Liquidating a Roth

by Beverly Bird

You might begin your retirement plan with the best of intentions, but sometimes life interferes. If unforeseen events occur and you realize that you need to access the money you invested in a Roth IRA, you might be able to do so without paying taxes or penalties under some circumstances.


If you converted a traditional IRA to establish your Roth IRA, this portion is your conversion money. However, you might also have contributed additional money to your Roth IRA over the years. At the time of publication, the IRS allows you to add up to $5,000 a year to your Roth, as long as you earned that money as income, and provided your income is less than $110,000 if you’re single, $173,000 if you’re married and file your taxes jointly. You still pay income tax on the money you invest, but that money is tax-free when you take it out again to fund your retirement. This portion of your Roth represents your contributions. If you want to liquidate your IRA, you can take your contributions back at any time, without paying taxes or penalties on the withdrawal. You already paid taxes on the money once, when you earned it. However, this doesn’t hold true with money that came from converting your traditional IRA, so liquidating your entire Roth can get tricky.


If you want to liquidate your IRA and it includes conversion money, you’ll have to bide your time. If you do it before five years has elapsed, you’ll pay a 10-percent penalty on that portion of the money, because it was tax-deductible to you in the year you invested it. The five-year period begins on January 1 of the year you converted your traditional IRA, so if you did so in December, you’ve already accumulated 11 months of that time. If you funded your Roth with conversion money in December 2011, you must wait until January 1, 2016 before you can liquidate it without paying the penalty on the conversion portion of the balance.


You invested in your Roth IRA because you wanted it to earn money for you, and it’s probably been doing that. Those earnings also complicate the situation if you want to liquidate. If you withdraw this portion of the money, you’ll pay the 10 percent penalty, and you’ll also pay income tax on it, presuming you're not of retirement age.


When it comes to investing, there are exceptions to almost every rule, including those regarding liquidation of your Roth IRA. You can get around the standard penalties under a few circumstances. You can access the money penalty-free after age 59 1/2, even if you’re not ready to retire yet. If you become disabled, you can cash out your Roth as well, in its entirety and including the earnings balance. However, the five-year rule still applies to any conversion and earnings amounts. You can access the earnings to buy a home as well, up to $10,000. If you do it before the five-year period expires, you’ll pay taxes on the money, but it’s penalty-free for this purpose.

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