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Tax-Free Roth IRA Withdrawal Options.  What every Roth IRA account holder should know

8/10/2020

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Withdrawing funds from your retirement accounts must be done carefully to avoid a potential 10% early withdrawal penalty.
 
Unfortunately, each retirement account type has different rules. Here are some tips for Roth IRAs.
 
Roth IRA basics
 
Roth IRA accounts differ from other IRAs in that your contributions are made in after-tax dollars. If you follow the Roth IRA rules, your withdrawals of any earnings in the account can be tax-free. Generally, to take advantage of the tax-free distribution from a Roth IRA:
 
  • You must be age 59½ or older.
  • You must have had funds in the Roth IRA account for more than 5 years.
  • You must understand what is being distributed (contributions, converted funds or account earnings).
  • You must know your possible tax-free distribution options.
 
If you do not comply with these rules you could be subject to income tax and a 10% early withdrawal (distribution) penalty. But wait! There are ways to avoid getting taxed and the early withdrawal penalty.
 
Roth IRA distribution tips
 
  • Plan around the 10% early withdrawal penalty. Prior to withdrawing funds, ask for help to ensure you know whether you will be subject to the early withdrawal penalty.

  • Remember that contributions have been taxed. What many forget is that your initial contributions have already been taxed. The portion of your early distribution from a Roth IRA account subject to income tax is only the untaxed earnings on your contributions.
 
  • Qualified early withdrawals. If you use the distributions for a qualified reason, you can avoid the early distribution penalty. Some of the more common qualified early withdrawals from a Roth IRA are used for:
 
  • College. If you withdraw Roth IRA earnings to pay for college expenses, you will pay tax on the earnings withdrawn, but you will not be subject to the 10% early withdrawal penalty.
 
  • First-time home buyer. Even if you’ve had your Roth IRA for less than five years, you can withdraw up to $10,000 in Roth IRA earnings tax-free and penalty-free if it is used to buy a first home.
 
  • Account holder disability or death.
 
  • Un-reimbursed medical expenses that exceed your itemized deduction threshold.
 
  • Substantially equal periodic payments. These must be made over the defined life-expectancy of the IRA holder using specific rules to avoid the early withdrawal penalty.
 
  • No minimum withdrawal requirements. The Roth IRA rules do not require you to take money out when you reach a certain age. This means you can have an estate-planning strategy to never withdraw the funds in your Roth IRA. While the funds would be considered part of your estate, your heirs could withdraw the funds tax and penalty-free.
 
  • Keep separate accounts. The taxability of a withdrawal can be complicated. Are you withdrawing contributions, converted funds or earnings? How long have the funds been in the Roth IRA? Because Roth IRA distribution rules can be complex, if you convert funds from another retirement account into a Roth IRA, do so in a separate account. It will then be easier to understand the impact of a withdrawal from the account.
 
If you have questions regarding your situation, speak to an advisor prior to taking any withdrawals from a Roth IRA or other tax-advantaged retirement plan.

"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.   
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. 
 
For more free resources, such as Tax Rates, Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Monarch Accounting Group, Inc
145 Tower Drive, Suite 4
Burr Ridge, IL 60527
Phone (630) 320-3720
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Phone: (630) 320-3720

Monarch Accounting Group Inc
145 Tower Drive, Suite 4
Burr Ridge, IL 60527-7836
Email: Info@MonarchAccountingGroup.com


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