Tax consequences of liquidating a roth ira
The tax rate on IRA distributions depends on your age and income tax rate when you access your money and the type of IRA you open.
With traditional IRAs you pay income tax at the time of the early withdrawal, but you might not have to pay income tax on early Roth IRA withdrawals.
That’s why I prepared this handy flowchart (and the following explanations) to help you determine whether or not distributions of earnings will be subject to income taxes and/or penalties.
🙂 Please note, this flowchart only applies to earnings when your Roth does not include any amounts converted from a traditional IRA or other retirement plan.
Contributing money to an individual retirement account can result in owning less income tax in the long run, but you can't avoid income taxes altogether.
However, in order to fully avoid taxes and penalties, there are some rules to keep in mind with respects to Roth IRA distributions.
The primary difference between Roth IRA and other retirement products is that contributions are taxed in the year they are earned.
IRA withdrawals made before the age of 59 1/2 are considered early distributions.
For traditional IRAs, in addition to paying regular income tax on your withdrawal, you must also pay a 10 percent early withdrawal penalty.