Roth IRA borrowing has limit

October 07, 2007|By Humberto Cruz | Humberto Cruz,Tribune Media Services

A recent column on having a Roth IRA serve as an emergency fund has prompted questions about the idea and IRAs in general.

A Roth IRA is a type of individual retirement account created 10 years ago. Unlike contributions to traditional IRAs, contributions to Roth IRAs are never tax-deductible. But while withdrawals from traditional deductible IRAs are fully taxed, withdrawals from Roth IRAs are tax-free once you are 59 1/2 and have had a Roth IRA five years.

In addition, you can always withdraw your direct Roth IRA contributions without taxes or penalties.

I had a temporary emergency and had to withdraw my 2007 Roth IRA contribution. Can I put the money back if I do it before April 15, 2008?

You can put the money back, but you can't wait that long.

Provided you follow the rules, money withdrawn from an IRA generally can be put back or "rolled over" into the same or another IRA, preserving its tax-favored status.

But you must put the money back within 60 days. Also, you cannot do such an out-and-back-in rollover more than once every 12 months per IRA account. And you can't put back money you withdraw as part of an IRA required minimum distribution. The 60-day deadline applies to both Roth and traditional IRAs.

By taking advantage of the 60-day rule it is possible to tap money in your IRA for short-term emergencies and still keep your retirement account fully funded. After 60 days, however, the withdrawal is considered permanent and the money can't be put back.

If counting any amount deposited and then withdrawn you have not made the maximum IRA contribution for a year, you can still contribute any remaining allowable amount for that year up to the normal tax-filing deadline.

At least with a Roth IRA, withdrawals of direct contributions "are always tax-free and penalty-free at any time and for any reason," said Ed Slott, a certified public accountant in Rockville Centre, N.Y.

Even so, if you don't put the Roth IRA money back in time you will no longer have it growing potentially tax-free for your retirement.

With a traditional deductible IRA the consequences of missing the 60-day deadline are more severe. All the money withdrawn would be subject to tax plus a possible 10 percent penalty for those under 59 1/2 .

The 60-day deadline also applies if your intent is simply to move your IRA from one custodian to another (for example, if switching brokers) and in doing so you come in possession of the money at any time.

I have found that traditional IRA withdrawals add to my income, raising my tax bracket and causing some of my Social Security benefits to be taxed. Is this true also of supposedly tax-free Roth IRA withdrawals?

Tax-free distributions from Roth IRAs are truly tax-free. They do not count as income and do not cause any of your other income to become taxable.

Humberto Cruz writes for Tribune Media Services.

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