What Are the Tax Implications of Early Withdrawal From a Roth IRA?
Your retirement nest egg could be damaged by an early withdrawal from a Roth IRA. rainy day savings image by Pix by Marti from Fotolia.com A Roth Individual Retirement Account (IRA) allows contributions and earnings to grow tax-deferred, much as a traditional IRA account does, but overall the income tax treatment of the two accounts can be quite different. Traditional IRAs are funded with pre-tax dollars, meaning that distributions are usually fully taxable. Roth IRAs, however, are funded with after-tax money, which generally makes distributions from Roth IRAs tax-free. The Internal Revenue Service (IRS) provides strict guidelines which you must follow to ensure that your Roth distributions remain tax- and penalty-free. Qualified Roth Distributions To be a qualified tax-free distribution, you cannot take a withdrawal from your Roth within the so-called “five-taxable-year period of participation.” This period begins on the first day of the taxable year in which you first made contributi
