Roth IRA Withdrawals

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Marc685
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Roth IRA Withdrawals

Postby Marc685 » Wed Feb 27, 2013 1:03 pm

Hello,

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,
Marc

DaveInPgh
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Re: Roth IRA Withdrawals

Postby DaveInPgh » Wed Feb 27, 2013 1:21 pm

Was curious about this myself.

VinTek
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Re: Roth IRA Withdrawals

Postby VinTek » Wed Feb 27, 2013 1:31 pm

Always go to the source.

Bichon Frise
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Re: Roth IRA Withdrawals

Postby Bichon Frise » Wed Feb 27, 2013 2:38 pm

Marc685 wrote:Hello,

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,
Marc


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
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

Marc685
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Re: Roth IRA Withdrawals

Postby Marc685 » Wed Feb 27, 2013 4:47 pm

Dear Bichon,

Thanks so much for the information. You completely and clearly answered each and every question I had. You are the smartest dog I ever met :)

DaveInPgh
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Re: Roth IRA Withdrawals

Postby DaveInPgh » Thu Feb 28, 2013 8:24 am

Bichon Frise wrote:
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


I really like how it was presented in the link above. Thanks for sharing.

Bichon Frise
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Re: Roth IRA Withdrawals

Postby Bichon Frise » Thu Feb 28, 2013 8:42 am

Please note the fairmark thread I posted is over 2 yrs old. There were many iterations within that thread, but to be sure we are looking at the same thing, I have copied and pasted the latest (and correct) version below.

Glad I could help. But KAWill and Alan S over at fairmark did the heavy lifting.

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-Yes (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!


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