by Ryan McKeown, CPA, CFP®, Vice President Financial Advisor, Wealth Enhancement Group

Roth IRAs are a wonderful tool to use to provide tax-free distributions for your retirement if you have had a Roth IRA for at least 5 years and you are age 59-1/2 or older (whichever is later). However, what a lot of people don't know is that you have the ability to always withdraw your contributions no matter what age or how long you have had a Roth IRA without any taxes. It is a lot more flexible than a traditional IRA or 401(k) plan, where every single dollar you withdraw is subject to ordinary income tax and potentially a 10% penalty!

Let's say that you have been contributing the maximum amount to a Roth IRA, currently $5,000 ($6,000 if age 50 or older) for 10 years, or $50,000. Let's also say that over that time frame, your account has grown to $75,000. You can still withdraw up to $50,000 at any age, any time, without any tax and for any reason. This helps provide some additional funds to use for items like college, emergencies, and so on. If you did withdraw the earnings portion, you would pay income tax plus a 10% early withdrawal penalty on those funds, but could avoid that penalty if you paid certain expenses, such as higher education costs in that year.  Always meet with your financial and tax advisor to make sure you do this correctly.

Another strategy that is popular for grandparents who are at least age 59-1/2 or older and have had a Roth IRA for at least five years, is to take tax-free withdrawals of both contributions and earnings to give to their grandchildren to use for college or living expenses. Because they have met the eligibility requirements for completely tax-free withdrawals, they have the ability to withdraw the entire account balance for any reason tax-free, which is more flexible than other college savings plan tools, like a 529 plan, where the earnings are only tax free when used for higher education expenses.

Always meet with your financial and tax advisor to make sure these strategies fit your situation.  With the flexibility of the Roth IRA, there are many more possibilities than mentioned here, so get creative and start planning!