I funded a Roth IRA for my daughter, matching her
earned income for last year. But then I heard that
contributions can be withdrawn tax free. Does this
mean that she can effectively drain the account and
and spend Spring Break in Cancun?

--Jack MacDonald

Jack writes:

I funded a Roth IRA for my daughter, matching her
earned income for last year. But then I heard that
contributions can be withdrawn tax free. Does this
mean that she can effectively drain the account and
and spend Spring Break in Cancun?

Without getting into too much detail you can withdraw funds from Roth IRAs without penalty and tax as follows:

Contributions: Five years after the first tax-year a contribution was made. (There are loophole provisions addressing this).

Earnings: Five years after the first tax-year a contribution was made and after the date you reach age 59 1/2.

Hope this helps.

Bob

[[I funded a Roth IRA for my daughter, matching her
earned income for last year. But then I heard that
contributions can be withdrawn tax free. Does this
mean that she can effectively drain the account and
and spend Spring Break in Cancun?]]

Bob was right on the money, Jack.

And if you would like to read more about Roth IRA issues and taxation (including much more on this very question), check out my series of posts in the Taxes FAQ area. You'll be glad that you did.

TMF Taxes
Roy

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BobCPA writes (in parT):

Without getting into too much detail you can withdraw funds from Roth IRAs without penalty and tax as follows:

Contributions: Five years after the first tax-year a contribution was made. (There are loophole provisions addressing this).

I reply:

This differs from my understanding. In order to withdraw conversions from a traditional IRA, not contributions, without penalty (taxes have already been paid), one must wait five "tax years" (the calculation can get a little funky). Check out the Taxes FAQ; I'm sure Roy treats this subject with his usual care and thoroughness. Contributions may be withdrawn without penalty at any time. In any event, if the daughter wants to drain the account, she can drain the account. She may end up paying some tax penalties, but that's all. --Bob

TMFTaxes writes (in part):

Bob[CPA] was right on the money, Jack.

I reply:

Roy, this is what you say in the December 31, 1998, Tax feature:

"Under the IRS ordering rules, you are allowed to remove your original contributions at any time without tax or penalty. In addition, after you have waited at least five tax years, you are able to withdraw your original conversion amounts without taxes or penalties. It's only when you get to the earnings generated by the original contributions and conversions that you will have a tax and/or penalty problem" (emphasis added).

That's not what BobCPA said. Ten thwacks with a wet noodle, my friend. --Bob

[[Roy, this is what you say in the December 31, 1998, Tax feature:

"Under the IRS ordering rules, you are allowed to remove your original
contributions at any time without tax or penalty. In addition, after you have
waited at least five tax years, you are able to withdraw your original conversion
amounts without taxes or penalties. It's only when you get to the earnings
generated by the original contributions and conversions that you will have a tax
and/or penalty problem" (emphasis added).

That's not what BobCPA said. Ten thwacks with a wet noodle, my friend.]]

Again...it appears that I misread the question. In the FIRST question that I blew, the question had to do with CONVERSIONS that are subsequently removed. In this question, it appears that the question had to do with original CONTRIBUTIONS. BobCPA gave the appropriate response for CONVERSIONS...and I agreed.

But, again, in going back and re-reading the question, it appears that the question had to do with CONTRIBUTIONS. So I simply booted ANOTHER response.

When dealing with IRA distributions, one must be very careful to separate distributions of CONVERSION funds and CONTRIBUTION funds. As you correctly point out, the rules are different for each. Hopefully that'll teach me to try to answer tax questions after 18 holes in the hot AZ sun. I guess I had spots before my eyes.
Anyway, I'll take my punishment. Thank GOD it wasn't a spanking...I might have enjoyed it!! (at least when administred by the right person) :-)

Again...and again...and yet again...my apologies. And another great catch, Bob. Thanks for your help.

TMF Taxes
Roy

TMFTaxes writes (in part):

Thank GOD it wasn't a spanking...I might have enjoyed it!! (at least when administred by the right person)

I reply:

Ummm, Roy, is this a threat to be ignored or an offer to be accepted (NOT!)? --Bob

Momma-
Don't let your babies grow up to do taxes. Look what its' done to TMFTaxes and Bob.

Fortunately, I'm normal.

Sincerely,

Amelia Earheart...Airheart...whatever.