Cash Out Roth IRA, WHEN??

A Roth IRA is a type of IRA, or Individual Retirement Account, that allows for people to lower their total tax liability by contributing a certain amount of their salary per year that is not taxed by the government. There are two separate pools of money in a Roth IRA. The first is the total amount contributed by the owner of the account, and the other is the pool of interest earnings for those contributions. The money actually contributed to the account is still subject to the income tax, but the earnings are not taxed. However, if you decide to take money from the earnings pool under certain circumstances, it is not only subject to the income tax but also a ten percent penalty.


Because you have already paid taxes for the money in the contributions pool, you can withdraw them at any time, but you must be 59 ½ Years of age or older to withdraw from the earnings pool without it being taxed and penalized. If you use the money you withdraw from the earnings pool to pay for a house or higher education, you do not have to pay the ten percent penalty, but it is still taxed. Be warned that it is possible to withdraw any amount, as long as it is from the contributions pool, but you can only add up to $4000 per year, so people can sometimes withdraw money and not be able to put it back in. For example, if you mistakenly withdraw $5000 from the account, and you contribute $3000 every year, you will only be able to put $1000 of that money back into the account each year, if you take that account of the $3000 that you would put in anyway, to it will take five years to re-contribute that $5000.
Before you decide to take money out of a Roth IRA, it is important to consider the consequences it will have for your retirement savings. A comfortable retirement is extremely expensive, and it takes many years of compounding earnings and interest to afford it. It is not advisable to cash out any retirement savings account just to pay bills or buy something expensive, as any withdrawal can have severe affects on future compounded that fund. It may even be preferable to take out a loan than to cash completely out a Roth IRA, because, in some cases, the interest you save from it being taxed-exempt is more than the interest you would have to pay for a loan.