Roth IRA withdrawal question for parent nearing retirement

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Mode32
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Roth IRA withdrawal question for parent nearing retirement

Post by Mode32 »

Bogleheads,

My mom is 69 years old, currently works part-time and thinking about investing in a Roth IRA. She plans to work another 3 years part-time.

My question is specifically on withdrawal from Roth IRA. If she decides to start Roth IRA this year (max it out at $7K), is there a certain number of years she needs to wait before she can use these funds (contributions and/or gains) to avoid some kind of penatly? (or can she use it anytime that she wants...ie, puts in the money today and use it in 5 months or a year if she wants?)

Thanks for your time.

Stay safe.
Buy_N_Hold
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Buy_N_Hold »

Mode32 wrote: Fri Sep 18, 2020 1:01 pm Bogleheads,

My mom is 69 years old, currently works part-time and thinking about investing in a Roth IRA. She plans to work another 3 years part-time.

My question is specifically on withdrawal from Roth IRA. If she decides to start Roth IRA this year (max it out at $7K), is there a certain number of years she needs to wait before she can use these funds (contributions and/or gains) to avoid some kind of penatly? (or can she use it anytime that she wants...ie, puts in the money today and use it in 5 months or a year if she wants?)

Thanks for your time.

Stay safe.
This article gives a helpful overview: https://www.schwab.com/ira/roth-ira/withdrawal-rules.

Essentially the contributions themselves could be withdrawn at anytime tax and penalty free since this money has already been taxed. However, the account would have to be open for five years before the earnings would also become tax free to withdraw. A withdrawal of earnings before the five-year period expires would be subject to taxes (but no penalties).

Hope that helps!
“To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable.” -Edgar Bronfman
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Mode32
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Mode32 »

Buy_N_Hold wrote: Fri Sep 18, 2020 1:14 pm
Mode32 wrote: Fri Sep 18, 2020 1:01 pm Bogleheads,

My mom is 69 years old, currently works part-time and thinking about investing in a Roth IRA. She plans to work another 3 years part-time.

My question is specifically on withdrawal from Roth IRA. If she decides to start Roth IRA this year (max it out at $7K), is there a certain number of years she needs to wait before she can use these funds (contributions and/or gains) to avoid some kind of penatly? (or can she use it anytime that she wants...ie, puts in the money today and use it in 5 months or a year if she wants?)

Thanks for your time.

Stay safe.
This article gives a helpful overview: https://www.schwab.com/ira/roth-ira/withdrawal-rules.

Essentially the contributions themselves could be withdrawn at anytime tax and penalty free since this money has already been taxed. However, the account would have to be open for five years before the earnings would also become tax free to withdraw. A withdrawal of earnings before the five-year period expires would be subject to taxes (but no penalties).

Hope that helps!
Thank you so much! Very helpful!

So it pretty much becomes a traditional IRA if you withdraw the earnings before 5 years. I'm believe no rules like this exist for traditional IRA in terms of withdrawal of earnings. Assuming that my mom may utilize the money (including earnings) within 5years, it seems more beneficial to use a traditional IRA?
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WoodSpinner
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by WoodSpinner »

OP,

See this link for details on Tax Implications for Roth withdrawals.

WoodSpinner
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grabiner
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by grabiner »

Mode32 wrote: Fri Sep 18, 2020 1:19 pm So it pretty much becomes a traditional IRA if you withdraw the earnings before 5 years. I'm believe no rules like this exist for traditional IRA in terms of withdrawal of earnings. Assuming that my mom may utilize the money (including earnings) within 5years, it seems more beneficial to use a traditional IRA?
Only if she can deduct the contributions. If she contributes to a non-deductible traditional IRA, the contributions are not-deductible, and earnings are taxable.

And in a Roth IRA, any part of the earnings that she doesn't use in the first four years will become tax-free. She could withdraw the entire contribution amount early, and wait until five years to withdraw the earnings, paying no tax.
Wiki David Grabiner
Buy_N_Hold
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Buy_N_Hold »

Mode32 wrote: Fri Sep 18, 2020 1:19 pm
Buy_N_Hold wrote: Fri Sep 18, 2020 1:14 pm
Mode32 wrote: Fri Sep 18, 2020 1:01 pm Bogleheads,

My mom is 69 years old, currently works part-time and thinking about investing in a Roth IRA. She plans to work another 3 years part-time.

My question is specifically on withdrawal from Roth IRA. If she decides to start Roth IRA this year (max it out at $7K), is there a certain number of years she needs to wait before she can use these funds (contributions and/or gains) to avoid some kind of penatly? (or can she use it anytime that she wants...ie, puts in the money today and use it in 5 months or a year if she wants?)

Thanks for your time.

Stay safe.
This article gives a helpful overview: https://www.schwab.com/ira/roth-ira/withdrawal-rules.

Essentially the contributions themselves could be withdrawn at anytime tax and penalty free since this money has already been taxed. However, the account would have to be open for five years before the earnings would also become tax free to withdraw. A withdrawal of earnings before the five-year period expires would be subject to taxes (but no penalties).

Hope that helps!
Thank you so much! Very helpful!

So it pretty much becomes a traditional IRA if you withdraw the earnings before 5 years. I'm believe no rules like this exist for traditional IRA in terms of withdrawal of earnings. Assuming that my mom may utilize the money (including earnings) within 5years, it seems more beneficial to use a traditional IRA?
Yes, if you withdraw the earnings before five years it functions as a traditional IRA. In terms of your mother using a Roth IRA or a traditional IRA, you will want to do some research or perhaps even talk to a financial advisor. It ultimately comes down to personal preference. I like the Roth IRA personally because it gets the taxes out of the way now, while tax rates are historically low. However, if your mom will drop into a lower tax bracket once she is fully retired the regular IRA could make more sense.

Also, I found this paragraph on Investopedia:

"There is yet another loophole for earnings on Roth contributions, however. If you contribute and then withdraw within the same tax year, then the contribution is treated as if it were never made.

For example, if you contribute $5,000 in the current year and those funds generate $500 in earnings, you can withdraw the full $5,500 penalty-free, as long as the distribution is taken prior to your tax filing due date. You would have to report those earnings as investment income, however." (Source: https://www.investopedia.com/ask/answer ... drawal.asp).

This would be another point in favor of the Roth IRA approach. Hope that helps!
“To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable.” -Edgar Bronfman
Topic Author
Mode32
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Mode32 »

WoodSpinner wrote: Fri Sep 18, 2020 1:24 pm OP,

See this link for details on Tax Implications for Roth withdrawals.

WoodSpinner
Thanks, very helpful!

I think after reading more, not really sure what's the best move for her, Roth or Traditional IRA.

She has well-funded 401K (60/40) (all traditional) from previous employer and has about a 1 years worth of cash. Known expenses for her would be some home remodeling and helping pay for my sister's wedding within the next 5 years; otherwise, it would be modest living expenses. Any thoughts on which to go for, Roth or Traditional IRA?
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Mode32
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Mode32 »

grabiner wrote: Fri Sep 18, 2020 1:35 pm
Mode32 wrote: Fri Sep 18, 2020 1:19 pm So it pretty much becomes a traditional IRA if you withdraw the earnings before 5 years. I'm believe no rules like this exist for traditional IRA in terms of withdrawal of earnings. Assuming that my mom may utilize the money (including earnings) within 5years, it seems more beneficial to use a traditional IRA?
Only if she can deduct the contributions. If she contributes to a non-deductible traditional IRA, the contributions are not-deductible, and earnings are taxable.

And in a Roth IRA, any part of the earnings that she doesn't use in the first four years will become tax-free. She could withdraw the entire contribution amount early, and wait until five years to withdraw the earnings, paying no tax.
Great point about withdrawing the earnings after five years.

How would she find out if she can deduct the contributions? I apologize if this is a very basic question (I'm in the accumulation phase and realize it's far easier planning this phase than for retirement phase).
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grabiner
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by grabiner »

Mode32 wrote: Fri Sep 18, 2020 2:03 pm
grabiner wrote: Fri Sep 18, 2020 1:35 pm
Mode32 wrote: Fri Sep 18, 2020 1:19 pm So it pretty much becomes a traditional IRA if you withdraw the earnings before 5 years. I'm believe no rules like this exist for traditional IRA in terms of withdrawal of earnings. Assuming that my mom may utilize the money (including earnings) within 5years, it seems more beneficial to use a traditional IRA?
Only if she can deduct the contributions. If she contributes to a non-deductible traditional IRA, the contributions are not-deductible, and earnings are taxable.

And in a Roth IRA, any part of the earnings that she doesn't use in the first four years will become tax-free. She could withdraw the entire contribution amount early, and wait until five years to withdraw the earnings, paying no tax.
Great point about withdrawing the earnings after five years.

How would she find out if she can deduct the contributions? I apologize if this is a very basic question (I'm in the accumulation phase and realize it's far easier planning this phase than for retirement phase).
It depends on her income, and on whether she or her spouse is covered by a retirement plan at work. Traditional IRA on the wiki has the details.
Wiki David Grabiner
retiredjg
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by retiredjg »

Mode32 wrote: Fri Sep 18, 2020 1:55 pm I think after reading more, not really sure what's the best move for her, Roth or Traditional IRA.
If she is in a very low tax bracket, there is a good chance that Roth IRA would be the better choice. Adding money to traditional IRA may not be a mistake though.

If you want to get good suggestions on this question, you really need to present more information. We don't know her filing status, her tax bracket, or how large the 401k is. Whether she is currently on SS. Or her expenses, or really anything for that matter. :happy
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Eagle33
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Eagle33 »

The contributions % within 4 years will most likely be larger than the earnings portion of the Roth IRA. So very little tax.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
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Mode32
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Mode32 »

Buy_N_Hold wrote: Fri Sep 18, 2020 1:53 pm
Mode32 wrote: Fri Sep 18, 2020 1:19 pm
Buy_N_Hold wrote: Fri Sep 18, 2020 1:14 pm
Mode32 wrote: Fri Sep 18, 2020 1:01 pm Bogleheads,

My mom is 69 years old, currently works part-time and thinking about investing in a Roth IRA. She plans to work another 3 years part-time.

My question is specifically on withdrawal from Roth IRA. If she decides to start Roth IRA this year (max it out at $7K), is there a certain number of years she needs to wait before she can use these funds (contributions and/or gains) to avoid some kind of penatly? (or can she use it anytime that she wants...ie, puts in the money today and use it in 5 months or a year if she wants?)

Thanks for your time.

Stay safe.
This article gives a helpful overview: https://www.schwab.com/ira/roth-ira/withdrawal-rules.

Essentially the contributions themselves could be withdrawn at anytime tax and penalty free since this money has already been taxed. However, the account would have to be open for five years before the earnings would also become tax free to withdraw. A withdrawal of earnings before the five-year period expires would be subject to taxes (but no penalties).

Hope that helps!
Thank you so much! Very helpful!

So it pretty much becomes a traditional IRA if you withdraw the earnings before 5 years. I'm believe no rules like this exist for traditional IRA in terms of withdrawal of earnings. Assuming that my mom may utilize the money (including earnings) within 5years, it seems more beneficial to use a traditional IRA?
Yes, if you withdraw the earnings before five years it functions as a traditional IRA. In terms of your mother using a Roth IRA or a traditional IRA, you will want to do some research or perhaps even talk to a financial advisor. It ultimately comes down to personal preference. I like the Roth IRA personally because it gets the taxes out of the way now, while tax rates are historically low. However, if your mom will drop into a lower tax bracket once she is fully retired the regular IRA could make more sense.

Also, I found this paragraph on Investopedia:

"There is yet another loophole for earnings on Roth contributions, however. If you contribute and then withdraw within the same tax year, then the contribution is treated as if it were never made.

For example, if you contribute $5,000 in the current year and those funds generate $500 in earnings, you can withdraw the full $5,500 penalty-free, as long as the distribution is taken prior to your tax filing due date. You would have to report those earnings as investment income, however." (Source: https://www.investopedia.com/ask/answer ... drawal.asp).

This would be another point in favor of the Roth IRA approach. Hope that helps!
Thanks! Very helpful!
Topic Author
Mode32
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Mode32 »

grabiner wrote: Fri Sep 18, 2020 2:17 pm
Mode32 wrote: Fri Sep 18, 2020 2:03 pm
grabiner wrote: Fri Sep 18, 2020 1:35 pm
Mode32 wrote: Fri Sep 18, 2020 1:19 pm So it pretty much becomes a traditional IRA if you withdraw the earnings before 5 years. I'm believe no rules like this exist for traditional IRA in terms of withdrawal of earnings. Assuming that my mom may utilize the money (including earnings) within 5years, it seems more beneficial to use a traditional IRA?
Only if she can deduct the contributions. If she contributes to a non-deductible traditional IRA, the contributions are not-deductible, and earnings are taxable.

And in a Roth IRA, any part of the earnings that she doesn't use in the first four years will become tax-free. She could withdraw the entire contribution amount early, and wait until five years to withdraw the earnings, paying no tax.
Great point about withdrawing the earnings after five years.

How would she find out if she can deduct the contributions? I apologize if this is a very basic question (I'm in the accumulation phase and realize it's far easier planning this phase than for retirement phase).
It depends on her income, and on whether she or her spouse is covered by a retirement plan at work. Traditional IRA on the wiki has the details.


The level of competence, willingness to share and evidence-based recommendations in this forum is much appreciated. Thank you!
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Mode32
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Mode32 »

retiredjg wrote: Fri Sep 18, 2020 3:28 pm
Mode32 wrote: Fri Sep 18, 2020 1:55 pm I think after reading more, not really sure what's the best move for her, Roth or Traditional IRA.
If she is in a very low tax bracket, there is a good chance that Roth IRA would be the better choice. Adding money to traditional IRA may not be a mistake though.

If you want to get good suggestions on this question, you really need to present more information. We don't know her filing status, her tax bracket, or how large the 401k is. Whether she is currently on SS. Or her expenses, or really anything for that matter. :happy
Thanks for your advice.

You’re right, my apologies for not including some of those details. It’s because I need to get a better understanding of it myself. Further, I’m realizing more and more the accumulation phase (which I’m currently in) is far easier to plan/think about than planing the financial considerations for retirement.
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Mode32
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Mode32 »

Eagle33 wrote: Fri Sep 18, 2020 9:41 pm The contributions % within 4 years will most likely be larger than the earnings portion of the Roth IRA. So very little tax.
That’s a very good point. Thank you!
Buy_N_Hold
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Buy_N_Hold »

Mode32 wrote: Fri Sep 18, 2020 10:41 pm
grabiner wrote: Fri Sep 18, 2020 2:17 pm
Mode32 wrote: Fri Sep 18, 2020 2:03 pm
grabiner wrote: Fri Sep 18, 2020 1:35 pm
Mode32 wrote: Fri Sep 18, 2020 1:19 pm So it pretty much becomes a traditional IRA if you withdraw the earnings before 5 years. I'm believe no rules like this exist for traditional IRA in terms of withdrawal of earnings. Assuming that my mom may utilize the money (including earnings) within 5years, it seems more beneficial to use a traditional IRA?
Only if she can deduct the contributions. If she contributes to a non-deductible traditional IRA, the contributions are not-deductible, and earnings are taxable.

And in a Roth IRA, any part of the earnings that she doesn't use in the first four years will become tax-free. She could withdraw the entire contribution amount early, and wait until five years to withdraw the earnings, paying no tax.
Great point about withdrawing the earnings after five years.

How would she find out if she can deduct the contributions? I apologize if this is a very basic question (I'm in the accumulation phase and realize it's far easier planning this phase than for retirement phase).
It depends on her income, and on whether she or her spouse is covered by a retirement plan at work. Traditional IRA on the wiki has the details.


The level of competence, willingness to share and evidence-based recommendations in this forum is much appreciated. Thank you!
Glad we could be of help to you!
“To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable.” -Edgar Bronfman
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by crefwatch »

Since she has a well-funded 401(k), it seems likely she will have substantial taxable income in retirement. If she did not, I would then ask how much time she wants/is willing to spend on tax planning in retirement. There are many people who could plan to keep their Social Security from becoming 85% taxable, or keep their (non-qualified) Capital Gains from being taxed at all, by carefully planning their income sources (savings, IRA, Roth IRA, 401(k)) for the first years of retirement.

Since your parent will have to claim Social Security very soon, it may not be as critical a subject to plan around. But if she has a substantial 401(k) to get (taxable) income from any time she needs it, I don't see why she couldn't wait five years to start drawing down the Roth. I wonder if she (or is it you?) has an aversion to "restrictions" on the use of HER money? You get something in exchange for those Roth restrictions, which is unlimited tax-free appreciation.

The key question is whether it's a hardship to leave that money alone for 5 years. It seems unlikely that it is. Many retirees are so conservative that they bristle at the idea that non-qualified money (their nest egg!!) should be used before tax-deferred and tax-exempt money is spent in retirement. She may wish to think about what sort of withdrawals will let her sleep well at night.
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by retiredjg »

There is no need to wait 5 years before withdrawing money from the Roth IRA. Her contributions would be available any time. It is only the earnings that occur inside the Roth IRA that would need to wait 5 tax years in order to be taken out tax free.
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by grabiner »

And since she has a 401(k), she can withdraw from that for part of her retirement expenses; she should have no need to touch any Roth earnings within the first four years. (She may still want to withdraw Roth contributions, depending on the tax situation.)
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ralph124cf
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by ralph124cf »

Hi all.

Terminology matters.

IRA contributions are never deductible, they may be tax deferred. If tax deferred, they are not considered current income for tax purposes, but will be current income when taken out of the IRA.

Yes I know what you meant, but deductible is not the same as deferred.

Ralph
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by Eagle33 »

ralph124cf wrote: Mon Sep 21, 2020 11:33 am Hi all.

Terminology matters.

IRA contributions are never deductible, they may be tax deferred. If tax deferred, they are not considered current income for tax purposes, but will be current income when taken out of the IRA.

Yes I know what you meant, but deductible is not the same as deferred.

Ralph
I guess you need to educate the IRS. Line 19 on Schedule 1 is IRA deduction.
https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
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Re: Roth IRA withdrawal question for parent nearing retirement

Post by grabiner »

Eagle33 wrote: Mon Sep 21, 2020 6:39 pm
ralph124cf wrote: Mon Sep 21, 2020 11:33 am Hi all.

Terminology matters.

IRA contributions are never deductible, they may be tax deferred. If tax deferred, they are not considered current income for tax purposes, but will be current income when taken out of the IRA.

Yes I know what you meant, but deductible is not the same as deferred.

Ralph
I guess you need to educate the IRS. Line 19 on Schedule 1 is IRA deduction.
https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
In particular, deductible IRA contributions are considered income for some tax purposes, such as the earned income credit. If your salary is $40K and you contribute $5K to a 401(k), your earned income is $35K. If you contribute $5K to a traditional IRA, your earned income is $40K, which may led to a lower earned income credit.

Deductible IRA contributions are subtracted from your total income when you compute your adjusted gross income, which is usually the most important income number. But even then, they are included in some versions of modified adjusted gross income; for example, deductible IRA contributions are not subtracted from your income in determining whether you are eligible to contribute to a Roth IRA.
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