Making Roth IRA Withdrawals

Making Roth IRA withdrawals is the ultimate goal of every Roth investor. We all want to get to the point where we can start enjoying the fruits of our labor. However, there are some rules and regulations that you have to go by with IRA withdrawals. Here are the basics of Roth IRA withdrawals and how they work. 

Roth IRA Withdrawals

The big advantage of a Roth IRA is the process of taking withdrawals. When you contribute to a Roth IRA, you do so with the understanding that you are paying your taxes upfront. You contribute to the fund with after-tax dollars, and then at the end of the process, you can withdraw the money tax-free. This could potentially net you a huge tax savings on your retirement dollars. 

In order to start making withdrawals that include investment earnings, you have to have reached the age of 59 1/2. You do not necessarily have to take money out of your Roth IRA at that point, but that is the earliest that you could. 

Another rule that you will have to abide by is the 5-year rule. This rule states that your funds have to have been invested in the Roth IRA for at least 5 years before you can start to withdraw. If you start your Roth IRA early on in life, this will be nothing to worry about. However, if you start it at about the age of 56, you will have to wait beyond the 59 1/2 threshold to take your money out. 

Principal Withdrawals

Unlike other retirement investment accounts, the Roth IRA allows you to withdraw from the principal--the amount that you have contributed--at any time. Even if you want the money before you turn 59 1/2, this is fine. Since you are funding the account with after-tax money, the government figures that you should be able to get it whenever you want. However, you cannot withdraw any of the earnings from the investments that were made with that money. That money will have to stay in the IRA for the duration of the term unless you are willing to pay penalties on it.

Early Withdrawals

When you take money out before the age of 59 1/2, you will have to be careful. You can take out the money that you have put into the plan, but if you want to cash out the entire account, which would include the money that was earned, you will most likely have to pay a 10 percent penalty on the withdrawal. The exception to this rule is if you can claim a hardship. Roth IRAs do allow an exception if you can prove that you have an extenuating circumstance, such as substantial medical bills, divorce or the death of a loved one. If you are not taking the money out due to hardship, you will have to pay the penalty as well as income tax on the gains.

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