Cashing Out Roth IRA

Are you considering to cashing out Roth IRA? If yes, have considered cashing out other retirement plans such as the 401k and Traditional IRA? I was once in this similar situation and decided to do my own research before I settled on Roth IRA. In this article, I’ll put you through the benefits of cashing Roth IRA plan.

First you should know that Roth IRA does not allow tax breaks on contributions as it is funded by post-tax income. Due to this, you are able to withdraw from Roth IRA without being forced to pay taxes, unlike other retirement plans such as Traditional IRA and 401k, which are pre-tax investment vehicles and thus you have to pay taxes. Most interestingly, there is no penalty charged whatsoever upon any contribution withdrawal at any given age.

Cashing Out Roth IRA early

1. Contribution: This is a non-deductible payment you make to your Roth IRA. This means that you first pay taxes on this money before you invest in into Roth IRA.
2. Earnings: This is the money that your Roth IRA contributions generate. It is basically dividends and interest you get from your funds.

For you to qualify for a tax-free and penalty-free withdrawal, you must be 59 ½ or older, and you keep the Roth IRA open for more than 5 years.

However, Cashing Out Roth IRA contributions is penalty-free and tax-free, at any age! If you contributed a total of $200,000 to Roth IRA but it is now worth $275,000, you are allowed to withdraw $200,000 penalty and tax-free at any age.  On the contrary, cashing out the remaining $75,000 which is the earnings would require a 10% penalty.

Special Cases for unrestricted Roth IRA withdrawals

In some special cases, you may be allowed to withdraw the earnings on your Roth IRA without penalties before you reach the limiting age. Those cases include:

•  First-time home purchase: You are allowed to withdraw up to $10,000 to meet part of the expense of first home purchase.
•  Qualified education expenses: You are exempted from penalties if you are withdrawing your earnings to fund a qualified education expense for a qualified member of your family (yourself, your spouse, your children or grandchildren). The qualified education expenses include expenses on post-secondary education, books, tuition, supplies and accommodation charges.
• Disability: If you are no longer capable of qualify to work due to disability.
• Unreimbursed medical expenses: But these expenses must surpass 7.5% of your AGI.
• Health insurance for the unemployed: If you withdraw the earnings to fund health insurance but you must have been collecting unemployment benefits for the prior12 consecutive weeks.

Even though I don’t suggest Cashing Out Roth IRA early, you might consider this option in case you need money. This article is a guide for those who plan cashing out Roth IRA. You can contact us, if you have inquiries regarding cashing out Roth IRA.