Welcome back. Let’s keep learning about Roth IRAs. Today, with the deadline to make your 2013 contribution just 4 months away, I will cover the rules for using your Roth IRA before you retire. Part of me hates to mention this information since tapping into your Roth IRA before retirement does not make your retirement money feel better. However, you may be reluctant in put money in a Roth IRA knowing that you have to wait decades before you can get reacquainted with your hard earned money.
Let’s face it – you will need money (and lots of it) for so many things during your life. Getting married, providing for children, providing for elderly parents, cars, a house and education are just a few things you will spend gobs of money on before you retire. If you always wait to fund your Roth IRA with the money you have left over, you will never put money in. The corollary is that if you take money out of your IRA, you will have nothing for retirement.
So, let’s come to an understanding – I want you to fund your Roth IRA and if you have no other resources when you need money, then (and only then) you should dip into your Roth IRA investment. Got it? Great. On to the rules.
Contributions can be withdrawn at any time for any reason. Simple! You put money in a Roth IRA and you can take that money out at any time tax and penalty free. So, if you are able to put $1,000 in your Roth IRA this year and next year you need $500 you can just take it out. (You did remember the whole, please do not do this unless you have some major financial issue and you have no other cash. Right?)
Of course, the goal of a Roth IRA is to invest the money and have much more than you originally contributed, which are called earnings. Your earnings are able to be withdrawn tax and penalty free when you reach 59.5 years old. Before then you are subject to regular income tax and a 10% penalty. It’s not a pretty sight.
Let’s cover three rules for tapping into your earnings before you reach 59.5. All withdrawal rules for earnings require the account to be opened for 5 years, which is yet another reason to get started opening an IRA this year.
First Time Home buyer – You can take up to $10,000 of earnings without taxes or penalty to buy your first home. In this case, a first time homeowner is defined as someone who has not owned a home in the past 2 years.
Education Expenses – Your earnings can be withdrawn penalty free used for educational expenses for you, your spouse, child or grandchild. You still have to pay taxes on the money you withdraw, you just get a break from the 10% early withdrawal penalty.
You become disabled – If you are disabled based on the Social Security guidelines, you can withdraw any amount of earnings in your Roth IRA tax and penalty free.
There are other rules, but these three are enough to show you that you can tap your Roth IRA earnings for some major expenditures. Knowledge is power and know that you know the early withdrawal rules for a Roth IRA you must be getting excited to open and/or fund your Roth IRA for 2013. You have 4 months left.
Next month I will cover a strategy where you can help someone fund their Roth IRA. Plus it works if you want to ask someone to fund your Roth IRA.
Keep saving and keep learning as we approach April 15th 2014, the deadline for your 2013 Roth IRA.