Though 59 ½ years of age is in general the ‘magic age’ to be able to begin receiving IRA withdrawals without procuring the federal 10% premature Roth IRA penalties, there are many conditions under which you can access your IRA funds without procuring a penalty. The following is a rundown of some of the proven ways to avoid Roth IRA withdrawal penalties:
Internal Revenue Service Policies
The Internal Revenue Service does not look at which Roth plan you procure your distribution. If you own multiple IRAs, the IRA tax rules deemed all of the account as a single plan for distribution purposes. In addition, the IRS has considered that the Roth IRA withdrawal should be distributed in a particular order, and that order is employed without considering which Roth IRA is utilized to take the withdrawal. The withdrawals should be carried out in the following order:
- From annual non-taxable contributions to a Roth Individual Retirement Account (aside from other conversion amounts)
- From conversion contributed funds, on a first-in and first-out basis
- From gains or earnings
These policies apply if you look forward to making an early distribution. Here are some of the examples that you might find helpful to your present circumstances:
Penalties from Contribution Earnings
Provided that there is no exception that applies, the withdrawal made prior to reaching 59 ½ years of age is subject to early withdrawal Roth IRA penalty of 10% on the sum of the withdrawal. It’s critical for you to exercise extra caution so you would not confuse yourself on the early withdrawal penalty with the imposed taxes on a non-qualified withdrawal.
Keep in mind that a non-qualified distribution inflicts an ordinary income tax on the withdrawal, but the early distribution penalty will be compelled in addition to such tax.
Example
Joe, 30 years of age, completed a Roth account contribution of $2,000 in 2000 before the Roth IRA deadline. In 2006, his account’s balance amounted to $3,500. Joe decided to close his account in a non-qualified withdrawal that same year. For the reason that the withdrawal is non-qualified, Joe incurred taxes on his account’s earnings amounting to $1,500. He also recompensed tax on this amount within his marginal tax rate.
Furthermore, because the withdrawal happened before he even became 59 ½ years of age, and since Joe did not qualify for the exceptions, he also procured the Roth IRA fees of 10% early withdrawal penalty on the earnings.
Supposing Joe falls in the 28% marginal tax bracket, he had reimbursed $420 in tax on the earnings alone, and had paid penalty in the sum of $150 on the early withdrawal.
IRA Withdrawal Exemptions
The penalties of Roth IRA do not apply to withdrawals that:
- Take place due to the owner’ disability.
- Take place due to the owner’s demise.
- Are made through substantially equal periodic payments completed over the life expectancy of the original owner of the IRA.
- Are utilized to pay off unreimbursed medical expenditures that go beyond 7 ½% of the AGI or adjusted gross income.
- Are used to recompense medical insurance premiums when the IRA owner has procured unemployment earning for more than twelve weeks.
- Are utilized to shell out the costs of home purchase for the first time, which will most likely incur a lifetime limit of $10,000.
- Are used to disburse for the qualified expenditures of college or higher education for the owner of the IRA and qualified family members.
- Are utilized to compensate taxes due to an IRS levy placed on the retirement account.
IRA Conversion Penalties
The Roth IRA penalties when it comes to conversion from a Traditional IRA to a Roth account are somewhat different than those applicable for annual contributions, which can be withdrawn at any time for whatever purpose without penalty as well as income taxes. An early distribution from a conversion contribution has different rules. The early distribution penalty pertains to a withdrawal of conversion money from a Roth account when:
The withdrawal is accomplished within the five-tax-year term beginning with the year that the conversion was withdrawn from a regular Individual Retirement Account; and
When the withdrawal can be attributed to money that was included in gross income due to conversion.
I was born on June 16, 1953. I opened a Roth IRA in 2008 with a $5500 deposit and followed it in 2009 with $6000 making a total basis of $11,500. In Feb 2011 the balance was $11,614. I withdrew prematurely $2700. I converted $2700 from a Trad IRA within 60 days back into the Roth – stupidly – to avoid the 10% penalty on that earlier withdrawal. I say stupidly because I now owe FIT on the $2700. OK – fine. Live and learn!
Now my Roth IRA has a balance of $11,614 as I said. I just turned 58 this year.
I want to know how much tax I would owe if I withdraw the present balance of $11,614? I think I owe tax on the $2700 that I converted and the $164 I gained since 2009. Is that correct. Do I owe the 10% penalty on the whole $11,614 or just the $2700 and the $164 or what? Thanks