Ins, outs of Roth IRA withdrawal

first_imgA: You can put the money back but you can’t wait that long. Provided you follow the rules, money withdrawn from an IRA generally can be put back or “rolled over” into the same or another IRA, preserving its tax-favored status. But you must put the money back within 60 days. Also, you cannot do such an out-and-back-in rollover more than once every 12 months per IRA account. And you can’t put back money you withdraw as part of an IRA required minimum distribution. By taking advantage of the 60-day rule, however, it is possible to tap money in your IRA for short-term emergencies and still keep your retirement account fully funded. After 60 days, however, the withdrawal is considered permanent and the money can’t be put back. At least with a Roth IRA, withdrawals of direct contributions “are always tax-free and penalty free at any time and for any reason,” emphasized Ed Slott, a certified public accountant in Rockville Centre, N.Y. who publishes a newsletter on IRAs. Even so, if you don’t put the Roth IRA money back in time you will no longer have it growing potentially tax-free for your retirement. With a traditional deductible IRA, the consequences of blowing the 60-day deadline are more severe. All the money withdrawn would be subject to tax plus a possible 10 percent penalty for those under 59 and a half. The 60-day deadline also applies if your intent is simply to move your IRA from one custodian to another (for example, if switching brokers) and in doing so you come in possession of the money at any time. “Doing a 60-day rollover is like playing Russian roulette with your retirement savings,” Slott said. You can avoid this risk by doing a so-called direct trustee-to-trustee IRA transfer without you ever getting your hands on any of the money. Q: I have found that traditional IRA withdrawals add to my income, raising my tax bracket and causing some of my Social Security benefits to be taxed. Is this true also of supposedly tax-free Roth IRA withdrawals? A: Tax-free distributions from Roth IRAs are truly tax-free. They do not count as income and do not cause any of your other income to become taxable. Q: I work and my husband stays home. Can I make the maximum IRA contribution for him? He says he can contribute only what he would earn from work. A: For single people, what your husband says is true. But in the case of married couples who file a joint tax return, both husband and wife can make IRA contributions up to the personal maximum each even if one spouse has little or no earned income. The two IRA contributions added together cannot exceed the couple’s combined earned income. Send questions or comments to Humberto Cruz at [email protected] or c/o Tribune Media Services, 2225 Kenmore Ave., Buffalo, NY 14207. Personal replies are not possible. 160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! A column on having a Roth IRA serve as an emergency fund has prompted questions about the idea and IRAs in general. A Roth IRA is a type of individual retirement account created by Congress 10 years ago. Unlike contributions to traditional IRAs, contributions to Roth IRAs are never tax deductible. But while withdrawals from traditional deductible IRAs are fully taxed, withdrawals from Roth IRAs are tax-free once you are 59 and a half and have had a Roth IRA five years. In addition – this is the how the emergency fund idea came about – you can always withdraw your direct Roth IRA contributions without taxes or penalties. Q: I had a temporary emergency and had to withdraw my 2007 Roth IRA contribution. Can I put the money back if I do it before April 15, 2008? last_img read more