Global Advice Center

Criteria for Roth IRA Withdrawal

Posted on Jul 19, 2010 03:04:12 PM

Certain conditions must be met before a Roth IRA withdrawal can be considered a qualified distribution. Qualified distributions are totally tax-free transactions. Roth IRA qualifications include the following situations: a transaction is made on or after the age of 59 1/2, a transaction is made to the estate or beneficiary of the deceased, a transaction is made after approved disability, or a transaction is made to cover first-time home-buyer expenses. Additionally, a Roth IRA withdrawal of earned returns must not be made within a five tax year period; transactions made before this time requirement is met will not be considered to be a qualified distribution.

Roth IRA Qualifications are different from a regular IRA. For example, a person can withdraw their contribution without tax or penalty. This is a huge difference from a traditional IRA; however, the rules to do a Roth IRA Withdrawal of only the invested contributions can get complex. The five year tax rule confuses many people. The IRS does not specify that the investor wait five calendar years; in fact, the investor has until April 15 of the following year to make a contribution for the previous tax year. Thus, the first year considered is the year for which the contribution has been made.

In addition, the IRS considers multiple Roth IRA accounts as one for tax purposes. An early withdrawal that is not covered by certain Roth IRA qualifications will result in a 10% penalty on the withdrawal amount. Also, a non qualified distribution will result in income taxes being assessed.

In conclusion, investors have to be vigilant about carefully reading and understanding the rules for Roth IRA distributions. The penalties can be quite costly; investors should make sure that they completely understand how much money they stand to lose. An investor can lose a large sum of money by not paying close attention to the rules.