To manage the account better, maintain a good financial health in the future and efficiently maintain a retirement account it is required to know the various penalties that exist and try to avoid them. The Roth IRA penalties are imposed by the IRS and are applicable to the owner on violation of laws. The best way to avoid the penalties is to know the rules and promptly follow them. Basically knowledge of the Roth IRA penalties is the key to properly funding the Roth IRA and follows the fundamentals, like the Roth IRA rules, Roth IRA contribution limits, and Roth IRA withdrawals.
If the owner follows the rules for at least five years, and wait until age 59 and a half before withdrawing any funds, then he/she will have no worry about incurring a Roth IRA penalty. The following are some of the common Roth IRA penalties.
- Early Withdrawal Penalty-this is the most common penalty basically only after the owner reaching the age of 59 and a halt the withdrawals are penalty-free any funds withdrawn prior to this age are subjected to penalty that is 10 % of the amount of withdrawal Not all early withdrawals are subject to an early withdrawal penalty, but those are the exception rather to the rule.
- Withdrawal In Less Than 5 Years- basically not all the withdrawals after the age of 59 and a half are not penalty free but penalty is also charged on the withdrawals done in less than five years for establishing the account. The Roth IRA must be open and funded for at least five years before any investment gains can be withdrawn tax-free and penalty-free.
- Excess Contribution Penalty- the owner has to make the contribution based on the limits stated by the IRS any amount made further to these limits are subjected to 6% penalty. The limits set by the IRS are $5,000 for individuals 49 years or less than that and for individuals 50 years and above the amount is $6,000. If the owner’sincome unexpectedly rises during the course of the year, then the contribution limit may change along with it, leaving the owners with an excess contribution. Hence it is advised to properly make a note of the changes in the year laws and in the personal incomes and calculate the contribution amount.
- Conversion Penalty – there is no specific Roth IRA conversion penalty, but if the owner is not careful with the process of conversion he/ she might incur some mistake or inadvertently do something which will trigger a penalty from Roth IRA. Hence conversions need to properly plan and then accessed. It is also required that the owners converting consult an experience advisor or accountant before taking any distributions unsure about.
- Other Non-Qualified Distribution Penalties- non-qualified Roth IRA distributions also trigger the early withdrawal penalty. Qualifieddistributions are distributions allowed after the owner meets the 5 year rule and reach age 59 and half years before make a qualified distribution. But there are exceptions like payment for first home purchase, some medical expenses, and education expenses etc. any withdrawals other that the qualified ones are called non-qualified withdrawals are penalised by the law.