There are certain restrictions when it comes to borrowing money from your Roth IRA. While you can't take out a loan from your Roth IRA like you can with other retirement accounts such as a 401(k), you may withdraw funds for short periods of time.
The withdrawal of these funds are tax-free, penalty-free and interest-free, according to Bible Money Matters.
You may also withdraw your original contributions to your Roth IRA without taxes or penalty.
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Here are some do's and don'ts of borrowing from your Roth IRA:
Keep in mind that the federal government allows holders of both Roth and traditional IRAs to take out an interest-free, short-term loan known as a "rollover" from their IRA.
Miss the deadline after borrowing from your Roth IRA by failing to return the rollover money within the 60 calendar day window required by federal law. The money must go into the same or another Roth IRA, because Roth IRAs can only be rolled over into Roth IRAs, according to IRS regulations.
If you fail to return the money on time, the transaction will likely be considered a distribution and you'll owe income tax on it, according to Bankrate.com. You may also owe a 10 percent early withdrawal penalty if you're younger than 59 and a half, the age at which the federal government begins allowing people to withdraw money from their IRAs without penalty, reports Bankrate.
Pay back less than the full amount you borrowed. Any money you don't pay back from an IRA rollover is a taxable distribution and may also be subject to the 10 percent early withdrawal penalty if you're younger than 59 and a half, according Nasdaq.
Roll over money from any IRA less than 12 months after previously rolling money over out of the same IRA. IRA holders who break that rule will likely be fined 6 percent for making excess IRA contributions, reports Nasdaq.
Keep in mind that your options for a rainy day include withdrawing up to 100 percent of your original contributions to your Roth IRA tax-free and penalty-free..
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Be careful about potentially withdrawing any of your earnings from your Roth IRA, which will likely result in your owing income taxes on the withdrawn earnings plus a 10 percent penalty for early withdrawal.
Charles Schwab indicated certain exceptions enable Roth IRA
holders to not face income tax penalties for withdrawing earnings in the first five years in the following situations:
• You use the withdrawal (up to a $10,000 lifetime maximum) to make 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 die.
• You use the withdrawal to pay for un-reimbursed medical expenses or health insurance if you're unemployed.
• The distribution is made in substantially equal periodic payments.
Keep in mind that the IRS treats a Roth IRA withdrawal made more than five years after the first tax year in which you made a contribution (including earnings) as a "qualified distribution," according Charles Schwab. This means it is not taxable or subject to a penalty as long as you satisfy one of the following conditions:
• You're at least age 59½.
• You become disabled or pass away.
• You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
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