Individual Retirement Accounts, or IRAs, are (as the name implies) savings vehicles for your retirement. Pretty simple. You contribute money to it over the years, allow it to grow and compound, and once you turn age 59½, you can begin taking penalty-free distributions if you so desire. And that’s generally true for all IRAs, whether it’s a traditional or a Roth.
And while there are ways to get money out of a tradtional IRA before age 59½ without a penalty, with a Roth, the tax code allows for some further exceptions and flexibility to those penalty rules that you may be able to use to your advantage. So along those lines, here are three things you may not have known about a Roth IRA:
First, you can always withdraw your contributions at any time, for any reason – no penalties, no tax. This, of course, is just the amount you have actually contributed, not any earnings you might have in the account. This feature is unique to a Roth IRA – you cannot do that with a traditional IRA. So let’s say you’re under 50 and opened up a Roth and contributed $6,500 to it this year, which is the maximum allowed for 2023. And let’s suppose that those investments in the Roth grew your balance to $7,500 later on. In that example, you’re eligible to take out the original $6,500 at any time or at any age. But if you took out any of the additional $1,000 in earnings, you may be subject to taxes and penalties if you withdrew it without following the rules.
Now, this freedom is nice, but keep in mind that if you take out those contributions, that money is no longer working for you. So it’s probably best to do this only as a last resort.
So how do you access the earnings in the Roth pre-age 59½? There are a couple of ways to do that.
One is to fund your child’s college education (or your own, for that matter). If you use your Roth funds to pay for qualified education expenses like tuition, books, fees, and supplies, the 10% penalty on withdrawing the earnings is waived (although the earnings will be subject to taxation). And if you’re over age 59½, and it’s been at least five years since you first contributed to any Roth at all, all of your withdrawals—earnings as well as contributions—are tax-free.
One thing to look out for here, though – check to make sure that the distributions don’t affect your financial aid if you’re looking for extra help through FAFSA. Just something to keep in mind.
Another way to access the earnings before age 59½ is for a first-time home purchase. The Roth IRA rules allow you to withdraw up to $10,000 of your Roth’s earnings and less than 5-year-old converted principal for a first-time home purchase, tax-free and penalty-free as long as you’ve had a Roth for at least 5 tax years. What’s more, this $10,000 homebuyer exemption is in addition to all the contributions you’ve made and any conversions you made more than 5 years prior. So if you’ve contributed, say, $50,000 to your Roth IRA over the last ten years, you can take out the entire $50,000 of contributions plus up to $10,000 of earnings under the first time homebuyer exemption, assuming you have that much in earnings, of course.
Make sure you adhere to the five-year-rule for this one as well.
So yes – the Roth IRA has some distinct advantages that other traditional retirement savings vehicles do not. As always, be sure to check with your financial advisor before you make any decisions about taking money out of your Roth, as everyone’s individual situation is different.
At AFG, we talk about things like this every single day with our clients. If you’d like to know if one of these Roth withdrawal strategies may be right for you, or if you need additional guidance with any other financial concerns, just give us a call, and we’ll be happy to meet with you!
The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
No client or prospective client should assume that this information, or any component thereof, serves as the receipt of, or a substitute for, personalized advice from Accardi Financial Group or from any other investment professional.
IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.
Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.
Examples cited are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated.
This material was prepared by Lucia Capital Group.
Joe Accardi, Damon Accardi, and Danielle Accardi are registered representatives with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the respective names Lucia Capital Group and Accardi Financial Group which are separate entities from LPL Financial. LPL ART-433284 (05/23)