Making an Roth IRA early withdrawal will cost you a 10% penalty fee, you will owe money to the IRS and you will probably pay a fee to your plan holder for early withdrawal. If you want to avoid a Roth IRA withdrawal penalty, read on. There are two exceptions to this rule that may keep you from being penalized if you meet these Roth IRA qualifications. You can withdraw money if you have reached the age of 59 ½ or you have had the account for a minimum of five years. The second exception is only available to those in an emergency situation.
There are ways to do a Roth IRA early withdrawal without penalty and fees and without breaking the law. The original money that you invest into the account is not subject to these rules. At anytime during the life of your Roth IRA account you are eligible to pull investment money out without a penalty. Roth investment money is money that you invested after you were taxed. Taxing the original investment money is considered double taxation and against the law.
As an example: You invest $10,000.00 into a Roth IRA, it has been generating a good return and is now worth $25,000.00. You are 45 years old and need to make a withdrawal but do not want to pay the fees. You can legally access, without fine or penalty, the original $10,000.00. Anything over that $10,000 will be taxable and subject to an early Roth IRA withdrawal penalty. The rest of your money that is in the account is considered investment gains and is subject to federal income tax laws.
The five year rule is very strict when it comes to early withdrawal. You MUST have had the account open and active for at least five years prior to making any form of withdrawal from the account. This means original investment or investment gains. You will automatically be penalized with the 10% penalty, charged the appropriate income taxes and fined by your investment company. The five year applies even if you reached the appropriate withdrawal age.
Depending on the financial company that is maintaining your account you may be subject to other fines and penalties for early withdrawal of monies from your account. This may include higher maintenance fees in the future or other associated fees. If at all possible you should leave your retirement money alone and seek financial assistance from another source.
It is very important that you familiarize yourself with any laws or rules concerning your individual account. The Internal Revenue Services, as well as the Federal Government, often changes the rules governing individual retirement accounts. Just because a certain law or regulation applies today does not mean that this will hold true in the new year. It is crucial if you are planning to make any changes to your retirement account, including an early withdrawal, in the upcoming year that you discuss any new implications it may have on your finances. All fines, penalties and stipulations cited in this article are in reference to laws currently in use in 2009 and may not necessarily be the same in 2010. Roth IRA vs 401k withdrawal penalty rules may be different as well as inherited IRA withdrawal rules. Keep this in mind.