We received an IRA mailbag question from Greg, who wanted to know if he could consolidate all of his separate converted Roth IRA funds into one account. Two important factors to answer this question are: 1) how long have the converted funds been in the Roth IRA? 2) how old is Greg?
An employer retirement plan, such as 401(k) plan may provide for hardship distributions. A hardship distribution must be for an immediate and heavy financial need of the employee, his spouse, or dependent. Hardship distributions are generally taxable and cannot be rolled over to an IRA or other retirement plan. They are also subject to the 10% early distribution penalty (unless an exception applies).
Memorial Day is almost here, and it should serve as a reminder that we owe a great deal of thanks to all the members of our armed forces, both past and present. With that in mind, today we chose to highlight a couple of IRA-related tax breaks that are available to certain members of our military and their families.
Last week I said that some taxpayers may be forced to take funds from their Roth IRA to pay the income tax due on a Roth IRA conversion. Yes, you can take money out of your Roth IRA. Generally there is no income tax due on a distribution, but if you are under age 59 ½ you may owe the 10% early distribution penalty. Here’s the way it works.
This week's Slott Report Mailbag includes your questions (and our answers) on IRA contribution limits, Roth IRA distribution rules and using the pro-rata rule.
For many who have IRAs, they are looking to use those funds in a down economy. But IRA distributions come with strings attached. There is income tax due on most IRA distributions since IRA funds are generally pre-tax funds.
You are not yet 59 1/2 and have become disabled. You want to take funds out of your IRA. Can you escape the 10% early distribution penalty?
Let me start out by saying there is no such thing as a hardship withdrawal from an IRA. An IRA owner generally has unlimited access to their IRA funds for any reason whatsoever (unless they are in an investment that limits their access). There is no age restriction on taking a withdrawal from the IRA. So, there is no need to prove a hardship. So, there is no need to prove a hardship. BUT, if you do take a withdrawal before you are age 59 ½, then there is an extra tax to pay.
A 10% early withdrawal penalty applies to taxable funds withdrawn from a traditional IRA before the account owner attains age 59 ½ unless an exception applies. The same penalty (with its own set of exceptions) also applies on distributions made from most employer-sponsored retirement plans, unless the payment is due to the participant’s separation from service in a year in which he or she attains age 55 or older. Click to read about two tax traps that will trip up an unsuspecting consumer and trigger the 10% penalty.
