Roth IRA's: Avoiding withdrawl penalties

[Life_is_Good]

An article came out in my local paper stating that a Roth could actually be a source of emergency funds. The author stated that the contributions made to the Roth IRA could be withdrawn at any time (no age condition) with no IRS penalties. The early withdrawl penalties only apply to investment returns from the account.

While I wouldn't use my Roth for a source of emergency funds... I had not ever heard that contribution withdrawls were penalty free - even if you are not yet at the age of required minimum distributions.

Any truth to this?

[Nords]

Quote:

Originally Posted by Life_is_Good Any truth to this?

That's correct.

Of course if one takes their contributions out of a Roth then those contributions can no longer contribute to its compounding. Unlike a 401(k) loan they can't be borrowed for a while and then put back (except through new contributions). So while it may come in handy for a true emergency, it's eating the seed corn.

An excellent reference source for IRA questions, no matter how obscure or complicated, is Ed Slott's IRAHelp Forum.

[trirod]

That's correct, unless your Roth IRA was a conversion from a traditional IRA - in which case you have to wait until age 59.5, and 5 years from the date of conversion.

I have heard some speakers suggest that a Roth IRA is a great way of saving for college since it can be more flexible than a Section 529 plan - you can withdraw the contributions to make tuition payments and the earnings remain in the Roth for your retirement. And if your kid doesn't go to college then you have a nice pot which will make ER so much easier!

[CompoundInterestFan]

Quote:

Originally Posted by trirod I have heard some speakers suggest that a Roth IRA is a great way of saving for college since it can be more flexible than a Section 529 plan - you can withdraw the contributions to make tuition payments and the earnings remain in the Roth for your retirement. And if your kid doesn't go to college then you have a nice pot which will make ER so much easier!

I've heard about this as well, but there's something I don't understand about it. You're only going to be able to withdraw the principal, so aren't you really limiting how much you can apply towards college? You can't apply any of the earnings, so it just seems really limited to me.

[ats5g]

I took at look at IRS Pub 590 is this conversation. Looks like you can withdraw contributions and earnings from a Roth or Traditional IRA for qualified higher education expenses.

- Alec

[LOL!]

Quote:

Originally Posted by ats5g I took at look at IRS Pub 590 is this conversation. Looks like you can withdraw contributions and earnings from a Roth or Traditional IRA for qualified higher education expenses. - Alec

In this case, Roth contributions won't be taxed, but earnings will be taxed, but not penalized. tIRA contributions and earnings will be taxed.

[Nords]

Quote:

Originally Posted by CompoundInterestFan I've heard about this as well, but there's something I don't understand about it. You're only going to be able to withdraw the principal, so aren't you really limiting how much you can apply towards college? You can't apply any of the earnings, so it just seems really limited to me.

Sure, but if it pays for part of a State U degree then it'll sweep up a lot of people who aren't enamored of the restrictions found in 529 plans and UTMA/UGMAs.

Another tool in the toolbox, but with more uses.