What Happens When You Take an Early Withdrawal From Your Roth IRA?

ira penaltyThere are rules and regulations guiding your Roth IRA, including withdrawals. Indeed, your earnings may grow tax-free while your contributions are also not tax deductible. Obviously, there are penalties and consequences for early withdrawals of Roth IRA subject to the respective age of individual contributors. Such as:

Age not more 59

You are permitted to withdraw your contributions to your Roth IRA based on your preference without any tax deduction or paying penalty. Unfortunately, you are expected to pay taxes and penalties according to your earnings in your Roth IRA.

If you want to withdraw from a Roth IRA which is not up to 5 years. In case you obtain a distribution of Roth IRA earnings while you are still below the age of 59.5 and your account is already 5 years old, the expected earnings may attract taxes and penalties. However, if you meet some exception clauses, the penalties may be waved but you will still pay taxes

Withdrawing from a Roth IRA which you had started more than 5 years ago and you are below the age of 59.5, your earnings will be tax free provided you meet all of the stipulated conditions set forth by the IRS.

Between the age of 59.5 to 70 years

If you are withdrawing from Roth IRA which is not up to 5 years minimum holding requirement, your earnings will not attract penalties but it will be tax deductible. On the other hand, if you are withdrawing from Roth IRA which you have opened for more than 5 years, your withdrawal will neither attracts penalties nor taxes.

Above 70.5 years of age

If your account does not meet the 5 years minimum requirement, your earnings will not attract penalties but tax deductible. However, If you are withdrawing from Roth IRA which is over 5 years, your earnings won’t be subject to penalties or taxes.
In general, where you transfer your Roth IRA and you demand that the check should be paid to you directly, you are allowed a maximum of 8 weeks to deposit same check into another IRA without taxes or penalties. It is otherwise referred to as “non-taxable rollover” and this is permitted just once in 265 days.

More often than not, you are likely to pay penalty on early withdrawal whenever you withdraw money from your retirement accounts. For instance the early withdraw penalty is usually 10% while you still pay tax on the money withdrawn at your standard tax rate, particularly when you are still below 59.5 years of age. It is noteworthy to state that early withdrawal can potentially cut away at least 40% from your retirement nest egg.

Loss of Future Earnings Growth

Without any doubt, the power of compounding interest is the major attraction of any Roth IRA and other retirement accounts. This implies that any early money you withdraw from your Roth IRA or retirement accounts is a loss opportunity for the wonderful compound interest calculations. Furthermore, your expected interest for the money withdrawn becomes an opportunity cost which will technically and invariable reduce your cumulative earnings substantially.

In the final analysis, anytime you are overwhelmed and you are in desperate need of cash, you may be tempted to fall back on early withdraw from your retirement account like traditional IRA or Roth IRA, after all, it’s still your money, your sweat for that matter! It is strongly suggested that the temptation to go for early withdrawal should only be used when you have sincerely explored other options. The multiplier effects of dipping into your retirement accounts can be a clog in the wheel of your future earnings. Always try as much as possible to avoid using your retirement funds for meeting emergency funding. Think of your future.


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