Roth IRA information on distributions

One of the factors that makes a Roth IRA more desirable than some other retirement options is that there are fewer penalties and restrictions on the distributions and

withdrawals of a of a Roth IRA.

The Roth IRA lets you keep your investment earnings

The taxes on a Roth IRA are also calculated differently than other cash distributions from retirement plans, with much of the Roth IRA non-taxable.  When taking a distribution from a Roth IRA the funds are not considered part of the owner’s regular income for the tax year. This is an advantage, especially if large amounts of money are withdrawn while the owner is still working within a much higher tax bracket.

Situations that avoid the early withdrawal penalty

First of all not all distributions from a Roth IRA are not subject to a 10 percent early withdrawal penalty as is the case with cashing out funds from a 401k plan or traditional IRA. If the owner is age 59 ½ or wants to buy their first home they will not pay the penalty for withdrawal. In addition, penalties are waived if the owner becomes disabled.  A final circumstance where penalties are waived is if the owner dies, their beneficiary receives the funds from the Roth IRA free of penalties.
 

Qualified withdrawals and the age of your Roth IRA account

The only remaining qualifier in whether an investor can withdraw finds from a Roth IRA under the above circumstances is if the fund has been in place for a long enough period of time. The Roth IRA must have been funded for at least five years before these qualified withdrawals can be made without paying the 10 percent penalty. This 5-year requirement applies to both new Roth IRAs or begins at the date on which the transfer was made from a traditional IRA. It does not matter if funding is made on a continual basis to the Roth IRA. The date that is used for determining if the five year requirement has been met is the date of the first deposit.
 

FIFO rules apply

The order in which funds are distributed is the order in which they were deposited, or a first-in-first-out system. This applies to roll over amounts which follow regular Roth IRA contributions in the distribution process. This is important in determining taxes, since contributions made in the form of a rollover have not yet been taxed, and contributions made directly to the Roth IRA are not ever subject to taxes. So if a Roth IRA is established from a roll over account, then those funds will be distributed first by the taxable contributions and therefore taxed at the owner’s current tax rate. Next to be distributed are the non-taxable funds.

59 ½ is the magic age to avoid taxation

Earnings from the investment are the last funds to be distributed. If the account is depleted from qualified contributions (all except the earnings on the direct Roth IRA contributions) then those earnings are subject to the 10 percent early withdrawal penalty. Also, all non-qualified distributions will be penalized and taxed if withdrawn before age 59 ½ .

No mandatory withdrawal amounts

To ensure the contributions and earnings from a Roth IRA are not penalized or taxed, the owner should be sure to wait at least 5 years before making a withdrawal. Next, they need to target those funds for a qualified purpose or wait until you are at least 59 ½ years of age before using the funds. Doing this will maximize the earnings on the account and save the tax payer in terms of penalties and taxes. Funds from Roth IRAs also can stay in the account as long as desired. There are not required withdrawals beginning at age 70 ½, as with traditional IRAs.