- When you cash out a Roth IRA with a qualified distribution, you can do so without any tax implications. To qualify, the Roth IRA must be at least 5 tax years old. The tax age counts from Jan. 1 of the tax year you first made the contribution. In addition, you must either be 59 1/2 years old or permanently disabled. You can also take a qualified Roth IRA distribution of up to $10,000 if your account is 5 tax years old and you use the money to buy your first home.
- If you do not meet the criteria to take qualified distributions from your Roth IRA, you can still cash out all of your contributions without any tax impact. When you make contributions to your Roth IRA, you do not get a tax deduction on your taxes. Therefore, the IRS lets you take out the contributions whenever you want without a tax impact. However, if you cash out any earnings, you will have to pay income taxes and penalties on those distributions.
- You have the option to make nondeductible contributions to a traditional IRA, which means that you claim no tax deduction for the money that you put in. Therefore, when you take that money out, the portion that comes from nondeductible contributions is not taxed. Unlike a Roth IRA, however, you cannot just remove the nondeductible contributions. Therefore, the only way you can take money out without tax consequences is if you have no earnings or deductible contributions in your traditional IRA.
- Despite the aforementioned cash-outs being tax-free, you must still report them on your income tax return for IRS record keeping. If you take a qualified Roth IRA distribution, simply report the amount as a nontaxable IRA distribution using Form 1040 or Form 1040A. If you take an early Roth IRA distribution or a distribution from a traditional IRA consisting of only nondeductible contributions, you must first complete Form 8606 and report the distribution as a nontaxable IRA distribution.
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