Roth IRA Withdrawal Rules Explained - YouTube

Hi everyone! Welcome back to Diamond NestEgg.  I'm Jennifer, personal finance educator and money  

expert. For those of you new to Diamond NestEgg,  I work with small and medium-sized businesses  

to teach and improve employee financial literacy  and wellness. Today I'm here to talk to you about  

Roth IRA withdrawals limits and penalties -  something that many clients have been asking  

a lot about recently as they think about  other ways to possibly make ends meet,  

given the current economic uncertainty. By the end  of this video, you'll know what you can take out  

of your Roth tax-free and penalty-free, as well  as what you can take out of your Roth - but you'll  

have to pay penalties and taxes on. We'll also  be giving you a chart that you can easily refer  

back to, to see which situation best applies  to you. So a Roth IRA is a special retirement  

savings account, where you pay taxes now so  you don't have to pay them later. So basically,  

you pay into your account with after tax money  - or money that you've already paid taxes on.  

Everything in your Roth IRA grows tax-free and all  future withdrawals are also tax-free. Roth iras  

are generally used by our younger clients recent  grads and those that think their taxes will be  

higher in retirement than they are right now if  you're interested in learning more about saving  

investing insurance or retirement hit that  subscribe button we're here every sunday with  

a brand new video about your money and how you  can make the most of it roth iras generally have  

more flexible withdrawal rules than traditional  iras and 401ks but do do your homework before  

making any roth ira withdrawals if you don't meet  certain requirements you could end up owing taxes  

and a 10 early withdrawal penalty do you have a  roth ira drop us a comment below and let us know  

moving on to roth ira withdrawal rules roth ira  withdrawal rules differ depending on whether you  

take out your contributions or your earnings  contributions of the money you put into your  

roth and earnings are the profits you make  from the funds and investments in your roth  

both contributions and earnings grow tax-free in  your account that's why it's so awesome let's talk  

about contributions first you can withdraw your  roth ira contributions at any time for any reason  

with no tax or penalties because you already paid  taxes on that money when you put it into your roth  

for 2021 the annual contribution limit for both  roth and traditional iras is six thousand dollars  

if you're age 50 or over you can make an  annual catch-up contribution of one thousand  

dollars please note though contributions  can be reduced based on your income level  

for 2021 if your modified adjusted gross  income is less than 125 000 as a single filer  

you can contribute the full amount of six  thousand dollars to your roth if your modified  

adjusted gross income is between a hundred and  twenty five thousand dollars and a hundred and  

forty thousand dollars your contribution will  be reduced and if your modified adjusted gross  

income is a hundred and forty thousand dollars  or more you don't even qualify for a roth  

and if you are married filing jointly you can  contribute the full amount of six thousand dollars  

if your modified adjusted gross income is less  than one hundred and ninety eight thousand dollars  

if your modified adjusted gross income is  between a hundred and ninety eight thousand  

dollars and two hundred and eight thousand  dollars your contribution will be reduced  

and again if you're modified adjusted gross  income is 208 000 or more you can even have a roth  

i've included links below if you want more details  on modified adjusted gross income and roth ira  

income limits for 2021. for those of you that  don't qualify for roth you can check out our  

video over here it goes through a roth versus  traditional 401k and ira check it out and see what  

other retirement options might be available to  you traditional iras don't have any income limits  

but there are income limits on the amount of  contributions that are tax deductible so far  

we've talked about roth contributions the  money you put into your wrath and the fact  

that contributions can be withdrawn at any time  for any reason with no tax or early withdrawal  

penalties because you've already paid taxes  on that money when you put it into your roth

withdrawals on earnings on the other hand work  differently these distributions could be subject  

to income taxes and a 10 penalty depending on  your age and how long you've had the account  

which brings us to the roth ira five year  rule generally speaking you can withdraw  

your earnings without owing taxes or penalties if  you meet these criteria one you're at least 59 and  

a half years old and two it's been at least five  years since you first contributed to any roth ira  

this is known as the five-year rule the five-year  rule applies regardless of your age when you open  

the account so for example if you open your  roth and make your first contribution at age 56  

you still have to wait five years until  you turn age 61 to avoid any taxes  

the clock starts ticking on january 1st of  the year that you first contribute to any roth  

now because you have until april 15th of the  following tax year to make a contribution your  

five years might not be a full five calendar  years again let's take an example if you make  

your first contribution to your roth in  early april 2021 that's before april 15th  

the tax deadline but you designate it for the 2020  tax year and yes you can do this you'll only have  

to wait until january 1st 2025 not january 1st  2026 to withdraw your roth earnings tax free  

assuming you're at least 59 and a half years old  with roth ira conversions the five-year clock  

starts ticking on january 1st of the year you make  the conversion a roth conversion is when you take  

all or part of the balance of any existing  traditional ira and move it into a roth ira  

and if you inherit a roth ira the  clock starts ticking when the original  

owner made their first contribution not  when the account is passed on to you  

so if you withdraw earnings from  your roth ira the withdrawal is tax  

free and penalty free what the internal revenue  service calls a qualified distribution so  

long as your roth meets this five-year rule and  one of the following circumstances applies to you  

one you make the withdrawal at age 59 and a half  or older two you withdraw funds because you are  

permanently disabled three the withdrawal is made  by a beneficiary or your estate after your death  

or four you use the withdrawal to purchase  build or rebuild a first home for yourself  

or a qualified family member qualified  family members include your spouse your  

children grandchildren parents or other  ancestors for this withdrawal there is  

a lifetime cap of ten thousand dollars we'll  talk a bit more about this later in the video  

again this type of withdrawal of earnings from  your roth that are tax-free and penalty-free are  

called qualified distributions now we're going  to talk about non-qualified distributions very  

simply stated non-qualified distributions are any  withdrawals that aren't qualified distributions  

you'll pay taxes at your ordinary income tax  rate on earnings plus an additional 10 penalty  

however there are certain circumstances when you  may not have to pay the 10 penalty and we'll talk  

in detail about the two most common ones the first  is the first time home buyer exception and the  

second is for qualified higher education expenses  let's dive into the first time homebuyer exception  

first but before we do this if you're enjoying  our video show us some love give us a thumbs up  

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so the first time home buyer exception you  can take money out of your roth without  

paying a penalty if you are a first-time homebuyer  the internal revenue service categorizes you as a  

first time home buyer if you and your spouse if  you have one haven't owned a home ever before or  

if you and your spouse again if you have one  haven't owned a home during the prior two years  

if you meet the five-year rule you can avoid  taxes altogether on your withdrawal if you  

don't meet the five-year rule you'll pay income  taxes on the earnings portion of your withdrawal  

money comes out of your roth in the following  order contributions come out first then comes the  

money that converted from another account such as  a traditional ira or 401k earnings come out last  

the maximum amount you can withdraw for this  purpose is 10 000 and it's a one-time deal  

for most folks once you make this withdrawal you  have 120 days to use it to buy build or rebuild  

a home for yourself or a qualified family member  and again qualified family members include your  

spouse your children your grandchildren parents  or other ancestors other than buying a first  

home another common reason for tapping into a  roth is for qualified higher education expenses  

you can take penalty-free withdrawals from your  roth ira to pay for higher education expenses  

at a college university vocational school or  other post-secondary educational institution  

but you'll still be responsible for  income taxes on the earnings portion  

qualified expenses include tuition fees books  supplies required equipment and room and board  

if you're at least a half time student you can use  the distribution for yourself or to help out your  

spouse children grandkids or great-grandkids just  keep in mind that the withdrawal cannot exceed  

your higher education expenses for the year  you should also know that roths and other  

retirement accounts are not counted as assets on  fafsa the free application for student aid but  

withdrawals do count as income what this means  is that you could receive less financial aid  

if you use your roth to pay for higher education  expenses here are some other situations when you  

may not have to pay the 10 withdrawal  penalty on non-qualified distributions  

one you have unreimbursed medical expenses that  exceed ten percent of your adjusted gross income  

two you need to cover medical insurance  premiums after a job loss three  

you're paying for childbirth or adoption expenses  this amount is capped at five thousand dollars  

four you owe the irs money and the  distribution is due to an irs levy  

five you need the money for qualified disaster  recovery six you're a member of the military  

reserve and taking qualified reservist  distributions and seven you're taking a  

series of substantially equal periodic payments  if this is what you are thinking about consider  

working with a tax professional substantially  equal periodic payments are somewhat complicated  

and there is little guidance available from the  irs and remember even if you don't have to pay the  

10 withdrawal penalty you will have to pay taxes  at your ordinary income tax rate on earnings we  

know this can be a complicated topic so if you  have any questions shoot us an email at hello  

at diamond nesting.com to see if we can help  or consult your tax advisor for more details  

now comes the million dollar question you can take  withdrawal but should you if money is tight or you  

think that it might be tight at some point in  the near future a withdrawal from your roth may  

seem like an easy solution but if you  can find another way to make ends meet  

you really should for example if you have an hsa a  health savings account you could use that to cover  

your medical expenses instead of dipping into your  roth take a look at this video here you can learn  

more about health savings accounts why many are  referring to this as their secret retirement tool  

and why you should probably consider having one  if this is an option available to you the other  

thing you can and should do first is to dip into  your emergency fund if you have one that's what  

it's there for emergencies to learn more about  emergency funds check out our playlist over here  

we go through how to start saving for an emergency  fund how much you should have in there as well and  

where to keep your emergency fund and why you  shouldn't keep it in your roth which some folks  

are tempted to do roth withdrawal should really  only be considered as a last resort not because  

you can avoid any potential taxes and penalties  but most importantly because you can keep your  

retirement savings untouched and stay on track  to reach your retirement goals once you take  

money out of your roth once you withdraw that  money you can't repay it and put it back in  

this is not a loan in fact the primary reason for  not taking an early withdrawal is that the money  

you take out of your roth and any potential  earnings that you could have made from it  

are gone forever you could miss out on years  or even decades of tax free earnings and  

growth depending on your age we created this  chart for you so that you can have a quick  

clear overview of the roth withdrawal rules all  in one place feel free to refer back to this as  

you need or if you'd like a hard copy just  shoot us an email at hello diamonestick.com  

i've included our email below this video alright  guys thanks for watching we hope you enjoyed this  

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