Withdraw Your Contributions at Any Time, No Penalties
This is probably one the best perks of a Roth IRA compared to other retirement vehicles. Any money you put into your Roth IRA account can be withdrawn at any time, without penalties and of course without taxes since contributions to your Roth IRA have already been taxed. The emphasis is on the word Contribution. If you want to withdraw the gains then that’s a different story. If you’re over 59 ½ years old and your Roth IRA account is at least 5 years old, then you can withdraw your gains tax and penalty free. If you’re under the age of 59 ½ then you’re going to be paying penalties and taxes on withdrawn gains.
For this reason, it’s imperative that you keep track of any amount of deposits you put into your account because when you withdraw you’ll have to prove (if audited) that you’re withdrawing your deposits and Not your gains and therefore no penalties and taxes are due on the withdrawn amount.
If you’re thinking “I don’t have to keep track because the Broker keeps track” then your reasoning is broken. Switching brokers is a common thing. When you roll your Account between brokers, the new broker receiving the funds has no Idea which portion is gains and which portion is contributions and that’s why you have to keep track of it.
Contribute Way More than $5,500, even Without an Income
The limit contribution you can make to a Roth IRA and a Traditional IRA is $5,500 or $6,500 if you’re over the age of 50. So, if you’re under the age of 50, the sum of all your contributions to a Roth IRA and Traditional IRA is $5,500. For example, you could contribute $5,500 to your Roth IRA and $0 to your traditional IRA, or $3000 to your Roth and the remaining $2,500 to the Traditional IRA.
The other rule is that you cannot contribute more than your earned income for the year. Earned income means income coming from anything other than Capital Gains and dividends. So, if you only made $3,000 for the year in earned income, your limit contribution for that year is $3,000 (not $5,500).
Some people realize the various perks of owning a Roth IRA account, such as not paying taxes when you withdraw after age 59 ½ and the ability to withdraw your contributions at any time, a little too late in their life and wish they could have contributed more towards the Roth IRA and less towards a traditional IRA.
No Problem! You can roll over your 401(k) account (after you have left your current employer, unless it’s a Rollover 401k account) and your traditional IRA account into your Roth IRA account. There are no limits on how much you can transfer over.
There is one caveat. The money in your non-Roth accounts has not been taxed so, when you make the roll over to a Roth IRA, you’ll have to pay taxes on your gains (but no penalty).
If you’re planning to retire early, you can simply make the rollover the year you have no income and that’ll guarantee you’ll pay very little taxes on that transfer. Likewise, if you’re planning to move to a different country, the US gives you a tax break on the first $105k you make in income that means you could make the rollover the year you’re out of the country and pay little tax. Or you could have simply lost your job; depending on how many months you are without income, you can decide to make the rollover then and pay little tax. In general, if your household income is less than $70,000 per year, you’ll pay very little taxes when you make a rollover anyway.
