roth earnings withdrawal prior to age 59 tax free

[Guest tom bochenek]

I have been told that after my Roth account is over 5 years old , i could then if i choos make withdrawals of the EARNINGS tax free, even if i am not over 59 years old and am not using the money for any of the IRS exceptions that they allow for withdrawals prior to age 59. However i would be sugject to paying a 10 % penalty for this early withdrawal of the earnings. Can anyone verify that this is the case?

thanks

tom

[John G]

{Oops! I have corrected my original erroneous post. Read original post too fast Barry... earnings not contributions was the issue! I stand well corrected. Following comment by BPicker is correct.}

But.... why is it that folks are interested in taking money out of the best tax shelter the average citizen can own? The whole purpose of a Roth is a longterm tax shelter for assets, the longer the better. Taking money out of a Roth should probably be the last thing anyone should do. Most people have multiple alternatives to taping a Roth: family funds, home equity loans, abstainance (aka "don't buy it"), other financing, etc.

Recognize that once you take it out is not so easy to get money back into the Roth. Reason 1: 2K annual limit per person. Reason 2: you may not qualify for a Roth in future years. Reason 3: no guarentees that Congress might not change the rules or eliminate the Roth in some future year.

Early withdrawals may be allowed by various rules and home ownership exceptions, etc. , but don't confused allowed with smart.

[BPickerCPA]

The above is NOT correct. If you take EARNINGS prior to age 59½, you WILL pay income tax on the earnings, and you WILL pay the 10% penalty, unless an exception applies. The only way not to pay income tax prior to age 59½ is a withdrawal on account of death, disability or for a first time home purchase.

Barry

[Guest tom bochenek]

Thanks for your comments, my source of the information was from the IRS. They told me that the Earning were not taxable. I guess you disagree with them. Perhaps the agent i spoke with was misinformed. Are you absolutely positive about this? Thanks.

tom bochenek

[John G]

BPicker is a very solid accountant and longtime commentor on this site. I am more a generalist. My mistake was totally missing the key word of EARNINGS.

Earnings are the gains on either the original contributions or on the Roth conversion amounts. Earnings are taxed if withdrawn prematurely or removed when no exception is applicable.

You should check out the rothira.com web site. You will find some articles there on the full range of subjects. There are lots of technical issues about qualifications and custodial proceedures. It is pretty common for magazine and newspaper articles to still get some details wrong or to give a 1/2 answer that leaves out important caveats.

PS: Your five years are not up... the rules can change in the future about this or other issues. And, the big picture is don't withdraw unless absolute last resort of funds and dire circumstances.