Ready to Withdraw from Your Roth IRA…Watch Out

I’m assuming that you know what a Roth IRA is, so I’m not going to talk about it from that perspective. But, if you are planning to withdraw funds from it, please read the rest of this article before you take a distribution.

There are two type of distributions, qualified and nonqualified.  As you might have guessed, in order to avoid taxes and penalties, you should be doing the qualified version. If you don’t, then you may be subject to tax and a 10% penalty on part of the distribution.  Here are the commonly known requirements of a qualified distribution.

1)      You are 59 ½ or older OR

2)      The distribution is attributable to you being  disabled OR

3)      The distribution is made to the owner’s estate or beneficiary on or after the owners death OR

4)      The distribution is for first-time home purchase (restrictions & limits apply)

However, there is an additional requirement that you may not know about.  The distribution must be made AFTER A 5-TAXABLE-YEAR-PERIOD.  The taxable year period begins on Jan 1 of whichever is earlier

1)      The first conversion contribution is made OR

2)      The first regular contribution is made.

So, if you think that you might want to convert your Traditional IRA into a Roth IRA in the undetermined future, then it might not be a bad idea to create a Roth IRA now with a small initial contribution, just to get the 5 year clock started.        

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com  http://www.brycast.com/
Enrolled Agent; Investment Advisor