Major advantage of Roth IRA: Early withdrawal
Roth IRA is a great investment vehicle as it not only provides a tax free growth and tax diversification of savings but also provides withdrawal from the account in case of emergencies. Thus, Roth IRA is proves to be a flexible retirement account options because you can make tax and penalty free withdrawals of your Roth IRA contributions at any time.
Account holders can make a Roth IRA withdrawal from their Roth IRA at any time, but unless you meet Roth qualifications a Roth IRA withdrawal on earnings will be penalized and taxed. Another great advantage of the Roth IRA is that you do not have to withdraw any funds when you reach the age of 59Ω. You can keep the funds in there till you die.
Roth IRA early withdrawal of contributions that you made can be made at any time but Roth IRA early withdrawal penalty will be applicable on earnings made on these contributions. When a Roth IRA withdrawal is made on earnings, it is also important to understand that the withdrawal is subject to the five year rule. The five year rule is simply that any earnings withdrawn from a Roth IRA must be made at least five tax years after the original contribution. For example if you were 58 years of age when you started your contributions, you cannot do penalty free Roth IRA withdrawal of earnings till you reach the age of 63.
Roth IRA withdrawals of earnings made outside of the Roth IRA withdrawal rules are subject to hefty fees and taxes because the money that is contributed to a Roth IRA is not taxed. So when earnings are withdrawn from a Roth IRA, they are charged with income tax and an additional 10% Roth IRA withdrawal penalty if it does not meet these requirements.
While there are early withdrawal penalties, there are many exceptions which allow withdrawal without having to endure a Roth IRA withdrawal penalty. Some exceptions to the rules are as follows:
- If the IRA owner is disabled or has reached the retirement age
- For the payment of outstanding medical bills and payments
- If the funds are used towards first-time home purchase
- If the Roth IRA withdrawal is for the payment of higher education for the IRA owner and/or eligible family members
You should though keep in mind prior to withdrawing from your account that beyond the withdrawal penalty, you will hamper your future retirement nest egg by missing out on years of compound interest. Compound interest simply put is when you earn interest on interest. If the principal is reduced it will not only reduce your retirement amount but also reduce the amount of money that is working for you to make that nest egg huge.
However you decide to use your Roth IRA, you really need to know the tax impact of your decision prior to removing any of your Roth IRA funds as it can cause a disastrous impact on your retirement. It is always good to learn more about qualified and non-qualified distributions, and as always, consult with a financial professional if you have any questions before you make any withdrawals or distributions. Stay away from your Roth IRA account unless your distribution is qualified and you meet one of the penalty exceptions.