Q:
Is it true that Roth IRA contributions can be withdrawn tax-free after
age 59 ˝? If so, is the operative word
here “contributions”? Does this mean
that earnings on those contributions are not tax-free?
A:
Not quite right, but almost.
Because Roth IRA contributions are made with an after-tax dollar, they
can be withdrawn tax-free at any age without penalty. However, earnings cannot be withdrawn
tax-free and penalty free unless the account has been open for at least five
years and the withdrawal is as a result of one of the following:
·
You
reach age 59 ˝
·
You
become disabled
·
Funds
are used to purchase a first-time residence ($10,000 lifetime cap)
·
Your
death
If you withdraw the earnings on your Roth
IRA prior to meeting the above requirements, they’ll be treated as ordinary
income for tax purposes and incur the additional 10% early withdrawal tax.
However, if earnings are withdrawn for one
of the following exceptions before age 59 ˝, the amount is subject to ordinary
income tax but the 10% early withdrawal tax does not apply:
·
To
pay non-reimbursed medical expenses in excess of 7.5% of your adjusted gross
income.
·
To
pay medical insurance premiums if you are unemployed
·
If
you become disabled.
·
To
pay qualified higher education expenses.
·
For
a first-time home purchase ($10,000 lifetime cap).
·
If
taken in substantially equal payments based on life expectancy.
·
Upon
your death.
If you converted a traditional IRA to a Roth
IRA, the converted amount is penalty free but subject to ordinary income tax in
the year of the transaction. This amount
can be withdrawn penalty free only after the account has been open for at least
five years.