Roth IRA withdrawals with annual tax implications

Forum|Forum|5 years ago
August 20, 2020
2 replies
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Okay, this is my question.

If you cash out some portion of your Roth IRA funds, you don't pay the taxes, right?

Now, does the withdrawn money count as my income, so do I have to add it to my annual income and pay the tax or not?

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macuser_22

Alumni - Champ

Depends. You can always withdraw your own prior contributions anytime tax free but if you withdraw any earnings then:

if you are over age 59 1/2 then the earnings are also tax free unless you have not had a Roth IRA for at least 5 years then the earnings can be taxable if withdrawn.

If under age 59 1/2 then the earnings are taxable and also subject to an additional 10% early distribution penalty.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

Opus 17

Level 15

Also be aware, if you have an after-tax 401(k) ("Roth 401(k)") that is not the same as an IRA and the rules are different. You generally can't withdraw any funds if you are still working for the company sponsor, even if you have had the account more than 5 years. And there may be other differences. But money withdrawn in retirement is not taxable income.

cspyonAuthor

Level 5

Got it.

I don't work for the company anymore.

So, my ROTH IRA has nothing to do with the company.

Opus 17

Level 15

@cspyon wrote:

Got it.

I don't work for the company anymore.

So, my ROTH IRA has nothing to do with the company.

I don't know why you are mentioning Roth IRA and "company" in the same sentence, so I'm concerned that one of us may be confused or miscommunication.

If your company opens a retirement plan for you, it might be a 401(k), 403(b), 401(a), or some other kind of qualified retirement plan, but it is not and never will be a Roth IRA. An IRA is an "individual" retirement arrangement, not sponsored by a company. You would go to your own broker to set one up. If you have a company plan, you can usually roll over or transfer the money into a private plan, but a company plan does not "turn into" a private plan when you leave the company.

The rules on withdrawing money from a private Roth IRA are fairly simple; you can withdrawn contributions tax-free at any time. Withdrawal of earnings is tax-free only if you are both (a) over age 59-1/2, and (b) the Roth IRA has been open at least 5 years.

The rules on withdrawing or removing money from a company plan are different.