withdrawals from Roth IRA or traditional

[Guest cindiw]

I am 64 and planning to invest money in an IRA this year. My question is about the tax benefits or penalties that might ensue. I believe that with the Roth IRA in order for me to avoid penalties I must leave the money in for 5 years. Could someone elaborate on this, because I think it refers only to the money earned, not the capital. What about the traditional IRAs? Since I am 64, if I invest this year, can I take money out without incurring a penalty at any time? Thank you for answering these questions.

[John G]

You can take contributions (not earnings) out of a Roth at any time, at any age, without penalty. You can request withdrawals once you reach 59 1/2 of both contributions and earnings.

Also, note that there are no MANDATORY distribution schedules with a Roth, which may allow you more flexibility than with a standard IRA.

Because you are age 64, you get the bump up in max contributions related to the "catch up provisions".

Post again if you have questions.

[mming]

Withdrawals can be made from traditional IRAs at any time without a penalty since you're over age 59 1/2, however the amount withdrawn will be considered taxable income.

[Guest cindiw]

You can take contributions (not earnings) out of a Roth at any time, at any age, without penalty. You can request withdrawals once you reach 59 1/2 of both contributions and earnings.

Also, note that there are no MANDATORY distribution schedules with a Roth, which may allow you more flexibility than with a standard IRA.

Because you are age 64, you get the bump up in max contributions related to the "catch up provisions".

Post again if you have questions.

I'm finding this difficult to understand, perhaps it's my brain. No, it must be my brain. Just to make certain I understand this before I put money in a Roth (and thank you for the reminder that there are no mandatory distribution schedules with a Roth IRA), if I put money at the age of 64 in a Roth account, can I withdraw both contributions and earnings w/o paying taxes if the contribution and earnings are in there for one year more or less? just so I understand... I do have more questions and hopefully I'll have them answered before April 15th rolls around so I can make an adequate decision. Thanks.

[John G]

Caveats:

1. Be sure that you understand the qualifications for contributing to a Roth - - earned income, tax filing status, max income level - - see IRS Publication 590. For example, if you are currently retired, you may not have the earned income to allow a contribution to either a Roth or IRA.

2. I'm not sure why anyone would start a Roth now and then take funds out in less than a year. That defeats the whole purpose of a tax shelter....time for your investments to grow. Are you just posing a hypothetical or planning a fast withdrawal? If the later, I'm not sure it is worth the bother to set up the Roth.

Withdrawals

Yes, you can withdraw ROTH contributions at any time, for any purpose, without penalty or tax. Since you are over the age of 59 1/2, you can withdraw earnings at any time.

5 Year Issue

I think you may have picked this up from IRA to Roth conversions, which does not appear to be what you are talking about. The 5 year rule only applies to conversions. You appear to be talking about contributions to a Roth.

MMngs comment

The Mmng comment is misleading/confusing. You can only withdraw from Roths without penalty before age 59 1/2. Early withdrawals for an IRA are both penalized and taxed. Taxes only apply to regular IRAs withdrawals and depend are effected by the previous deductible/non-deductible components...a complication that does not apply if you are just talking about Roths.

Post again if you have questions.

[Belgarath]

CindiW - re your question as to whether you can withdraw Roth earnings, INCOME TAX FREE, if you haven't satisfied the 5-year period:

According to Treasury Regulation 1.408A-6, Q&A-1(b), in order to be a "qualified distribution" (that is, no taxation on the earnings) you must satisfy the 5-year period IN ADDITION to attaining age 59-1/2, death, disability, or allowable first-time home purchase.

So while you can always withdraw the contributions tax free, the earnings are another matter.

P.S. - here's the regulation excerpt if you are interested.

§ 1.408A-6 Distributions.

This section sets forth the following questions and answers that provide rules regarding distributions from Roth IRAs:

Q–1. How are distributions from Roth IRAs taxed?

A–1. (a) The taxability of a distribution from a Roth IRA generally depends on whether or not the distribution is a qualified distribution. This A–1 provides rules for qualified distributions and certain other nontaxable distributions. A–4 of this section provides rules for the taxability of distributions that are not qualified distributions.

(b) A distribution from a Roth IRA is not includible in the owner's gross income if it is a qualified distribution or to the extent that it is a return of the owner's contributions to the Roth IRA (determined in accordance with A–8 of this section). A qualified distribution is one that is both—

(1) Made after a 5-taxable-year period (defined in A–2 of this section); and

(2) Made on or after the date on which the owner attains age 591/2, made to a beneficiary or the estate of the owner on or after the date of the owner's death, attributable to the owner's being disabled within the meaning of section 72(m)(7), or to which section 72(t)(2)(F) applies (exception for first-time home purchase).

© An amount distributed from a Roth IRA will not be included in gross income to the extent it is rolled over to another Roth IRA on a tax-free basis under the rules of sections 408(d)(3) and 408A(e).

(d) Contributions that are returned to the Roth IRA owner in accordance with section 408(d)(4) (corrective distributions) are not includible in gross income, but any net income required to be distributed under section 408(d)(4) together with the contributions is includible in gross income for the taxable year in which the contributions were made.

Q–2. When does the 5-taxable-year period described in A–1 of this section (relating to qualified distributions) begin and end?

A–2. The 5-taxable-year period described in A–1 of this section begins on the first day of the individual's taxable year for which the first regular contribution is made to any Roth IRA of the individual or, if earlier, the first day of the individual's taxable year in which the first conversion contribution is made to any Roth IRA of the individual. The 5-taxable-year period ends on the last day of the individual's fifth consecutive taxable year beginning with the taxable year described in the preceding sentence. For example, if an individual whose taxable year is the calendar year makes a first-time regular Roth IRA contribution any time between January 1, 1998, and April 15, 1999, for 1998, the 5-taxable-year period begins on January 1, 1998. Thus, each Roth IRA owner has only one 5-taxable-year period described in A–1 of this section for all the Roth IRAs of which he or she is the owner. Further, because of the requirement of the 5-taxable-year period, no qualified distributions can occur before taxable years beginning in 2003. For purposes of this A–2, the amount of any contribution distributed as a corrective distribution under A–1(d) of this section is treated as if it was never contributed.