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IRA Withdrawal Penalty Exceptions

Roth IRA is an individual retirement account that offers tax-free growth and normally tax-free withdrawals. I said normally because Roth has specific rules, not only in contributions, but also with distributions. The Internal Revenue Service predetermined two kinds of distributions: qualified and unqualified (subject to Roth IRA penalties). Early withdrawals can be made because the IRS does prevent such. They know life happens and it does not always go our way. Financial constraints due to major health issues or personal issues may arise any moment making us in need for a source of ready cash.

Qualified Distributions

First withdrawals made after 5 tax years counting from January 1 of the year the first contribution was made are considered qualified Roth IRA distributions. No matter when you first made contribution with your account, the count would still start from January 1st of that same year. An account holder should also withdraw money out of his Roth only upon reaching the age of 59 ½. Original contributions can be distributed anytime tax-free. While investment gains out of your Roth should wait until the account matures before it can be withdrawn otherwise it will be subjected to penalties and taxes.

Unqualified Distributions

These are withdrawals out of the terms mentioned earlier. Generally taxes and penalties will be charged with doing so. A 10% penalty of the taxable amount will be charged. For example you took out $5,000 then you will have to pay $500 as penalty. But of course there are still exemptions to these fees provided that it falls under the qualified distributions.

Penalty Exceptions

IRS extended the scope of their qualified distributions for Roth. There are several instances that IRS allows tax-free and penalty-free early withdrawals. These are also termed as IRA hardship withdrawal. Roth IRA withdrawal penalty exceptions apply to distributions made because of permanent disability, medical expenses (exceeding 7.5% of adjusted gross income), education expenses, and first home purchase (up to $10,000). Others include:

  • Paying medical insurance after job loss.
  • Distributions due to IRS levy for qualified plans.
  • Distributions by a qualified reservist.
  • Distributions for a qualified disaster recovery aid.
  • Distributions made by beneficiaries who inherited the account.

Roth IRA Deadline

You will have until April 15 of the tax filing Roth IRA deadline date. You must put money into your account before April 15 and specify which year you want it to count. Contributions will not be tax-deductible but you can make a Retirement Account Savings Credit of up to $2,000 (for married couples jointly filing) and $1,000 (for single filers) with income below the limits.

IRA Income Limits

Roth modified adjusted gross income (MAGI) limits are listed below.

  • Single filers, head of household and married couples filing separately and not living together will have a limit of $107,000 – $122,000 to be permitted a full contribution to Roth.
  • Joint filers will have a limit of $169,000 – $179,000 so that full contribution will be allowed.
  • Married couples filing separately and living together should not exceed an MAGI of $10,000 otherwise Roth contributions will not be possible.
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