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3 BRUTAL Roth IRA Distribution Penalties to Avoid! (Roth IRA Distribution Rules) - Very Detailed - YouTube
Channel: Money and Life TV
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what's going on my YouTube family! it is
so good to see all of you and see your
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beautiful smiling faces across the
internet if you're joining us for the
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first time my name is Mike the CPA and
here on money in life we teach finances
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investing taxes and more now I know it's
been a while since I've made a video
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around Roth IRAs well I finally have
another one for you and in today's video
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we're gonna cover the many different
traps when it comes to Roth IRA
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penalties Roth IRAs have great tax
advantages they can be great for your
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long-term retirement needs
however there's many penalty traps
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people fall into and I hope to help you
avoid those today not only will I be
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covering the ten percent penalty with
you guys but I'm gonna mention a few
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other penalties as well that you might
not be aware of I have a spreadsheet
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I've designed for you to simplify this
information as much as I possibly could
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all the information you're seeing came
directly from the IRS Publication and
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that's how I've constructed the
spreadsheet you can find this
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spreadsheet free to download in the
description and I'll also put it in the
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comment section down below I see a lot
of people out there as a CPA make
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mistakes like this so this whole video
will really summarize the bulk of all
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Roth IRA penalties with the spreadsheet
you're gonna see I've designed it by age
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the reason for distribution whether or
not it's a qualified distribution which
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we're about to talk about right now
Timber if the 10 percent tax penalty
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applies if income tax will apply on your
earnings when you take the distribution
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and if or if income tax will not apply
in the earnings when you take to
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distribution now penalties for Roth IRAs
are generally come into play when you
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actually do take money out of the
account that's when more or less you're
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gonna be subject to one of these
penalties unless there's other special
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circumstances which we're gonna talk
about later in the video but let's start
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with a qualified distribution what is
that so let's flip over here I pulled
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this up on screen this is from the IRS
website it says a qualified if you don't
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know what this is it says a qualified
distribution from a designated Roth
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account is excludable not included from
gross
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come so it's not included in your gross
income a qualified distribution is one
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that occurs at least five years after
the year of the employees first
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designated Roth contribution counting
the first year as part of the five and
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it's made on or after the attainment of
age 59 59 and a half on account of the
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employee's disability so if you become
disabled at any age you can take the
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money out without penalties are on or
after the employee's death whew I'll be
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looking forward to that day yeah thanks
a lot chipper love you too
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that birds just waiting me out so that's
essentially what a qualified
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distribution is if you want to learn
what a non-qualified distribution is you
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can pause the video and just read this
right here
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alright let's run through some scenarios
because there's many different scenarios
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of when you either won't be penalized or
you will be penalized with that 10%
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early withdrawal penalty so the way that
works is that let's say you take out a
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thousand bucks
you distribute from your Roth a thousand
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dollars right so if you and if it's not
a qualified distribution you're gonna
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pay a 10% on the total amount of the
distribution so a thousand bucks in this
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example times 10% means you're paying an
extra hundred dollars in tax and you're
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gonna pay that tax when you go to file
your tax return for the coming year so
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starting with this first one if you're
under at age 59 and a half if you take
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out the contributions only from your
Roth then as far as I know of as far as
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I understand there that's gonna be a
qualified distribution okay so you're
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not touching the earnings but only what
you've put in yourself there's a 10%
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penalty apply no and in this instance if
you're just withdrawing your
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contributions you're not touching
earnings then there's no tax that you
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have to worry about now for if you
convert an account from a traditional
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IRA to a Roth IRA as far as I understand
as far as I know of you have to keep
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that money that you've converted in that
Roth for at least five years before you
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can start to pull it out without facing
tax consequences or penalties so if
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that's if that's not the case if you
guys know differently please let me know
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okay let's look at the knee next
scenario a very common scenario we see
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is that people they put money and one of
these retirement accounts such as a Roth
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they get in trouble financially or they
have debt to pay they lose their job
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whatever and so they need money because
they're broke so of course they see
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their nice pile of cash sitting over
here and their Roth IRA so they go and
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touch it right because they figure if
they lost their job they're gonna be
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okay to touch it without anything
backfiring on them well that's not
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always the case so if you need cash this
because you're broke that is not
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considered a qualified distribution so
what that means is whatever amount you
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take you out it's gonna be hit with a
10% tax penalty and if you withdraw the
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earnings as well you're also going
pay your income taxes on that as well so
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you're gonna have your 10% penalty plus
whatever your income tax rate is on that
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for federal and state is gonna be
applied to you of course if you had that
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money in the account for longer than
five years income tax may or may not
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apply on the distribution it just
depends it could be partially taxed or
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fully taxed depending upon your
situation so let's say for whatever
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reason you become disabled or your
currently disabled and you have money in
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one of these Roth IRA accounts well if
you take money out it's okay so it's a
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it's known as a qualified distribution
no 10% penalty will apply to you which
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is great tax may apply on their earnings
if that money has been in your Roth for
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less than five years so that may apply
but if your money like most of these if
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it's been in there longer than five
years then tax generally will not apply
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so that's just the general rule of thumb
I'll make a separate video on taxes with
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Roth's there are situations what with a
Roth where you can pay tax I'll make a
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separate video for that but I'm just
gonna focus primarily on the penalties
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the rest of the video and not cover too
much on the tax side all right so let's
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go down to the next one now many of you
heard there's exclusions of therefore
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certain things you can take money out
and not be penalized and that is true
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and buying your first home if you need
to distribute money to buy your first
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property or build or rebuild your first
home then you can and withdrawal
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currently up to ten thousand dollars
from your Roth IRA and it's known as a
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qualified distribution no penalties
apply so what if you have now what if
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you did lose your job well if you just
lost your job and you need money
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remember that is not a qualified
distribution but if you lose your job
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now all of a sudden you don't have
medical insurance you need to pay for
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medical insurance well you can withdraw
from your Roth to help you afford
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medical insurance and that's known as a
qualified distribution and you will not
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be penalized regardless of your age for
doing that the next situation is non
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reimbursed medical expenses now it
doesn't count for all medical expenses
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you have to look very closely it says
non reimburse metal collects Pence's
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that exceed ten percent of your adjusted
gross income
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so what does that mean so if you think
about your tax return for a second and
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let's say your adjusted gross income is
50,000 well your medical expenses would
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need to exceed 10% of 50,000 before your
Roth distributions would become
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qualified so you would have to have
medical expenses in that case if you
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have an AGI of 50,000 greater then
$5,000 of medical expenses before you
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could withdraw from your Roth IRA
without incurring early withdrawal
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penalty so that's how that works so just
be careful on that it's a lot of people
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just say oh yeah you can take it out for
medical expenses yes but only those men
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will expenses that exceed 10 percent of
your AGI for the year now this one a lot
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of you guys are gonna like so what about
qualified higher education expenses so
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what if you need the money for school
and by qualified higher education
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expenses generally what that means is
you're pursuing a degree at a four-year
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university a junior college or whatever
or like a master's degree things like
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that if you're just trying to get a
certification or license it's not gonna
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count towards that because they don't
consider that qualified higher education
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it's only good in the pursuit of a
degree at an accredited school or
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university now it also applies to
certain family members which is great so
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if you have kids if you want to help
them with your college you can do that
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so if you distribute from the Roth no
penalty is going to apply to you so
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that's very cool so if you're going to
school and need some money your Roth can
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help you there even if you're under age
59 and a half what if you die now
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chipper like I said earlier chipper
apparently he's just waiting for me to
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die so he give him inherit this money if
you've made somebody that beneficiary to
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your estate after your death well once
you've passed away and you're the let's
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say you're the Roth account holder your
beneficiary can take that money out
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without penalty and other special rules
but in generally speaking they can if
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they're a designated beneficiary which
you would have assigned who your
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beneficiaries are hopefully when you
were setting up your account if you were
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to die then that money will go directly
to them and it's gonna either gonna go
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to them it has to be paid out to them in
five equal payments or it's gonna be
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based on their life expect
see depending upon how you set up the
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account how old they are and so on and
so forth but those distributions are
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generally qualified okay so normally if
you're a beneficiary of a Roth you can
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take the money out generally without
penalties even if you're under age 59
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and a half the next area where penalties
don't apply is a qualified disaster
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recovery assistance distribution let's
say you've just gone through a hurricane
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a tornado or some qualified disaster
area
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well then distributions are gonna be
qualified to come out of your account
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without penalties even if you're under
fifteen and a half because you've just
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gone through some catastrophic event in
your life and the government is giving
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me a break on that the next one is a
qualified reservist distribution now
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this is mainly for people who are in the
military or who who are on the reserve
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list and at some point they might get
called back to service so if you're a
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member of the National Guard for example
called to duty for at least 180 days
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then that could be a qualified
distribution if that's your scenario and
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you can even if you're under net age 59
and a half you can take out the money
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without penalties okay the last two here
on the 10% early withdrawal penalty so
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you've reached age 15 and a half so the
day you become 59 and a half doesn't
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matter why you take out the the money
from your Roth it is now deemed the
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qualified distribution you have nothing
you no longer have to worry about that
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10% early withdrawal penalty and at that
point life is good ladies gentlemen life
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is good the last one I have on this list
before we dive into a couple of other
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penalties real quick that are associated
with Roth's
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is prohibited transactions so I've left
a link to the publication that I've
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actually used to produce this
spreadsheet in this video but there are
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prohibited transactions so especially if
you have a more so I think if you have a
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self-directed IRA what you're in charge
of well there's certain things you can't
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do like you can't use your Roth as
collateral to get a loan
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you can't sell property to your Roth and
there's certain prohibited transactions
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that could get you in a lot of trouble
so you really want to know what those
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are like you can't buy collectibles
within your Roth or there's rules around
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collectibles like gold and things like
that like physical gold I'm not talking
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about stock
talking about physical assets and things
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like that so so just know what they are
and you can explore that further in
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detail by clicking this link here and
checking out the prohibited transaction
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portion of this publication okay there's
a few more penalties I want you to be
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aware of with Ross so that you have a
full overview of what to expect there is
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now generally speaking there is no
required minimum distribution penalty
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for a Roth IRA there would be one for a
traditional IRA but not so much for a
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Roth however let's read this real quick
just so you guys are aware says you
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aren't required now this is from the
publication as well 590 be from the IRS
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website it says you aren't required to
take distributions from your Roth at any
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age the minimum distribution rules that
applies to traditional IRAs
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don't apply to Ross while the owner is
alive that's a key point it does not
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apply as long as you are alive okay
however after the death of a Roth IRA
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owner certain minimum distribution rules
that apply to traditional IRAs
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traditional IRAs also will then apply to
Roth IRA race as explained later under
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distributions and after the owner's
death so basically this is what you need
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to know generally the entire interest in
a Roth IRA must be distributed by the
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end of the fifth calendar year which it
was what we talked about a little bit
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earlier in the video after the year of
the owner's death so you must generally
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you must distribute that money within
five years if you're the beneficiary of
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that IRA within five years of the owners
death unless the interest is payable to
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a designated beneficiary over the life
or life expectancy of the beneficiary so
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not of the owner not of the original
owner of the Roth but over the life
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expectancy of the beneficiary and the
Roth IRA holder will designate that or
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the rules will come into play based upon
the circumstances so you always want to
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check if you are inheriting a Roth make
sure you're consulting with somebody to
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see how to see how that's working but
generally speaking your
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get that money in five equal
installments over five years okay so
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that now that is the RMD penalty okay
and so the RMD penalty is huge it's huge
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and so let's so if you're required
minimum distribution let's say it's ten
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thousand dollars well I don't know if
you guys know this but the required
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minimum distribution penalty is
generally 50 percent of the required
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minimum distribution that's right 50
frickin percent it's like paying tax at
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50 percent rate which is absolutely
extortion in my opinion so if you had if
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you were required to withdrawal $10,000
from that account your penalty and you
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didn't do it your penalty would be five
thousand dollars that would now all go
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to the government just because you
didn't take the money out of the account
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in time what a fricking bummer you
thought there was just an early
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withdrawal penalty right no no there's
several penalties involved with these
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Ross that you have to be aware of what
about penalties this is a common one now
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this one's pretty common is that
penalties for excess contributions not
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distributions but contributions so
basically what that means is if you have
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a Roth and you over contribute to that
account and you know go above and beyond
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the limit so if you're right now as a
rule state if you're under the age of 50
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you can each person can contribute
$6,000 per year to a Roth IRA if you're
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over the age of 50 you can contribute up
to a max of $7,000 per year per person
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in a Roth IRA you know of course as long
as you qualify to contribute to a Roth
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in the first place right
let's say you put in ten thousand
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instead of six thousand well in that
example you have four thousand dollars
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too much in that account right so four
thousand dollars will become subject to
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a penalty and what penalty is that it's
the excess contribution penalty and that
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is six percent so your tax on that will
be four thousand dollars times six
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percent and you might even be hit with
an early withdrawal penalty so watch out
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for that if you've done that
the good news is is you can avoid it
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okay there's you can take corrective
action so if you realize that you've
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contributed too much what you can do is
as long as you take that money out
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before the end of the year that extra
four thousand in this example then
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you'll be fine so just pull that money
back out of your account you should be
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okay but if you leave it in there if you
leave those contributions in there and
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let them let them go well until you take
that money out you can be penalized each
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year going forward so it's a real pain
of that you know what so really watch
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out for that alright YouTube family that
is all the information I have for you in
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today's video if you like the
information please make sure to drop a
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like before you leave comment down below
let me know what penalties you've heard
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of or if you have any questions related
to Roth IRA penalties I will be doing a
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separate video on the taxation of Roth
IRAs because there are times when tax
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applies so I'm gonna be doing a follow
up video on that topic in the near
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future and if you're new to the channel
make sure to subscribe because every
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single week here on money in live TV our
goal and mission is to help you become
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channel
I usually release a new video about once
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per week it was so good to see all of
you again thank you so much for spending
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time with me here on YouTube it means a
lot guys it means more than you know I
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love doing this and I hope you have a
great week live life on Kage and I'll
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see you in the next one guys pace
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you
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