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February 2024

A Roth IRA is a Personal Emergency Savings Account

A Roth IRA is not only for retirement. At least not for individuals who are not close to retiring.

A Roth IRA is a fantastic investment and savings account. Individuals hopefully understand that by maintaining and contributing to a Roth IRA an individual has his or her own emergency savings account. One does not go to jail or get tax penalized because one withdraws money from their Roth IRA. If one needs to fix the car or replace a washing machine, you may need to use funds from your Roth IRA.

Many individuals do not understand well the tax features of Roth IRAs. Normally, a person may withdraw funds from their Roth IRA at any time without having to pay any income taxes because the person is only withdrawing their own contributions. The law mandates the order of the distributions from a Roth IRA and the order is, annual contributions are withdrawn first, conversion contributions, if any, are withdrawn second and then any income is withdrawn third or last. This income is taxable if the distribution is a non-qualified distribution. This income is not taxable if the distribution is qualified.

To be qualified the distribution of income is made to the accountholder or the beneficiary and the 5-year requirement has been met and the distribution is because the accountholder is age 59 1/2 or older or disabled, or the distribution is to a beneficiary.

A person almost never wants to withdraw the income earned by the Roth IRA if it would be taxed, but one is always able to withdraw their own contributions without any adverse tax consequences.

Every person should have a Roth IRA because it can act as a personal emergency savings account. If one has a financial emergency one may certainly withdraw funds from their Roth IRA with the only income tax consequence being - having to explain on their tax return that the distribution is not taxable. The person may even be able to make a rollover contribution back into the Roth IRA.

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