Withdrawing From A Roth IRA before 59.5

[Run4life]

Is only the contributions what get taxed when withdrawing? Like if I put 20 thousand of my money in that made 5 thousand, can I withdraw 20,000 without a penalty?

Also, is it best to put the full contribution limit at the beginning of every year?

Thanks

[CuseFan]

Contributions never taxed on distribution as they were never deducted. Unless it's a qualified distribution, which before 59.5 and 5 years established, then earnings are taxed and I think subject to penalty taxes (not sure on that). I also think you must withdraw prorated contributions and income, so I do not think you could take out $20k contrib w/o taxation while leaving the $5k earnings in the IRA. 

Front loading contributions early in the year does maximize the time and the dollars for earnings potential, but then you are investing a lump sum amount once a year at the same time, which may or may not be the best time to invest, rather than dollar cost averaging throughout the year. You could be in cash/money market in the IRA and then dollar cost average from inside the IRA as well.

If you have an accountant or financial advisor that you trust, they should be able to provide definitive guidance on this. This is my opinion and free advice, which may or may not be worth more than you paid. :-)

 

[Belgarath]

Roth IRA's are FIFO on basis. So if a Roth IRA, yes, if you contribute 20,000, have 25,000 total, then you can withdraw 20,000 tax free. The interest earnings taxation depends upon "qualified" vs. "non-qualified" distribution, as 'Cuse mentions.

[CuseFan]

Thanks for correcting me B. So that piece of advice was worth the price paid - nothing!

[Belgarath]

Run - it does occur to me that I should mention my assumption that we are talking about "regular" Roth IRA contributions. If you are "converting" an existing IRA to Roth, and you subsequently take a distribution prior to age 59-1/2,  a premature distribution penalty may apply. This is generally referred to as the "recapture" rule. You'd want to run this by your tax advisor if such a situation applies. 

I know this wasn't the situation you posited, but I thought I'd toss this in FWIW.