IRA distributions. When money is withdrawn, the order begins with contributions made directly. Any money that has been rolled over from another Roth account, such as a Roth 401(k) or that has been converted from a traditional IRA is next. Earnings on contributions are counted last.
Roth IRA account holders who have built up a large nest-egg can take withdrawals tax-free and without penalties but those who started accounts recently and have not contributed much may be penalized.
How Do I Avoid Roth IRA Penalties?
Exceptions to Roth IRA early distribution penalties include distributions due to disability, death, a first home, qualified education expenses, health insurance premiums when unemployed, unreimbursed medical expenses, and when substantially equal payments are taken.
Although a Roth IRA account holder must generally be held for five years to avoid 10% penalty fees on earnings, the Internal Revenue Service has a list of exceptions which permit withdrawals without incurring the penalty.
Beyond the exceptions listed above (disability, death, and building a first time home), other withdrawals which don’t trigger the 10% penalty include:
- Health insurance premiums when unemployed;
- Qualified education expenses;
- Unreimbursed medical expenses greater than 10% of your adjusted gross income;
- When substantially equal payments are taken that lock you into a minimum of one distribution each year for at least five years or until you are aged 59.5, whichever comes later.
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