Cashing in part of a Roth IRA

[Guest nchunter]

I have a Roth IRA that I started in 1998 with a financial institution and 2 years ago I moved it to another financial institution. I am looking at the option of cashing in part of it to pay off a high rate equity loan. Will I have to pay pentilities and taxes on what I withdraw?

[JanetM]

No 10% penalty on earnings if you are over 59.5. If you are not older then 59.5 you will have to pay the 10% penalty on earnings. There are exceptions - if you are disabled, or if this is for qualifed purpose - eg first time home purchase.

[Guest taylorjeff]

You can withdraw contributions at any time without penalty.

If over 59½, no penalty on earnings -

If under 59½, no penalty if -

Qualified higher education expenses

Qualified first home purchase (lifetime limit of $10,000)

Certain major medical expenses

Certain long-term unemployment expenses

Disability

Substantially equal periodic payments

Otherwise, 10% penalty

[Guest nchunter]

No 10% penalty on earnings if you are over 59.5. If you are not older then 59.5 you will have to pay the 10% penalty on earnings. There are exceptions - if you are disabled, or if this is for qualifed purpose - eg first time home purchase.

I guess another question would be; according to Kiplinger.com and I quote " money that is converted to a Roth must generally stay in the account long enoughto meet the 5 year test-- that is, for 4 calendar years after the year of conversion--to advoid the 10% penalty".

They then give an example; In 2000 a 30 year old converted $20,000 to a Roth IRA. The 5 year test would be met at the end of 2004, so at age 34 the investor could withdraw the $20,000 tax and penalty free.

Is this true or are they leaving something very importent out?

[saabraa]

Someone's leaving something out. You'd still have to meet one of the traditional IRA exceptions to the 10% additional income tax. By leaving a conversion in the account for 5 years, you've avoided the 10% tax only in regard to converted principal. Even any portion of the conversion that was never pretax could have otherwise been subject to the 10% tax, which is contrary to the usual IRA rule.

[Appleby]

In the example (in the article you cited), the amount would be penalty free if withdrawn in 2005. The example appears to require a little modification to the wording to make that clear. Also, there are two five year periods, one used to determine if a distribution is qualified, and other to determine if taxable conversion amounts has aged five years.

See the article at http://www.investopedia.com/articles/retir...t/03/030403.asp

[John G]

Before you cash out any of your Roth, you should look at different institutions for alternative financing or re-financing. The 10 year bond rate has dropped almost 1/2 point since May 2006, and this is often what financial houses are using for setting loan rates. As of Oct 2006, interest rates are LOWER for most loans than this past spring.

You give no details other than to say high rate equity loan. Higher than your margin rate on stocks? Higher than a complete refinance? I can find some banks that are giving signature lines of credit at 7%.

So, I would make some phone calls before touching the Roth.

[Guest Giraf37]

No 10% penalty on earnings if you are over 59.5. If you are not older then 59.5 you will have to pay the 10% penalty on earnings. There are exceptions - if you are disabled, or if this is for qualifed purpose - eg first time home purchase.

What about penalty on distribution of the principal?

[John G]

There is NO penalty on the distribution of converted amount if the account has "vintaged" five years. See the reference posted by Appleby.

But... the best answer is solve the problem some other way and leave your tax shelter Roth alone.

[Guest mrbutterpie]

just curious - if you did take a withdrawal from a roth ira before 59 1/2, but it was of the principal only, I understand there is not a tax consequence, but would you still have to report the withdrawal to the IRS?

[Guest Giraf37]

just curious - if you did take a withdrawal from a roth ira before 59 1/2, but it was of the principal only, I understand there is not a tax consequence, but would you still have to report the withdrawal to the IRS?

Of course you have to report the withdrawal, you would still get a 1099-r(I think it's r) anyway, the concern of my question was not the tax, I already paid that and already know there is no tax consequence, my question is will there still be the 10%penalty on the principal(not the earnings), I would be withdrawing from the principal, not anything I earned above and beyond.

[Guest mrbutterpie]

I know you were asking a different question, and understand there is no tax consequence to withdrawal of principal in a Roth, I just don't see where you would report this allowed withdrawal. On form 8606 Pt. III there is only space to input taxable unqualified distributions (ie. on earning)..the figure would then be added to form 1040 line 15b. Maybe I'm not seeing something correctly?