A:

If you withdraw your Roth IRA contribution, the amount will be tax and penalty free. If your initial contribution accrued earnings while in the Roth IRA and you also withdraw the earnings, the earnings will be subject to income tax. Furthermore, if you are under age 59.5, the withdrawal will be subject to an early distribution penalty as well, unless you meet an exception to the penalty. Both the tax and the penalty apply because your distribution is not a qualified distribution.

As an alternative to withdrawing the amount, you may consider transferring the balance to the new financial institution with which you plan to establish your new Roth IRA. A transfer is a tax-free movement of assets between retirement plans. The Roth IRA established to receive this transfer could also be the same Roth IRA to which you make your contribution for tax year 2007 and future years. Your new financial institution will be able to assist you with the necessary paperwork to effect this transfer. Alternately, you could request a distribution of the assets and make a rollover contribution to your new Roth IRA within 60 days after your receive the distribution. A rollover is also a tax-free movement of assets between retirement plans.

Please bear in mind that you must meet certain income requirements in order to make a Roth IRA contribution. For 2007 they are as follows:

You are able to contribute 100% of compensation up to $4,000 ($5,000 if you are at least age 50 by the end of the year for which you are making the contribution) your modified adjusted gross income cannot exceed:

  • $114,000 if you are single (the $4,000 limit is reduced if you earn between $99,000 and $114,000)
  • $166,000 if you are married filing jointly (the $4,000 limit is reduced if you earn between $156,000 and $166,000)
  • $10,000 if you are married filing separately (the $4,000 limit is reduced if you earn between $0 and $10,000)

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS
  1. What are the benefits of a Roth IRA for a high income worker?

    I am a high income worker (over $250K / year). I would like to do a Roth IRA for my wife using the back door method. ... Read Answer >>
  2. What are the differences between a Roth IRA distribution and a distribution from ...

  3. What are the advantages of a Roth IRA?

    Contribute to your Roth IRA and gain the advantage of it free of taxes and penalties. Make approved early withdrawals to ... Read Answer >>
  4. Can I withdraw money from my Roth IRA?

    Withdrawing money from you Roth IRA is taxed and penalized under certain conditions. Learn about the five-year rule and prerequisites ... Read Answer >>
  5. Can I use my IRA savings to start my own savings?

    Find out whether you can withdraw funds from your IRA to start a savings account, and why this is not the wisest use of your ... Read Answer >>
  6. What is the tax rate of a Roth IRA if I withdraw it for the purchase of a house?

    Use your Roth IRA to fund the purchase of your first home, and learn how the distribution could qualify for a waiver of taxes ... Read Answer >>
Related Articles
  1. Retirement

    5 Secrets You Didn't Know About Roth IRAs

    Between its generous tax benefits at retirement and no required minimum distributions, a Roth IRA is well worth considering if you're eligible to have one.
  2. Retirement

    How a Roth IRA Works After Retirement

    What retirees need to know about taxes, distributions and passing on your unspent savings to the next generation.
  3. Retirement

    How to Use Your Roth IRA as an Emergency Fund

    Do you feel like you don’t have enough money to save for emergencies and also save for retirement? An often-overlooked feature of the Roth IRA could solve your problem.
  4. Retirement

    Don't Make These Top 10 Mistakes On Your Roth IRA

    Don't lose out on the benefits of a Roth by contributing too much, breaking rollover rules or making other avoidable errors.
  5. Retirement

    What's the Tax Hit on an IRA Withdrawal?

    How much taxes you'll pay on IRA withdrawals depends on a variety of factors. Use this guide to plan ahead.
  6. Retirement

    Why You Should Have a Roth IRA

    The world of retirement savings plans is filled with options. Here are the reasons why you should consider a Roth IRA when saving for retirement.
  7. Retirement

    In Your 20s? Reasons To Get A Roth IRA Now

    There are strong reasons to put retirement savings into a Roth IRA now, while time is on your side, your salary hasn't peaked, and the rules favor you.
  8. Retirement

    Roth vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.
  9. Retirement

    Roth 401(k) Vs. Roth IRA: Which One Is Better?

    It all depends on your age, your income - and your plans for your retirement nest egg.
  10. Retirement

    Converting A Traditional IRA To A Roth

    When is it a good idea to convert traditional IRA funds into Roth IRA funds? And when does it not make sense?
RELATED TERMS
  1. Roth IRA

    An individual retirement plan that bears many similarities to ...
  2. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
  3. Qualified Distribution

    Distributions made from a Roth IRA that are tax and penalty free. ...
  4. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  5. Ordering Rules

    The order in which Roth IRA assets are distributed. Assets are ...
  6. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center