When it comes to investment vehicles, few are as reliable or popular as the IRA. The framework for these accounts was established in 1997 Federal legislation, and has since become a bedrock part of many Americans’ retirement hopes and dreams. There are, of course, many things that you need to understand before you make the decision to start a Roth account – everything from the eligibility requirements to the contribution limits – but perhaps none more important than the issue of IRA withdrawal. When and how you can access your retirement funds can often become a problem for people who own the accounts, especially when they did not properly prepare for withdrawal in advance.
How much to contribute
Before you can think about any IRA withdrawal, however, you will want to ensure that you are making the right contributions to the account. Here is where most people get into trouble! The rules for the Roth IRA – or any IRA for that matter – allow for contributions of no more than $5,000 a year for most people, with an additional $1,000 for older contributors. That amount is slated to rise each year to keep pace with the cost of living and inflation. However, just because you are allowed to make contributions in that amount does not mean that you are required to do so.
The big mistake
In an effort to make maximum use of the tax benefits associated with an IRA account, many people make the mistake of forcing themselves to contribute the maximum allowable amount during each calendar year, leaving nothing for other types of savings accounts. While a Roth IRA can easily outpace a traditional savings account, Roth IRA withdrawal rules can make it painful to withdraw your money from the account under some circumstances, forcing you to choose between doing without the money until you are almost sixty, or paying a substantial early Roth IRA withdrawal penalty.
Getting around the rules
An early Roth IRA withdrawal is possible in some situations, however – most notably when you are injured, disabled, or deceased (at which point the fund has to be distributed to your surviving beneficiaries). There are a few other exceptions as well, but taking money out of your account without a penalty attached to the withdrawal is generally difficult to accomplish. Once you reach the age of 59 and a half, however, taxes and penalties are no longer an issue.
The fact that there are some issues related to Roth IRA withdrawal of funds is the most important reason why you should plan your contributions wisely. Life happens to all of us, and things can sometimes change before we have a chance to see the change coming. The best way to ensure that you never have to make a penalized Roth IRA withdrawal is to ensure that you have other savings vehicles in place as well. In other words, have your Roth IRA – and contribute what you can – but have bank accounts and other more liquid assets available to you as well so that you never have to deal with the pain of a penalty for withdrawal.
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