Considering A Roth IRA Early Withdrawal? Read This First

Many people are proud owners of a Roth Individual Retirement Account, also commonly referred to as a Roth IRA. This type of retirement account was established in 1997 by the Taxpayer Relief Act. People who open a Roth IRA can invest in stocks, mutual funds, certificates of deposit, real estate, and other acceptable investments. There are certain eligibility requirements that must be met before an individual may open a Roth IRA, and this type of retirement account also offers the owner certain tax advantages.

For those individuals who have a Roth IRA, it can be very tempting to want to withdrawal the funds. However, in some instances, a person who withdrawals his or her funds from a Roth IRA before a certain age can incur hefty early withdrawal penalties. These penalties are in the form of fees that must be paid upon withdrawal of the funds, and can be rather expensive, adding up to ten percent or more of the withdrawal amount. The account owner will also be forced to pay income taxes on any earnings that are withdrawn from the account. After an individual withdraws funds and the early withdrawal penalty fees are subtracted, the amount of money left is often much less than anticipated.

On the other hand, there are a few situations where an individual can withdrawal funds from a Roth IRA and incur no Roth IRA early withdrawal penalty. In general, the account owner will not have to pay any penalty fees as long as he or she is over 59 ½ years old and the funds have been in the account for a period of time longer than five years. These withdrawals are known as qualified distributions. Another time when a Roth IRA owner can withdraw funds with no penalty is when the funds are used for a down payment on the owner’s first home purchase. As much as 10,000 can be withdrawn for this purpose. Roth IRA owners who become disabled are also able to withdraw funds before they are 59 ½ without incurring any penalties. Other circumstances warranting a Roth IRA early withdrawal without penalty include secondary educational expenses, a significant economic loss, and substantial medical expenses.

Roth IRAs are excellent investing and long-term savings vehicles. They offer many tax advantages for the owners as long as the funds are not withdrawn until a certain time. For those individuals who find it necessary to withdraw their funds early, certain circumstances can prevent these people from having to pay early withdrawal penalty fees. If the withdrawal is not classified as a qualified distribution, the account owner will have to pay an early withdrawal penalty plus income tax on any earnings that are withdrawn.