There are many advantages to the Roth IRA. One of those is a generous early withdrawal policy.
When it comes to retirement savings, it's a good idea to put whatever you can in a variety of tax-advantaged retirement plans. And, even if you're self-employed, you can still take advantage of the tax-advantaged retirement plans available for you. One of the best options for many people is the Roth IRA.
The Roth IRA provides you the opportunity for tax-free growth, boosting your ability to earn in your retirement account. It's a nice bonus, too, that you can withdraw money from your account later without paying taxes on it. There are other advantages to the Roth IRA as well.
In fact, the Roth IRA is so cool that many financial bloggers are focusing on this great tool today. Jeff Rose, the guy behind Good Financial Cents has sparked a Roth IRA Movement, and many of us are more than happy to spread the word. Outside the world of financial professionals and financial bloggers, the Roth IRA isn't completely well-known. And we hope to change that. And today I'd like to take a look at the early withdrawal ability with the Roth IRA.
Penalty-Free Early Withdrawal with the Roth IRA
One of the downsides to many of the tax-advantaged retirement plans is the fact that there are early withdrawal penalties to pay. If you withdraw before the age of 59.5, you are hit with a penalty, and you have to pay taxes. The Roth IRA can help you avoid that fate, though, if you are careful about how you withdraw. In order to withdraw penalty-free, you have to do so by withdrawing only the money you have contributed. As long as you withdraw only your contributions, and don't touch the money that you have earned as a result of your investment, you don't have to worry about penalties.
This is because, with the Roth IRA, you pay taxes before you contribute. The IRS recognizes that you have paid taxes on the money that you are contributing, so you have access to it at any time. This has led some people to treat their Roth IRA accounts as emergency funds. While this isn't one of the best uses of your money, I do think that the ability to tap into a Roth to withdraw contributions penalty-free can be a huge advantage when you are in a tight spot.
Downsides to Tapping Your Roth IRA
Of course, even though you can withdraw contributions from your Roth IRA without penalty, it doesn't meant that you should. When you withdraw that money, it is no longer working on your behalf. You end up suffering due to the cost of lost opportunity. It's really too bad in such cases, since you can't replace the time your money could have spent earning compound interest — even if you replace the money you withdrew.
While there are definite advantages to withdrawing from a Roth IRA, you really should think twice. That money should be working for you, helping you build your nest egg. However, if you do need the money, and if you have a Roth IRA, you can avoid many of the penalties and hassles that come with getting money from other retirement accounts. The Roth IRA offers that to you, and is one of the best retirement planning tools out there.