Where your Roth money goes (Hint: Not down a storm drain)


Lot’s of snow here so far in Chicago. Then there was extreme cold followed by warmer temperatures. Snow is melting at a rapid pace.

“What’s up with the weather and where does the snow go when it melts, Dad?” asked one of my boys.

They should know by now that Daddy understands numbers but, science, not so much…

So meteorological questions I can’t answer without google, but I can handle the the following query - which I hear quite frequently.

When you put money into a Roth IRA, where does it go?

As if Roth money goes to a mythical, far, far-away land or the storm drain like the snow when it melts.

It doesn’t. The short answer is that accessing Roth money has some limitations, but Roth money is like most other money. Sometimes the only way to tell is that Roth statements have the word "Roth" on the top. The benefits, though, of this unique account are far greater than a little extra print on your statement.

The long answer is more involved, but has a happy tax-free ending.

Many people think that Roth money is untouchable. That is will be unavailable in an emergency. That’s often a sentiment I hear when I suggest using this tax-preferred account for retirement. As with many financial myths, there is a shrewd of truth.

Generally speaking Roth money is less accessible if you’re younger than 59 1/2 or haven’t had the account set up for more than 5 years.

Here are the specifics so you can rest easy knowing this may be a suitable idea for you.

If you are Age 59 and under

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

If you withdraw from a Roth IRA you’ve had less than five years.

If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.

  • You use the withdrawal to pay for qualified education expenses.

  • You're at least age 59½.

  • You become disabled or pass away.

  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.

  • The distribution is made in substantially equal periodic payments.

Withdrawals from a Roth IRA you've had more than five years.

If you’re under age 59½ and your Roth IRA has been open five years or more, your earnings will not be subject to taxes if you meet one of the following conditions:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.

  • You use the withdrawal to pay for qualified education expenses.

  • You're at least age 59½.

  • You become disabled or pass away.

  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.

  • The distribution is made in substantially equal periodic payments.

If your age falls between 59½ to 70

Withdrawals from a Roth IRA you've had less than five years.

If you haven’t met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

Withdrawals from a Roth IRA you've had more than five years.

If you’ve met the five-year holding requirement, you can withdraw money from a Roth IRA with no taxes or penalties.

If your age is 70½ and over

Withdrawals from a Roth IRA you've had less than five years.

If you haven’t met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

Withdrawals from a Roth IRA you've had more than five years.

If you’ve met the five-year holding requirement, you can withdraw money from a Roth IRA with no taxes or penalties.

What’s most important to remember, generally speaking, is that your contributions are accessible. If you put 20,000 dollars in a Roth IRA and need it the next day, you have access to that contribution. Remember that Roth accounts are different from traditional tax-deferred accounts because you have already paid taxes. (I think this is the point that confuses many people. Case in point, last week’s post where I shared that 48% of people surveyed don’t understand Roth accounts.)

So there you have it! Once the snow enters the drain, it’s gone forever. Your money in a Roth IRA, fortunately, will be there when you need it!

If you haven’t delved into the world of Roth IRAs, please do so.

Have a great day and a safe new year!

Darryl

P.S.

Why do I say “generally speaking”? Well, "generally speaking" every situation is different. Every investor has different goals and a unique situation. No two scenarios are the same and it’s wrong to dispense financial advice for something as critical as your RETIREMENT without careful analysis. For best results, speak to a tax advisor, retirement specialist or someone who has attained the RICP designation. A Retirement Income Certification Professional focuses on transitioning from asset accumulation to creating a sustainable livelihood in retirement. For greater peace of mind and a secure and (hopefully) tax-free retirement, reach out to me by clicking here.

Required disclosures: Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and (Strataxa Retirement Advisors, LLC) are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.

Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional


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Darryl Rosen MBA, RICP

Darryl Rosen is the founder of Rose Advisory Group, and operates www.RealRetirementAdvice.com as a way to help others create their ideal retirement. He is obsessed with helping people create safety, simplicity and strength in their financial future. Darryl’s clients enjoy his straight-forward, plain-spoken guidance, strategies to minimize taxes and ability to generate investment returns, while minimizing risk so his clients can sleep at night! Darryl is licensed to provide guidance on securities and insurance solutions and has achieved the highly desired Retirement Income Certified Professional (RICP) designation.

Darryl is the creator of the well-known SECURiMENT™ Retirement Planning Method. A simple to understand and implement planning method that demystifies retirement planning so that people can take action. Visit Rose Advisory Group to learn more! 

Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor.  BCM and (Rose Advisory Group) are independent of each other.   Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Information provided is not intended as tax or legal advice, and should not be relied on as such.  You are encouraged to seek tax or legal advice from an independent professional.