IRA withdrawal rules: Regular Vs. Roth
The IRA withdrawal rules may be different, depending on whether the IRA account is a traditional one or a Roth IRA variety. Any withdrawals from a traditional IRA account are taxed using the ordinary income tax, because these account contributions are made from earnings which are pre tax instead of post tax. No taxes are collected on the funds contributed to a traditional account, or collected as part of a traditional IRA rollover transaction. With a Roth IRA the IRA withdrawal rules are different, because any contributions to this type of account are made after taxes have been deducted from the amount. This means that any withdrawal from a Roth account is normally free from any taxes in most cases, but there are some exceptions.
When you compare Roth IRA withdrawal rules versus a traditional IRA there are many of the same components included. Both types of account have an age requirement in the IRA withdrawal rules, and any funds withdrawn before the age of fifty nine and a half may be taxed with a penalty tax even if the account is a Roth IRA. The penalty involved for an early account withdrawal is usually ten percent of the withdrawal amount, and this is assessed because a withdrawal is made before the age requirement. In some plans a 401k hardship withdrawal can be made for certain specified reasons, such as the purchase of a first home or to pay off past due medical bills, and both types of IRA account may allow this.
The Roth IRA withdrawal rules also specify a five year requirement, which can be confusing to some. Your Roth IRA must be open for a minimum of five years regardless of your age before withdrawals are exempt from any tax penalty. As long as you have reached the minimum age and had the account for at least the required time limit there are no taxes on any withdrawal. With a traditional IRA there will still be taxes assessed, because these funds were never taxed initially. Some investors cashing out 401k plans at retirement may pay thousands of dollars or more in taxes from this income, but with a Roth IRA the withdrawals are not taxed at all when the age and time requirements are met.