If you’ve done well with your retirement planning then you may have a number of different accounts that contain your retirement nest egg. You may have one or more 401(k)s from prior employment sources, non-retirement specific assets (such as a brokerage account, as well as your home into the real estate holdings), one or more individual retirement accounts, plus whatever you are due to receive in Social Security retirement benefits. Having the largest possible nest egg means that you’re likely to have the best chance of being able to afford whatever retirement lifestyle you desire.
But having multiple sources of retirement funds also means that you have flexibility in how you use those funds. As you may know, withdrawals from traditional IRAs are subject to income tax when you withdraw them, while withdrawals from Roth IRAs during retirement are tax-free. This leads many retirees to prioritize their withdrawals based on their current year tax situation, as well as the possibility for future tax free growth within their Roth IRA.
The tax-free nature of withdrawals from a Roth IRA also extends to early withdrawal options that are available to the account holder. Here are some ways you could use the early withdrawal options of your Roth IRA to benefit you in specific financial situations.
Educational Expenses. The IRS rules permit you to withdraw money from your IRA early, and not have to pay the 10% early withdrawal penalty that would otherwise apply, if you are using those funds for qualified educational expenses. These expenses can be yours personally, or the expenses of your child or grandchild. Significantly, there is no limit on the amount that you can withdraw early for these purposes. This can be a significant help in funding your children’s or grandchildren’s education.
First-Time Home Buyer Expenses. You may also take a penalty free early withdrawal from your Roth IRA if you’re using the funds for a down payment on a home, and you qualify as a first time home buyer. First time homebuyer is defined to mean someone who has not owned their own homes in the past two years, and as with the early withdrawals for educational purposes you can use this to benefit your child or grandchild. But note that these withdrawals are limited to a maximum of $10,000 over the course of your lifetime.
Certain Medical Expenses. While there is no permitted early withdrawal for general hardship circumstances, you are permitted to take penalty free withdrawals to pay certain are reimbursed medical expenses, as well as to pay your own medical insurance premiums while you are unemployed.
Roth IRA Aging Rules. The above early withdrawal options from a Roth IRA also require that your account and its deposits be at least five years old. If this isn’t the case, then you’ll need to make a special calculation to determine the pro rata count that represents contributions less than five years old, and you’ll be responsible for a penalty on this amount.
Roth IRAs also have significant advantages when it comes to using them for estate planning purposes. Contact Quest Trust Company for additional information.
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