If I make a partial Roth IRA withdrawal from a converted Roth IRA, will I have to pay taxes on it? That is a question that is often asked by tax payers.
My spouse and I converted most of our Roth IRA a couple years ago, and taxes were paid on it. If we have to, is it possible to withdraw that portion without paying any taxes or penalties? Just a slight technical issue here-any IRAs cannot be owned by two people, even married couples. It belongs to one of you two, and the person with their name on the account will have to follow the rules.
If you opt for a withdrawal, more taxes should not have to be paid. You opted for the ROTH conversion deal in 2010, so half of the taxes should have been paid in 2011. The last half will be due on your 2012 taxes.
You however, may incur a penalty of 10 percent for an early withdrawal. If you are not at least 59.5 years when the year ends, you will have to pay this. Or you can have had the conversion amount in your Roth IRA for at least 5 years. However, you can get around this if you are using up to $10,000 of the money to buy your first house.
IRS Distribution Penalty
This IRA distribution penalty is important to remember, and could save you some money, or let you access some much needed cash if buying a home. If you want, using something like TurboTax can often make the process easier, because it will run you through all the rules and summarize everything.
There are times when we find ourselves in financial pinches perhaps an unexpected medical bill or car repair or we could just be going through a rough patch and need some help. These are the times when we should consider a 401k loan because they are different than traditional bank loans in that they come with very low interest rates, there is no credit check and you have longer to pay them back which is done through payroll deductions. Though there are tax implications involved, it still may be your best bet.
All companies are different and have different rules attached. For instance, some will allow you only one 401k loan per twelve months whereas others will allow you two and the maximum loan amount is typically fifty percent of what you have contributed. Also, some plans prevent you from contributing more until the loan is paid back. In addition, there is also a 401k hardship withdrawal in which you can take if there is an immediate need for the funds such as primary residence eviction prevention or funeral expenses for the death of a spouse. This type of loan is a little different in that it requires additional paperwork and you can obtain one even if you have maxed your regular loan limit. There again, you may not be allowed to contribute to your account for a minimum of six months. This is actually a withdrawal and not a loan so you are not required to pay it back.
Should you change jobs and still owe money on your retirement loans, it may be a good idea to consider a 401k rollover. That way, you will not lose any of your contributed funds. If you are already fully vested with your present company, the face value of the account is yours however, cashing it out may involve early withdrawal penalties. Your outstanding loans, any penalties and a twenty percent tax will be taken right off the top and could most literally leave you with very little in the end so rolling it over into a new account would most likely be your best option in that situation.