Whether financial experts admit it or not, retirement planning has an amount of vagueness in it. The ambiguity circles around several factors. At which age would you actually retire? If a salaried person, would you have the scope to earn even after retiring from your job? How long would your retirement life be (depending on your total life span)? What amount of money would you need to keep up your living standards? All these questions almost remain uncertain and unanswered, don’t they? That makes your retirement plans a touch difficult.
Talking about financial scenes in the US, almost every individual stashes away dollars into the traditional or the Roth IRA account. It, therefore, is a common query: is the Roth or the Traditional IRA account subject to withdrawal?
Well, yes. And the withdrawal rules, I must say, are quite beneficiary-friendly, and not stringent to the least! We’ll take a look at them in this write-up.
The 5-year and the 59 ½ rules applicable to IRA withdrawals
IRAs are essential, for different breeds. To my opinion, you need to sit with the best financial advisors in Los Angeles to figure out which account would be most profitable for keeping your money!
Now, be it a traditional IRA, a Roth IRA, an inherited IRA, or a conversion from a traditional to a Roth IRA, the 5-year rule applies to them all. It demands that a period of 5 odd years need to pass before an account holder claims the money. If it does not, taxes would be applicable, even though your contributions were made with after-tax dollars!
And the second most prominent withdrawal rule for IRAs is that a 10% penalty applies to any withdrawal that needs to take place before the beneficiary attains the age of 59½!
Exemptions to the IRA withdrawal rules
Yes, that’s the good news. You always have an alternative – a chance to evade that tax burden and the 10% penalty too! The conditions under which that can be done include –
- You are using the amount to pay for a new home and that essentially needs to be your first-time purchase (only up to the amount of $10,000).
- The withdrawal money is being used for qualified expenses related to adoption, birth, or, education expenses.
- The money is needed in any case of death or physical disability.
- Health insurance payments (in case the individual is unemployed). Also, unreimbursed medical expenses are out of the ambit of penalties too.
[Read More: Rich Man’s Roth]
Does it ever make sense to withdraw funds early like for buying a home or paying for college expenses?
While buying your home, if you are a first-time buyer, it’s good news! First-time buyers are exempted from penalties, even if the withdrawal is earlier than the age of 59 ½ (the age when you are permitted to withdraw funds penalty-free).
When it comes to college expenses, they are pricey these days too. Hence, footing a bill that exhibits college expenses could waive off the withdrawal penalty! The IRA withdrawal rules specifically exempt the Qualified Higher Education Expenses (QHEE) from the withdrawal penalty. The qualified expenses include tuition fees, books, supplies (like laptops, and notebooks), and other equipment needed for college enrolment.
[Also Read: Best Way to Invest Money]
As we already mentioned earlier, IRA withdrawal rules and their exemptions are somewhat friendly to the beneficiaries, if not stringent ones at all!
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