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I would like to withdraw the money from my Roth IRA account. But I have the following concerns, before I make the decision.

  1. Will there be fee, charge, or penalty if I withdraw the money from Roth IRA?

    Should I try my best to keep the money in Roth IRA till I reach 60, or is there no disadvantage that I withdraw it now?

    Relevant information:

    • I opened the Roth IRA account more than 5 years ago, which was then migrated to another brokerage company which acquired my original one.

    • I haven't contributed to the Roth IRA account in the last 5 years.

    • the balance in my Roth IRA is less than $4000.

    • I have sold out all the mutual funds I have bought 2 years ago. The money in my Roth IRA has been in "FDIC INSURED DEPOSIT ACCOUNT CORE NOT COVERED BY SIPC" (I didn't put the money in it, so it is a default).

  2. Considering tax, when is it better for me to withdraw the money, this year or next year?

    Relevant information:

    • I used the money in the account to buy mutual funds. I sold all the mutual funds two years ago, and at that time I had lost 1/4 of the money. The money obtained has been staying the same in the deposit account core since.
      The current balance in Roth IRA is less than the total I have put into, because the mutual funds that I bought didn't perform well, so I think I have net capital loss.

    • I don't have income this year, so my tax this year will be zero. But suppose I will have income next year, so my tax next year will be more than zero.

    Can the capital loss offset tax, so is it better to withdraw it next year than this year?

  3. What if it were a traditional IRA account?

Thanks.

  • If I don't ask, someone else will: Are you under age 59 1/2? Have you contributed to this account within the past 5 years? obliviousinvestor.com/roth-401k-distribution-rules – Ogre Psalm33 Dec 6 '15 at 4:28
  • Yes, I am. The account was created for more than 5 years, and migrated to a different brokerage company 4 years ago because it acquired the original company. I haven't contributed to the account within the past 5 years. – Tim Dec 6 '15 at 4:42
  • what does "deposit account core" mean? – littleadv Dec 6 '15 at 5:17
  • @littleadv: "FDIC INSURED DEPOSIT ACCOUNT CORE NOT COVERED BY SIPC". I didn't put the money in Roth IRA to it, so it is a default. – Tim Dec 6 '15 at 5:19
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    Basically it means that your money was lying uninvested during the 5 years of the best returns on the market in a tax sheltered account. Got it. I think you can do whatever you want, the damage you've done already makes anything else pale in comparison. – littleadv Dec 6 '15 at 5:22
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First thing to note is that contributions (i.e. the total of all the amounts that you directly contributed into Roth IRA at any point in time) to a Roth IRA can be withdrawn at any time, without needing any reason, without any tax or penalty. Early withdrawal (early because you are under 59.5) of earnings, on the other hand, will incur tax and penalty. (I didn't go into withdrawal of conversions as those are a little more complex.)

When you withdraw, contributions come out first, so as long as you don't withdraw more than the amount of past contributions, you won't have any tax or penalty. And if it's not going to have tax, it doesn't really matter if you do it this year or next year. If you need to dip into the earnings, however, then maybe it would be better to do this year so it will be taxed at lower rates.

  • Thanks. I forgot to mention in my post that the current balance in Roth IRA is less than the total I have put into, because of the mutual funds that I bought, so I think I have net capital loss. I don't have income this year, but may have next year. Can the capital loss offset tax, so is it better to withdraw it next year than this year? See my update to my post. – Tim Dec 6 '15 at 14:34
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One "con" I have not yet seen mentioned: retirement accounts are generally protected from creditors in a bankruptcy. There are limits and exceptions, Roth has a 1.2 million dollar limit and can be split by a divorce QDRO for instance. Link

Since it seems you have no income this year, you may may be raiding your IRA for living expenses. If there is a chance you may declare bankruptcy in the next year or so, consider doing that first and raid the IRA for seed money after.

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In a year with no income, the best advice is to convert existing IRA money to Roth. This lets you take advantage of the 'zero' bracket, the combination of your exemption and standard deduction. This adds to $10,300 for a single person.

Other than that, if you are determined to take the money out, just do it. There would be a 10% penalty of the growth, but the original deposit comes out tax free anyway.

Edit - There's a rule that if you sell your entire Roth account (i.e. all Roth accounts, you can't pick one of a few) and have a loss, you can take that loss. (Per Dilip's comment, this strategy is pretty moot, it's not a loss taken against other income as a stock loss would potentially be))

  • Thanks. I forgot to mention in my post that the current balance in Roth IRA is less than the total I have put into, because of the mutual funds that I bought, so I think I have net capital loss. I don't have income this year, but may have next year. Can the capital loss offset tax, so is it better to withdraw it next year than this year? See my update to my post. – Tim Dec 6 '15 at 14:34
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    The net loss when all Roth IRAs have been closed and the total amount taken out is less than the amount contributed is deductible only as Miscellaneous Deduction on Schedule A which is subject to the"only in excess of 2% of AGI" rule and also to the Standard Deduction. In short, you need to have enough other deductions to make the total Itemized Deductions exceed the Standard Deduction, as well as a large loss on the Roth IRA to get above the 2% of AGI bar. If the current balance in the Roth IRA is only $4K or so, I doubt that there would any explicit write-off of the loss. – Dilip Sarwate Dec 6 '15 at 16:43
  • @DilipSarwate: suppose my net capital loss is $1000, then to make it deductible, should my AGI be no more than $50000? What is the standard deduction usually? – Tim Dec 6 '15 at 19:08

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