A taxpayer made a withdrawl from his Roth IRA. He is under 59 1/2 and the Roth has only been open for 1 year. He had put 2500 into the Roth and was now withdrawing 1000. Hard to believe but there is not 10% penalty or tax, as the penalty and tax is only on withdrawling earnings. So you can withdrawl from a Roth what you put into it without tax or penalty regardless of when you do it or your age. Seems to lenient but unless anyone disagrees, thats appears to be the rule.
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Yep, those are the rules.
That's why I suggest to clients that qualify for the "Saver's Credit" to contribute to a Roth. They can withdraw the initial contribution anytime after April 15th tax free and penalty free, but get to keep the Saver's Credit. -
One exception is if they convert from a traditional IRA to a Roth IRA. In which case if the conversion was done within the last 5 years they do pay the 10% penalty on the distribution even if the distribution isn't taxable. Other than that though no tax when you withdraw your basis. Makes it good when you want to put money in an IRA but think you might need to withdraw it before you're 59.5.Comment
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Thank you for that input. That said it appears the Roth is a good place for a college student to put the money they are making while working so they do not get penalized for financial aid. When they go to get the money, there's no tax or penalty.Comment
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David:
I want to thank you very much for that post.
I was on the verge of giving a new client a wrong answer on this very question until your comment made me re-think their situation. Now I have to give them bad news, but I don't have to do it in "apology" mode, plus I would have probably lost them next year. (Well, I may lose them anyhow, but that's OK - still not in apology mode)"The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Shucks. I didn't get one.Comment
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