Would like some clarifications w.r.t. Roth IRA withdrawals.
I am 43 years old.
a) It is my understanding that one can withdraw one’s *principal* (not earnings) w/o any penalties or taxes – is this correct?
b) I “think” I may have also heard about a “5 year rule” – does this mean one would not be able to withdraw their principal penalty and tax free until 5 years after a particular contribution?
c) if I were able to withdraw my principal penalty and tax free, how does one go about making sure one withdraws from the principal and not the earnings – is this solely my responsibility to be aware off (i.e. *I* must be aware that I have enough principal to meet my withdrawal) or does the IRA provider automatically distribute my withdrawal from my principal and not my earnings balance?
Any help or advice would be greatly appreciated,
assuming we are talking non-qualified distributions (generally had an IRA longer than 5 yrs and over 59.5 constitutes qualified, with some exceptions of course)
a) contributions made directly to a Roth IRA can be withdrawn tax and penalty free. not to be confused with basis derived from such things as a Roth conversion. according to ordering rules for non-qual dist's, these come out first. http://fairmark.com/forum/read.php?2,54159
b) no 5 yr rule contributions made directly to a Roth IRA account. there are 2 types of 5 yr rules as they pertain to Roth IRA's: 1) so you can take qualified distributions (must have an account at least "5" years old) and 2) for non-qual dist's of converted funds. IF we are talking about non-qual dist's for contributions made directly to a Roth IRA, none of this matters.
c) see link on Roth ordering rules above. You are responsible for tracking your contributions. You receive a form after April each year, form 5498, and you should keep these to track your basis. All Roth IRA accounts are considered as a whole for non-qual dist purposes.
Example: Joe has 2 Roth IRA accounts: RIRA1 - $6000 ($5k basis), RIRA2 - $10k ($10k from Rollover). Joe can take $5k from either account or some combination thereof (eg $2.5k from each) without tax and penalty. This will reduce his basis (done on form 8606) by $5k and he will have no more left after the distribution is taken.
hope this helps