Roth IRA (Photo credit: Philip Taylor PT)
My daughter has just been hired at a new job and she will be making more money than her last job. She wants to open a Roth IRA. It seems to be not a priority to her. But from my point of view it is. I want to encourage her to do this because starting at her young age she has the years ahead to grow it into a tidy sum for retirement.
She has concerns that if she should need the money for an emergency or other unforeseen occurrence, can she withdraw the money? Roth IRA’s are accounts strictly for the purpose of building a retirement account. IRS rules have put a 10% penalty on the money if you withdraw from the account before you reach the age of 59 1/2. But are there ways you can withdraw the money without penalty?
What are the exceptions to the 10% penalty?
There are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations.
- You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
- The distributions are not more than the cost of your medical insurance.
- You are disabled.
- You are the beneficiary of a deceased IRA owner.
- You are receiving distributions in the form of an annuity.
- The distributions are not more than your qualified higher education expenses.
- You use the distributions to buy, build, or rebuild a first home.
- The distribution is due to an IRS levy of the qualified plan.
- The distribution is a qualified reservist distribution.
To Purchase your first home.
One of the biggest reasons people do not invest in a Roth Ira is they think they can not withdraw the money in case of emergency. Also Roth accounts are probably the largest amount of money people have in their life. The need for a large down payment for a home keeps people away from the Roth. But knowing you can withdraw up to $10,000, penalty free, for a first time home purchase makes the account a little more palatable. Also if your spouse has a Roth, they can withdraw $10,000 from their account for the home purchase and be penalty free also.
The withdrawal and use of the funds can also be applied to your spouse, child and grandchild of you or your spouse. Even you or your spouse’s parents or ancestors.
Higher education expenses.
You are allowed to have penalty withdrawals for higher education. This education just doesn’t have to be for yourself. It can be for your spouse, or the children or grandchildren of you or your spouse. Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.
There are exceptions to the Roth IRA withdrawal penalties that do cover most needs. But even if you need the money you just have to pay the 10% penalty and you have your money to pay for emergencies.
It’s always never to late to open a Roth IRA and start investing. It’s better to do it when you start your first job. Don’t wait.
Share and Enjoy