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Using Roth IRA Income to Fund Retirement

May 2nd, 2011
Using Roth IRA Income to Fund Retirement

If you're in or near retirement, chances are you've already heard that you can use Roth IRA income as a key tool in funding your retirement. That’s because, while money going into a Roth IRA is taxed, all earnings are tax-free, as long as you wait until you are 59 ½ or older to start withdrawing it. If you already have a Roth IRA that you’ve been funding for several years, you’re in a great position to reap the rewards. But it's important to make note of recent 2011 tax laws that affect how you fund and then spend Roth IRA income. Here are a few of the most important ones.

News in Converting/Funding

The option to spread tax payments on a Roth conversion over two years has expired. All tax fees on conversions made in 2011 are due with your 2011 tax returns.

Withdrawing Roth IRA Income

If you have a traditional IRA and not a Roth IRA: If you’re over 70 ½ years of age and are not taking IRS-mandated payouts yet, you may not be sliding by much longer. The IRS plans on stepping up its review process after 2012 to catch those who aren’t following the rules.

Those with Roth IRAs do not have to follow a mandatory payout rule. However, withdrawing earnings from a Roth IRA within 5 years of your first contribution may incur taxes or penalties, unless the purpose of the withdrawal fits certain criteria (being above 59 ½ years in age qualifies, so the average retiree withdrawing Roth IRA income is most likely safe from scrutiny).

Usually, the trickiest part of converting the Roth IRA, and then withdrawing Roth IRA income is knowing when and how to pay the taxes and/or penalties in order to create the retirement income you desire. A qualified tax advisor can help you navigate that terrain.


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