Are you considering a Roth IRA withdrawal from you account? You may have many different reasons for doing this. In fact within the Roth IRA it even gives you clear guidelines when you can take a Roth IRA withdraw.
The current Roth IRA withdrawal rules are currently as follows.
- Buying or building your first home. You can take as much as $10,000 out without facing a penalty.
- If you become disabled and can no longer hold a job.
- In the event of your death money will be disburse to your primary and secondary beneficiaries.
- If you owe back taxes to the federal or state government.
- After age 59 and a half the 10% tax penalty will no longer apply and you will be able to take Roth IRA withdrawals as you please. However you must take a withdrawal before age 70 and a half or you could face as high as a 50% tax penalty.
- If you need money for your child’s college education.
When You Should Not Withdrawal
Of all the Roth IRA rules for withdrawal their are times when you should not pull money out of your account. In fact in the rest of this article I am going to cover why pulling your money out period could be a bad idea.
To help you understand why you should not pull your money out of your Roth account I am going to give you a simple example to help you understand why.
Let’s say you have $10,000 in your Roth account and you are currently 2o years old. You plan on retiring at age 65 and in that time your account will average a return of 12% a year. At age 45 you would have earned $1,640,000 the compound interest of your money!
That’s a good chunk of money saved back for retirement but at age 20 most people are not thinking about retirement but rather college, parties, and buying things we somehow justify we need. The problem is we look at are retirement account and believe that $10,000 isn’t that much money and it won’t do much for the sake of our retirement.
Now consider the opposite. If you would have spent the $10,000 on a new car that would have been like paying over a million dollars for that car because you gave your entire retirement nest egg to buy something you really didn’t need.
In the end the Roth IRA withdrawal rules will allow you to bypass a lot of the tax issues but you also need to consider what could happen to your account and what this could do to your retirement if you did pull the money out.
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I really like your comparison of spending $10,000 on a car and losing a million dollars by age 45 due to the power of compound interest. Wait this gets even better, because Roth IRAs are funded with after-tax dollars so once you pay taxes on the 10 grand now, you will owe NO taxes when you retire with a million+… Young people need to be taught this immediately!
The only downside to this is if you are currently earning $100k plus and would like something to deduct against your income (to lower your taxes), a Roth IRA will not do the job because it is funded with after-tax dollars. Here’s more info from http://www.definerothira.com
This is the main advantage of using a Roth IRA. Even though the contributions are made with after tax money, the withdrawals are tax free if you meet certain conditions (withdrawals are made after 59 and a half and account is 5+ years old). The disadvantage to this is that you will not get a deduction when you contribute to an IRA as you do with some other investment accounts.
Thanks for the comment Hisham. A lot of young people don’t know about this kind of stuff but what’s even more frighting is many middle aged people don’t even know this stuff either which puts them at a higher risk because they don’t the time behind them like they use to, to let the money compound.
Enjoy your money or someone else will. I wish I had a corvette in college than when I am 65 now and have only memories.
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