Is withdrawal from Roth IRA tax-free and penalty-free even under age 59.5?
Are withdrawals of contributions from a Roth IRA tax-free and penalty-free as long as you’ve had the account for 5 years?
I’m 30 years old.
I’ve had a Roth IRA for just over 5 years.
If I withdraw my contributions, will it be tax-free and penalty-free or will I have to pay a 10% penalty because I’m under 59.5.
I am planning to use the funds for a down payment on a property, but I am NOT a first-time homebuyer.
I don’t meet any of the IRS qualified distribution criteria.
According to the flowchart for the IRS, I would pay 10%.
However, most places I read online say that my withdrawal would be penalty-free.
Which is correct?
I can’t seem to find the right answer anywhere.
By the way, I made about $2500 in contributions in 2011 and $5500 in contributions maybe 2 years ago.
If I wanted to take out all my contributions (about $8k), it should be fine since I opened the account 5 years ago?
Thanks!
Permalink Submitted by Jose Morales on Wed, 2016-08-24 17:19
Think of your Roth IRA as a layer cake. The contributions are in one layer, earnings are in another, and conversions in yet another layer. Since you don’t mention conversions I’ll leave that out for now. When you withdraw funds you just must exhaust the contributions layer, and anything that comes form this layer represents funds that you have already paid taxes on. Because of this, that money is not taxed again and is not subject to a tax penalty (10% of a $0 tax bill = $0 anyway). It is only when you reach in and take from the earnings layer that you must meet the standards for a qualified distribution in order to have the distribution be tax and penalty free.
Permalink Submitted by Daniel Lee on Wed, 2016-08-24 18:16
I have a Capital One Investing account.Which option do I select for Distribution?NormalEarly with no known exceptionEarly with exceptionRemoval of excess contribution If I click on Early with no known exception, it says I may be assessed a 10% penalty from the IRS. Should I just click that one anyway and report my contributions when I file my taxes?
Permalink Submitted by Alan - IRA critic on Wed, 2016-08-24 20:25
For your Roth distribution, select “early with no known exception”. As long as you limit the distribution to your regular contribution total (8k), your distribution will be tax and penalty free after correctly reporting it on Form 8606. You must keep track of your total regular contributions made in order to correctly complete Form 8606 or a tax program entry. Note that the 5 years is immaterial to your particular situation here because you do not qualify for a first home distribution.