Posts Tagged ‘Roth IRA’

When Withdrawing Funds from your IRA are Penalty-Free

Monday, October 26th, 2015

IRA withdrawal

It’s not uncommon that contributions that workers make to their IRA are prematurely withdrawn. An IRA is intended to supplement income in retirement years, but as the future and some circumstances are often out of our control, an IRA is sometimes used in other ways than retirement.

Should workers need to take funds from their IRA, the money that’s withdrawn may be subject to federal and state taxes, and if the person withdrawing the money is under age 59.5 when this occurs, another early-distribution penalty of 10% may be incurred. The reason the IRS imposes these fees is to deter workers from taking distributions from their IRA early, but there are situations where the IRS will waive early-distribution penalty fees.

Health Insurance

If you lose your job, and subsequently your health insurance (unless your insurance is purchased through HealthCare.gov, or have a private plan outside of the market) and are unemployed for 12 weeks or more, you may use your IRA to pay for purchasing health insurance for yourself, your spouse, or your dependents.

Medical Expenses

If you do not have health insurance and something like an accident or medical emergency should happen, the expenses that go along with a hospital can be financially devastating. You’re able to take distributions from your IRA if your medical expenses are more than your insurance will cover for the year, or if you have no insurance at all.
You’re also eligible to pull money out of your IRA and have medical expenses covered if you have unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income. These exemptions allow you to pull the money out of your IRA without likely incurring the 10-percent early withdrawal penalty.

Your First Home

A penalty-free withdrawal of up to $10,000 ($20,000 for couples) can be taken from your IRA when you’re buying or building your first home. The funds can be used to pay for a down payment, closing costs, taxes, and other fees that go into buying a home.
The IRS sees this home as your first home only if you or your spouse have not owned a home in the last two years. It’s also important to note that this $10,000 is a lifetime limit per individual, meaning that you can’t make this withdrawal every time you buy a house. The $10,000 mark is the absolute limit for the penalty-free homebuyer provision.

College Costs

IRA distributions are allowed to pay for college costs like tuition, fees, books and supplies, and yourself, your spouse, your children or your grandchildren are eligible. Room and board expenses can also be covered for part-time students. It’s important to note that IRA withdrawals for this purpose could possibly reduce eligibility for financial aid for some students, as the IRA funds can be considered income, therefore possibly disqualifying aid. Waiting until the student is in their final year at college reduces the risk of financial aid being withdrawn.

Disability

If a doctor can determine that due to a mental or physical disability, that you’re unable to find work or stay employed, you are eligible for penalty-free distributions from your IRA. One factor though is that the disability must be expected to last the duration of your life, or result in your death. The funds can be withdrawn for any purpose in this circumstance, but make sure that you check with your IRA custodian regarding their policies for handling distributions due to disability.

In the end, most retirement advisors don’t like the idea of early distribution, but there’s no doubt it can be a life-saver in many situations. Even though the above situations are exempt from early-distribution penalties, they still may be subject to federal and state taxes. Speak with your tax professional to determine whether or not certain amounts are taxable.

Author: Tanya

Let’s Talk About the Pros and Cons of President Obama’s “myRA”

Monday, September 28th, 2015

myRA pic 3

(image credit to The Monday Face)

In the State of the Union of January 2014, President Obama announced his plans to introduce a program called “myRA” which stands for My Retirement Account. It’s specifically built for workers who may not have a current retirement account, but would like to start building a nest egg. Here are a few of the specifications for opening a myRA.

How does it work?

The account is essentially a Roth IRA, so the contributions that you make each month are made tax-free, and through direct deposit (which means that your work will first have to offer the program). Your contributions are made automatically on whatever day works best for you, like a certain day of the month, or multiple paydays within a month. If/when workers switch jobs, the account stays with you since your employer isn’t administering the account, so no worries on that front.

The funds that you deposit are invested in government savings bonds, and backed by the U.S Department of the Treasury, so savers can never lose their principal investment. The cap on myRA contributions are $5,500, a year under current limits, just like with regular Roth IRAs.

Who’s eligible?

This new program is mainly aimed at low to middle-income americans who don’t have access to employer-sponsored retirement plans. With no fees to maintain the account, and no fees to open the account, it’s ideal for the target demographic. But all workers may invest in a myRA, including those who would like to supplement an existing 401k plan, as long as their household income falls below $191,000 a year.

What are the downsides?

One of the main downsides is that it’s not a long-term retirement plan. The myRA plan is mainly meant as a kickstarter for your retirement, because once a participant’s account balance hits $15,000, or the account has been open for 30 years, they will have to roll it over to a private sector Roth IRA, where the money can continue to grow tax-free. Another downside is interest that the account will gain, you’re not going to have a huge amount of earnings on this account. The White House said the accounts will earn the same rate as the Thrift Savings Plan’s Government Securities Investment Fund that it offers to federal workers. That fund earned around 1.5 % in 2012, and had an average annual return of 3.6% between 2003 and 2012.

The lack of investment control that the account holder has might also be a downside for some. As we said above, the funds are invested in government savings bonds, and so subsequently, the opportunity for workers to have some investment freedom is out the window unfortunately.

The truth is that no one thinks this alone will fix the fact that millions of Americans have little-to-no retirement savings, but retirement advocates are cheering on the new program as an important step in the right direction.

Author: Tanya

Self Directed IRA Accounts – Roth IRA

Friday, February 14th, 2014

Roth IRA

With more than one retirement account option it can be hard to know which account would be best for you. If you are setting up your first or fifth retirement account it can be hard to know which is best for you. The main types of retirement accounts are: Traditional IRA, Roth IRA, 401K plans, 403B plans, SIMPLE IRA plans, SEP plans. Understanding the differences between these types of accounts will help you decide which is right for you. It is also important to know how each one of these differs when you are setting up a self directed IRA or a self directed 401k. Today we will be talking about the basics of a Roth IRA.

Roth IRA Basics

A Roth IRA gives you the ability to save and invest your after-tax dollars, let the investment grow completely tax free, and withdraw your principal and earnings tax-free if the Roth has existed for at least five years. For certain reasons you may be subject to a 10 percent penalty on the earnings if taken before age 59 ½. In other words, once your after-tax dollars go into the Roth, neither those dollars nor any future earnings on the dollars are ever taxed again, a very powerful feature. And, unlike the Traditional IRA, there is no 70-½ years age limit on making contributions, you may make contributions at any age. One thing to remember is that you must have income in order to contribute.  You can’t contribute more than you make nor more than the maximum contribution limit.

Contributions

The deadline to contribute to a Roth IRA for a particular tax year is generally April 15 of the following year. When this date occurs on a weekend or a legal holiday, the following business day becomes the deadline. Tax return extensions do not extend this deadline, it’s always April 15th of the following year. When an individual makes a contribution to his or her Roth between January 1 and April 15, for the previous tax year, this is frequently referred to as a “carryback contribution”. See the page 4 topic “Contribution Rules For Both Roth and Traditional IRAs” for contribution limits.

Withdrawals a.k.a. Distributions

You may make tax-free and penalty-free withdrawals from your Roth IRA if you meet two conditions. First, your Roth IRA must have been open for a minimum of five years. Second, the withdrawal must be made because of the occurrence of one of the following events:
  • You have reached age 59-½
  • The only other way you can take any withdrawls is if you meet the IRS provision which allows partial withdrawals to begin at almost any age and to continue for a specific time frame. This provision is called a 72(t). Some of the exceptions are
    • Your death
    • A disability you incur
    • Your first home purchase
Check out the IRS website for more information about a 72(t)
Distributions or withdrawals that meet the above requirements are referred to as “qualified distributions”. While you may take distributions from your Roth IRA at any time, distributions which are not qualified distributions may be subject to taxes (and in some cases early distribution penalties) to the extent they exceed your combined contributions to the Roth IRA.
You are not required to take withdrawals at age 70-½ or any other age as you are with a Traditional IRA, another very powerful feature. You can leave everything in the Roth, continuing to grow tax free, and pass the Roth after your death on to your heirs also income tax free. However, the amount left in the Roth after death will be subject to estate or other death taxes if the estate is large enough to hit the taxable minimums.

Author: , Self Directed IRA Professional
1.801.683.9291
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