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Roth IRA question

In these unstable, hard economic times, I would like to expand my liquid assets. Having a six month emergency fund doesn't make me feel particularlly comfortable anymore. I have a Roth IRA, but I am depending mainly on other accounts for retirement. In an emergency situation, I'm thinking I could cash in the Roth IRA. Here's my question:

I've already paid taxes on the money I put into the Roth. I am in my early 50s. If i cash this out early, am I going to have to pay taxes on all this money AGAIN, plus pay a 10% penalty. Or do I only pay taxes on any interest earned? And does the 10% penalty apply to the whole amount or just the interest?

If I have to pay taxes on the whole amount, I must say that seems rather unfair.

Reply to
iarwain
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Indeed, deposits may come out tax free/ penalty free any time. This opens the possibility to treat the Roth as a secondary emergency fund if your retirement is funded elsewhere. Gains are taxed and 10% penalty if not 59.5.

Reply to
JoeTaxpayer

The money you *contributed* comes out tax-free and penalty-free.

The money, if any, that you converted from a traditional IRA to a Roth IRA comes out tax-free. If it has been more than 5 years since you made the conversion, money from *that* conversion also fomes out penalty-free.

Any earnings will be subject to both income tax and the 10% early withdrawal penalty (unless you meet one of the exceptions, like using it to pay certain medical expenses of more than a certain amount).

And unlike trad IRA distributions which follow a pro-ration rule, Roth distributions follow a specific order:

  • First your contributions are deemed to come out.
  • Then your conversions are deemed to come out, in the order they were made.
  • Then your earnings are deemed to come out.

This is all explained further in IRS Pub 590.

Reply to
Rich Carreiro

Thanks gentlemen, that's a load off my mind.

Reply to
iarwain

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