When Can You Cash Out a Roth IRA?
To Cash out your Roth IRA contributions have no penalties; however, when you cash out your Roth IRA earnings can incur the 10% withdrawal penalty
If you were smart and began contribution to a Roth IRA before your 30th birthday, you must have noticed the increase in the amount in the account over the years. A Roth IRA account is one of the best known retirement tools used today. However, many people still pose the question, "when can you cash out a Roth IRA?" Upon opening the account, you will be provided with much of this information, including rules regarding withdrawing from the Roth IRA account. It is recommended that everyone who has a Roth IRA, make themselves familiar with these rules. It could be the key to some extra money during a financial crisis!
There are some various factors that should be known regarding withdrawals from a Roth IRA account. There are two types of withdrawals to consider. First is the money that was contributed. This is the amount that was put into the account by the owner, not the earnings on the account. The IRA rules state that the contribution money can be withdrawn at any time without penalties. Let's say you have contributed $4,000 to the account for 7 years. This means that you have contributed a total of $28,000. You are allowed to withdraw that amount and you will not incur taxes or early withdrawal penalties. This is another great benefit of a Roth IRA. It provides you with access to your money without any age restraints or penalties. So, when can you cash out a Roth IRA? It depends on how much you plan to withdraw relative to how much you put in and how much has accumulated due to good investment decisions. If you only cash out the amount you have contributed, you can take that money at any time as a last resort, for any reason.
The other type of withdrawal will include the earnings in the account. For example, if you contributed that $28,000 over 7 years, and the account has earned an additional $5,000, the balance in the account is $33,000. Here are where the Roth IRA withdrawal rules come into play. In order to withdraw the full amount, including earnings and contributions, you must be over the age of 59 ½ and have had the account for at least 5 years. If you do not meet these requirements, you will incur a 10% early withdrawal penalty. Let's say the person who owns the account is 63 years old, but they have only owned the account for 3 years. Even though the age requirements are met, they will still be penalized because the account has not been active for at least 5 years. It is important to know you must meet both of these requirements in order to avoid penalties.
So, anyone, regardless of age, can withdraw their contributions from their Roth IRA retirement account at any time. There will be no taxes, no penalties and no worries. However, if you plan to withdraw an amount that exceeds what you have actually contributed, you will be dipping into the earnings. This means that, unless you are over 59 ½ with a 5 year old account, you will be taxed on the earnings withdrawn.
In summary, the question of when can you cash out a Roth IRA has two answers. It all depends on the situation, the age of the owner and how long the account has been open. In addition, you can cash out your Roth IRA contributions (as opposed to the earnings) at any time without any penalties or consequences. Keep in mind that even though you have access to the contributions made to the account, it is recommended you leave the money in the account so it can grow. The whole idea of a Roth IRA is to save for retirement. In some cases, when an emergency arises, it is nice to know you have access to this money. However, if you have other financial sources available, you should leave the Roth IRA alone, allowing it to grow tax-free. You will appreciate the growth later in life when you have tax-free retirement income!
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Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.
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