Author Topic: Early withdrawals from roth  (Read 5038 times)

justchristine

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Early withdrawals from roth
« on: November 06, 2013, 03:42:48 AM »
Can someone help me out figure out the details on withdrawing early from a Roth?  I'm not sure if I'm over thinking this or not.  If I had a Roth IRA with a balance of 100k, 60k of which are contributions.  Let's say that this kicks off 3k in dividends each year.  If I wanted to withdraw 3k each year during early retirement, could I just turn off my dividend reinvestment or would I actually have to sell off 3k from the original balance? 

I've tried googling this but my google skills are failing me this early morning.

lentilman

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Re: Early withdrawals from roth
« Reply #1 on: November 06, 2013, 03:51:14 AM »
I think you would be better off just taking out 3k of contributions to avoid any penalties.  At least for the first 20 years of ER.

justchristine

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Re: Early withdrawals from roth
« Reply #2 on: November 06, 2013, 04:04:39 AM »
Hmmm, maybe I wasn't clear in my question.  I understand that I should withdraw from the contributions first.  What I'm trying to understand is how contributions are defined.  Is it the actual contribution that I made years ago or is it more of a threshold dollar amount that I can't cross.

matchewed

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Re: Early withdrawals from roth
« Reply #3 on: November 06, 2013, 05:04:15 AM »
Contributions are defined as (in this case) after tax money you have earned that you are putting into the Roth IRA. So dividends do not count as contributions.

arebelspy

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Re: Early withdrawals from roth
« Reply #4 on: November 06, 2013, 07:55:19 AM »
Once it's money in the account though, does it matter?

Like say you have 100k invested in index fund X, and get 3k in dividends.

You want to withdraw 3k.  You have to sell 3k of index fund X and then rebuy 3k of it with the dividends?  Rather than just withdraw the 3k and designate that as principal?

I honestly don't know the rules behind, would love to see the IRS regulation if anyone has it on hand.
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Mississippi Mudstache

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Re: Early withdrawals from roth
« Reply #5 on: November 06, 2013, 08:17:37 AM »
I'm with arebelspy on this one - my understanding is that, if you contribute $3000 to a Roth IRA, then you can pull $3000 out whenever you feel like it. It doesn't make a bit of difference where that $3000 comes from. Why the heck would it?

matchewed

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Re: Early withdrawals from roth
« Reply #6 on: November 06, 2013, 08:21:51 AM »
Once it's money in the account though, does it matter?

Like say you have 100k invested in index fund X, and get 3k in dividends.

You want to withdraw 3k.  You have to sell 3k of index fund X and then rebuy 3k of it with the dividends?  Rather than just withdraw the 3k and designate that as principal?

I honestly don't know the rules behind, would love to see the IRS regulation if anyone has it on hand.

Well it's mostly dependent on how that 100k came to be. If you're looking at the 100k as 80k principal and 20k gains then that 80k is free game to withdraw whatever you want whenever you want. That 20k has the various restrictions (I've been meaning to whip together a guide on Roth IRA's and their various rules for a better picture on pipelines, maybe a weekend project) that are on earnings in Roth IRA's.

To my knowledge basically for the OP you can withdraw 3k up until you hit that 60k mark regardless of how you treat your dividends. Then the situation gets a bit more complicated.

*Edit* as to the question of whether dollar to dollar is tracked in this the answer is no, you can just withdraw money from the account regardless of the source.
« Last Edit: November 06, 2013, 08:45:48 AM by matchewed »

justchristine

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Re: Early withdrawals from roth
« Reply #7 on: November 06, 2013, 01:13:58 PM »
Once it's money in the account though, does it matter?

Like say you have 100k invested in index fund X, and get 3k in dividends.

You want to withdraw 3k.  You have to sell 3k of index fund X and then rebuy 3k of it with the dividends?  Rather than just withdraw the 3k and designate that as principal?

I honestly don't know the rules behind, would love to see the IRS regulation if anyone has it on hand.

Well it's mostly dependent on how that 100k came to be. If you're looking at the 100k as 80k principal and 20k gains then that 80k is free game to withdraw whatever you want whenever you want. That 20k has the various restrictions (I've been meaning to whip together a guide on Roth IRA's and their various rules for a better picture on pipelines, maybe a weekend project) that are on earnings in Roth IRA's.

To my knowledge basically for the OP you can withdraw 3k up until you hit that 60k mark regardless of how you treat your dividends. Then the situation gets a bit more complicated.

*Edit* as to the question of whether dollar to dollar is tracked in this the answer is no, you can just withdraw money from the account regardless of the source.

That's what I originally thought, but then I got thinking it about it more and started questioning myself.  This is the sort of stuff I think about at 3am when i can't get back to sleep :)

arebelspy

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Re: Early withdrawals from roth
« Reply #8 on: November 06, 2013, 01:30:34 PM »
Okay, that's what I thought.  Thanks for the confirmation!
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Dezrah

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Re: Early withdrawals from roth
« Reply #9 on: November 06, 2013, 02:23:51 PM »
The advice in this thread is accurate.  The "conversation" would go something like this:

You: “Hey IRS, I’m going to withdraw $3,000 from this Roth IRA account.”

IRS: “Okay.  How much have you contributed to it over the years?”

You: “$60,000.”

IRS: “Alright, you can take that without penalty.  For future reference, you can now only withdraw $57,000 without penalty.  Have a nice day.”

Also, don't forget that unlike a 401(k), whatever you take out can never be put back.  The only exception is if you rollover from one broker to another, then you have 60 days before penalties are calculated and assessed.

Eric

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Re: Early withdrawals from roth
« Reply #10 on: November 06, 2013, 04:42:17 PM »
Also, don't forget that unlike a 401(k), whatever you take out can never be put back.  The only exception is if you rollover from one broker to another, then you have 60 days before penalties are calculated and assessed.

What do you mean?  You could still contribute $5500 per year (or some fraction up to the max) at any point, no?

arebelspy

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Re: Early withdrawals from roth
« Reply #11 on: November 06, 2013, 05:28:06 PM »
Also, don't forget that unlike a 401(k), whatever you take out can never be put back.  The only exception is if you rollover from one broker to another, then you have 60 days before penalties are calculated and assessed.

What do you mean?  You could still contribute $5500 per year (or some fraction up to the max) at any point, no?

Sure, if you still qualify, but money you take out can't be "replaced" - that would be a new contribution.
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Nords

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Re: Early withdrawals from roth
« Reply #12 on: November 06, 2013, 09:46:17 PM »
Also, don't forget that unlike a 401(k), whatever you take out can never be put back.  The only exception is if you rollover from one broker to another, then you have 60 days before penalties are calculated and assessed.
Sure, if you still qualify, but money you take out can't be "replaced" - that would be a new contribution.
Ahem.  I ran across a loophole a few months ago (thanks to HTown Harry at Early-Retirement.org) where you CAN put the money back in an IRA.

It's a "qualified Reservist distribution" for, um, Reservists and National Guard servicemembers who are mobilized.
http://www.theslottreport.com/2013/03/special-ira-distribution-tax-break-for.html
Quote
A distribution you receive is a qualified reservist distribution (QRD) if the following requirements are met:
You were called to active duty after September 11, 2001
You were called to active duty for a period of 180 days or more or for an indefinite period because you are a member of a reserve component
Your distribution was made no earlier than the date you were called to active duty and no later than the end of the active duty period
The term “reserve component” means the Army National Guard, Army Reserve, Naval Reserve, Marine Corps Reserve, Air National Guard of the United States, Air Force Reserve, Coast Guard Reserve, or Reserve Corps of the Public Health Service.

If your IRA distribution is a QRD, then the IRS 10% penalty won’t apply, but the distribution is still taxable. You have to file IRS Form 5329 to claim the exception to the 10% penalty and report the distribution on your federal income tax return (IRS Form 1040) to pay the tax.

Also, you can repay part or all of these distributions to an IRA within a two-year period after your active duty period is over. You can make these repayments even if they exceed the annual limit on IRA contributions. The repayments can be made to an IRA even if you received the QRD from a 401(k) plan. You cannot deduct repaid QRDs. If you repay a QRD, you must report it on IRS Form 8606. An alternative would be to make the repayment to a Roth IRA.

But, yeah, I only know about it because it was specifically called to my attention.

arebelspy

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Re: Early withdrawals from roth
« Reply #13 on: November 07, 2013, 07:15:38 AM »
Good to know, thanks!
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.