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The simple answer is that you don't have to pay taxes or any penalties on the contributed amounts.
There are three types of funds in a Roth IRA.
1. Contributed funds
2. Converted funds (from 401k, traditional IRA, etc)
3. Funds resulted from growth.
As long as you are withdrawing only contributed funds, there are no penalties or taxes. If you are withdrawing converted funds, there is a penalty only if the funds were converted less than 5 years ago. Funds resulted from growth will have implications.
The simple answer is that you don't have to pay taxes or any penalties on the contributed amounts.
There are three types of funds in a Roth IRA.
1. Contributed funds
2. Converted funds (from 401k, traditional IRA, etc)
3. Funds resulted from growth.
As long as you are withdrawing only contributed funds, there are no penalties or taxes. If you are withdrawing converted funds, there is a penalty only if the funds were converted less than 5 years ago. Funds resulted from growth will have implications.
Thank you! And thanks for not yelling at me and telling me not to withdraw no matter what I have another IRA and a 401K and while I understand this will be lost income for retirement, it might just be more important that I have the money now.
Here's another question:
If I withdraw ONLY the original converted fund amount -- will I then have to add that to this year's income (will it be viewed as income?) making my tax bracket higher when I file in 2012?
Also, can funds only be converted into an IRA once? If I withdraw the original converted amount this year -- can I also roll over (add more converted funds from a previous employer) into this same Roth IRA? I have some savings still sitting at a former employer which needs to be rolled into something.
The converted funds that you withdraw from your Roth IRA will not be considered income. It was already taxed as income when you converted it. Again, I must stress, make sure that the converted funds you withdraw have been in that Roth IRA for 5 years. Also, make sure you keep all your documentation and a log of the conversions and withdrawing. It's not uncommon for the IRS to ask for details around tax sheltered withdrawals.
In regards to your other question, you can convert as many times as you see fit, as long as you have funds to convert/rollover. For a Roth IRA, it's best to do it when you are in your lowest tax bracket.... such as a year where you make considerably less than normal or you take unpaid vacation.
I thought about yelling at you, but decided not to be your financial advisor. I hope you thought it through. Just keep in mind that you're giving up 20+ years of compounding yields, which is fairly substantial. I mean 8% compounded over 20 years is a lot more than 29.99% over a few years.
The converted funds that you withdraw from your Roth IRA will not be considered income. It was already taxed as income when you converted it. Again, I must stress, make sure that the converted funds you withdraw have been in that Roth IRA for 5 years. Also, make sure you keep all your documentation and a log of the conversions and withdrawing. It's not uncommon for the IRS to ask for details around tax sheltered withdrawals.
In regards to your other question, you can convert as many times as you see fit, as long as you have funds to convert/rollover. For a Roth IRA, it's best to do it when you are in your lowest tax bracket.... such as a year where you make considerably less than normal or you take unpaid vacation.
I thought about yelling at you, but decided not to be your financial advisor. I hope you thought it through. Just keep in mind that you're giving up 20+ years of compounding yields, which is fairly substantial. I mean 8% compounded over 20 years is a lot more than 29.99% over a few years.
NJBest is correct, and giving you sound advice. I opened a Roth IRA for my 50th birthday and contribute the max (for over age 50), it gets automatically taken out of my checking account monthly and put into the Roth IRA. Best present I ever gave myself! Only regret is I didn't open it immediately after Roth IRA's began!
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I have another IRA and a 401K and while I understand this will be lost income for retirement, it might just be more important that I have the money now.
