Roth IRA Distributions: Rules And Caveats

Roth IRA’s are retirement arrangements that offers individuals the opportunity to save money toward retirement on their own. Unlike some other IRA plans, individuals who qualify for a Roth IRA enjoy a retirement plan where contributions can be withdrawn at any time without risk of penalty for early withdrawal. To qualify for a Roth IRA you must meet income guidelines which are determined by your taxable income and tax filing status. For example, in 2010 individuals who have an adjusted gross income of $120,000 or less can contribute to a Roth IRA, with couples adjusted gross income limited to $176,000.

If you qualify as a contributor to a Roth IRA, it is important you understand distribution rules in order to gain the maximum benefit from your retirement account. The term distribution is essentially the same as “withdrawal” in this case, which occurs when you take money out of your retirement account. As stated earlier, you can withdrawal contributions from your Roth IRA at any time without suffering a penalty. It is important to note that only contributions can be withdrawn at any time without penalty, the same rules do not apply to earnings from money invested. For example if your Roth IRA balance is $4,000- made up of $3,000 in contributions and $1,000 in earnings, you would be permitted to withdrawal $3,000 at any time without incurring penalties or fees. Should you find yourself in need of money at some point, this is an ideal situation compared to those who have their money tied up in a traditional IRA. The problem with this easy access to money is off course the temptation to withdrawal money for circumstances that are not emergency in nature. Remember the ideal place for your retirement contributions is in the retirement account where it can continue to grow and earn money toward retirement goals.

Tax Treatment of Roth IRA Distributions

How your distributions are taxed depends on whether or not the distribution is qualified or non-qualified. Here are examples of qualified distributions if the account is at least five years old.

• The contributor is 59.5 years of age or older.
• Limited to $10,000 per lifetime, distributions that are used toward the purchase or rebuilding of a first time home for account holder or qualified family members.
• Distributions made after the IRA account holder becomes disabled.
• Distributions made to beneficiaries after the death of the contributor.

Non-qualified distributions may be subject to income tax and early withdrawal penalties. It is important that all contributors to a Roth IRA plan understand all of the rules and penalties prior to withdrawing any cash to avoid unpleasant surprises later down the road.