Cashing Out a Retirement Account
The Roth IRA is a great retirement investment vehicle along with a number of other federally available retirement plans such as traditional IRAs and SEPS. With the Roth IRA specifically, you pay taxes on the money invested prior to placing it into the account. Therefore when the money is withdrawn at retirement time, it can be done so tax free. This is the main advantage of the Roth IRA over other retirement plans. But don’t be tempted to cash out the retirement account during difficult financial times as that will result is penalties and taxes that you should avoid.
Qualified distributions are the kind of retirement account distributions that you want to take. These withdrawals occur on accounts that have been open for more than six years when you turn 59 1/2 years of age. These withdrawals are penalty and tax free. Non-qualified withdrawals result in a 10% penalty on the funds cashed out along with the requirement of some income taxes. The good news is that only the investment income is taxable as you already paid taxes on the initial investment, therefore it is not taxed twice. If your account has not grown in value, all you owe is the penalty and no income taxes.
There are several hardship exemptions to the penalty and tax provisions of the law including disability, death, college expenses, medical expenses, unemployed health insurance premiums, and first time home buyers. When you fall into one of these categories you can ignore the penalties and the income taxes, withdrawal the money, and spend it specifically on the exempt item. Another exemption is a special annuity-type withdrawal where the money is cashed out equally over the life of the individual in consistent payments. Talk to a tax accountant to find out more about this special withdrawal scenario.Cashing Out a Retirement Account by Steve