Part Three of Four: Accessing your Roth IRA prior to age 59 ½

If you plan on accessing your retirement accounts prior to age 59 ½, hands down, the Roth IRA is your best bet. A Roth IRA allows you to contribute $5,500 a year if you are under the age of 50. If you are 50 or over, you can contribute $6,500 a year. Roth IRA’s are subject to income limits so not everyone can contribute to a Roth if you make too much money. (The phase out starts at $189,000 if you are married and filing jointly. If you are single, the phase out starts at $120,000.)

So what makes a Roth special? If you’ve owned your Roth IRA for more than five years, at 59 ½ years old you are able to withdraw your entire account balance without paying taxes on it. That’s right, a Roth has a tax-free benefit to it. How many other tax-free accounts can you think of? Tax-free municipal bonds, College 529 plans and Roth IRA’s are the big ones.

How do they help me if I retire early? When you contribute money to a Roth, unlike a traditional IRA, you do not get a tax deduction. So your contributions go in with after tax money. This is important because it allows you to take your contributions back out anytime without paying taxes or penalties because you already have paid the taxes.

Now, your earnings are subject to taxes and the 10% early withdrawal penalty if you take them out prior to 59 ½. Much like a traditional IRA, there are exceptions such as disability, first time home buyer, college education, active military reservist and certain medical expenses.

Keep in mind, you are able to do a 72T withdrawal on your earnings, prior to 59 ½ and avoid the 10% early withdrawal penalty.
(See the last blog for more explanation on 72T)

For example:

  • You started a Roth IRA 12 years ago.
  • Your current value is $103,000
  • Your contributions were $53,000
  • Your earnings were $50,000

You are currently 55 years old and ready to retire early. If at all possible, it would be ideal if you could allow the Roth to continue to grow. But for this example, let’s say you need money now. You’re able to withdraw all $53,000 in contributions with no taxes or penalties. You can then allow the $50,000 in earnings to continue to grow and at 59 ½, you can withdraw that portion tax free. Not bad right?

One other thing to consider is to look at converting your traditional IRA’s into a Roth IRA. The younger you are, the more this makes sense. Keep in mind though, when you convert your traditional IRA to a Roth IRA, you’ll have to pay federal and state tax on the conversion. (There is no 10% early withdrawal penalty on a conversion.) It’s best to pay those taxes from money outside of your IRA’s.

Traditional IRA’s have been sold for years based on the assumption that when you contribute to it, you get a tax deduction now but when you retire and start taking the money out, you’ll pay taxes at a lower rate. This just simply not the case any longer. People tend to stay in the same tax bracket in retirement as they were in when they were working.

The Roth IRA and it’s tax-free benefits is truly, in my opinion, the best individual retirement account available.

Keep an eye out for the final installment of this blog mini-series, coming next week!