Getting Money Out Of A Roth IRA

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This is the Truth Network. Welcome to Finishing Well, brought to you by cardinalguide.com with certified financial planner, Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Well.

Welcome to Finishing Well, certified financial planner, Hans Scheil, and I think you're going to love today's topic, getting money out of a Roth IRA. And so, you know, how fun is that? We're going to find out a lot about that. But as I was thinking about this biblically, I have been studying and thinking a lot lately about multiplication versus depreciation, because, you know, a lot of us, I guess, we think in terms of depreciation, you know, that car is not going to be worth what I paid for it. You know, I'm going to get old and die.

There's so many things that are depreciating. But in God's economy, he loves multiplication, right? And you see this throughout the Bible. Clearly, you know, Jesus took the fishes and the loaves and he multiplied them.

But, you know, one of the great examples of this, and I think the wonderful, I guess, basic understanding of the laws of multiplication is there's laws involved. And so in the Old Testament, Elisha, the prophet, visited the widow. You might be familiar with the story. And she was to get some bottles to put oil in, and the more bottles she had, the more oil she got. So what ended up happening at the end was she didn't have the faith to have more bottles.

She wasn't ready for all the way that God would bless her. And so we're hoping that through today's show, you can see some of the advantages of saving and whatever and improving your faith to where you got plenty of bottles, Hans. Well, yeah. So when we talk about retirement accounts and IRAs, 401ks, money that you accumulate over time, all kinds of people are experts in how to get money in there. And you're an expert if you have money in one of those, getting money in there and you're an expert or somebody's doing the work, God's doing the work of multiplying it. And then right when you get to retirement and right when you're coming in that world and you're planning your retirement, now you got to think about getting money out of the thing.

Okay. And boy, that's troubling for a lot of people. They've been save, save, save, avoid tax, avoid tax, avoid tax. And they're just kind of there and they're looking at this number and then all of a sudden, they're also saying I'm going to retire in a year or two years or next month. And so we're going to look at this retirement account. And now we got to figure out a way to get the money out of there and do it in the right way and do it in such a way they don't get killed in taxes.

And they still have some money if they're alive or one of them's alive at 80, 85, 90. So I just want to point out in the larger sense is this is a whole different subject. We're talking about getting money out of whatever it is we're investing in as opposed to putting money in there. Yeah, that's really helpful.

Because, you know, that is kind of the object of the game is to be able to use this for the kingdom, right? Well, yeah, and they never gave me any training, by the way, in getting money out of insurance policies. I mean, I was 47 years ago when I was starting in the business. And they taught me how to get people to put money in insurance. But they didn't really give any training is once they got the insurance, if they need to get money out of this thing, how do they do it?

And there's not really a lot of training in that if you kind of get my joke. And the same is true with like Roth IRAs. So people know, okay, so how do I get money in the Roth? Well, I got to pay the taxes on money that I already have in an IRA. And I just move it over, but I got to pay taxes. And you know, they don't like that. But they do it. And they're doing it to create a tax free account. And they're going to leave it there for a while.

And then they're going to start pulling money out of this at some point or their heirs are. And now we want to talk about how do you do that? How do you when do you do that? How do you do it? And how do you make this whole account tax free?

And what amount do you do it in? Okay, yeah, because that to me, you taught me all about Roth IRA, so I now have one. And, you know, the beautiful thing is that not only you know, it's obviously the money in there is never going to be taxed. But if you obey the rules, you do all this stuff, right, that we're going to learn about here in a minute.

The income that you made the way it was multiplied will never be taxed either, right? Right. And I always love this game. And, you know, that people come in and some clients think that we're playing a game of I say the first half of the sentence, and then they come in and finish the sentence. And they do that with Roth IRAs. They say, Oh, yeah, the five year rule, right? Because because anybody that's done any reading on Roth, they know about the five year rule. And a lot of people say, Oh, I can't touch it for five years, right? That's right.

That's all right. I mean, there is a five year rule. And there are is a situation if you're a given age that if you tried to get it within five years, that's going to cost you some tax money. So I'm not going to deny that otherwise it wouldn't have a five year rule. But people just jump to conclusions. And so what we're going to do is we're going to explain the five year rule and how it could come into play for you.

Okay, all right. Now, the the five year clock starts running the day you open your first Roth IRA. And that's why I'm going to tell people that don't have a Roth.

I don't care how old you are. You know, we got to make sure you don't make too much money and you're not eligible. But if you're eligible, now would be a good time to start and just put 500 bucks in there or whatever, because you start the five year clock running the day you open your first Roth IRA.

So if you're 60 years old or 61, or something, that's a pretty good suggestion that I can make that isn't going to do a harm to a lot of people. You could even convert a small amount if you make too much money, but you can still do a conversion. So get an account open and get your spouse to open an account. And now the clock's ticking on the five year deal.

Okay. Yeah, I mean, it's kind of important to note that there is apparently a huge difference between a Roth 401k and a Roth IRA. And so if you've been contributing to a Roth 401k through your employer or something like that, don't be confused. You haven't started your five year rule yet until you actually get a Roth IRA. Am I right?

That's exactly right. Okay. His is that the five year clock doesn't apply to the Roth 401k.

Okay. It just like, if you leave your money in your 401k, just for the rest of your life, and then start making withdrawals from the Roth portion of your 401k, you don't have to wait five years for nothing. I mean, you can just, do that whenever you're ready. But the reality is most people don't leave their money in their 401k for the rest of their life. Most people, when they get to retirement and they stop working for that employer, they roll it over into an individual IRA. And if you do that, you're going to need to open up two individual IRAs, one Roth and one, I mean, I can help you with all this, but it's you're going to have two different distinct. One is going to be a traditional IRA, and one's going to be a Roth. And the day you open that is going to be when the five year clock starts ticking. Okay.

Exactly. The Roth doesn't count. And for those of you listening, some people may get Roth 401k, never heard of it. Talk to your employer, more than likely they didn't offer this 10 years ago.

They do now. That you can make contributions directly into the Roth 401k out of your salary. And you're going to have to pay taxes on the money first. So this is going to sting you a little bit. But it's now in Roth forever. So I'd recommend you investigate that.

I'll help you do it if you want me to. But today we're talking about the five year clock. And the five year clock is going to be the five year clock on distributions out of a Roth IRA. What does it mean?

How does it apply? And the five year forever clock starts on the date you open your first Roth IRA. If you opened it with 500 bucks four years ago, and then you dump a million dollars in there this year, your five year clock is going to be up in a year.

It doesn't matter the amounts, nothing. It's just the fact that you have a Roth IRA. So do it on both of you if you haven't already done it. And the cool thing about that is it's, from what I understand from watching your videos and talk to you many times, is that you can have 14 different Roth IRAs, right? That you've got one that was done from one conversion, one from another. However, you ended up with a numerous Roth IRAs. It was the day you started your first one that the IRS considers it all one account, so to speak. So the day you started your first one is the day that the five year rule starts clicking, right?

That's correct. So I mean, I don't think you're going to want 14 different ones. You're just going over that to make a point because that creates confusion in retirement. But you can have several of them and the five year clock is going to start picking the day you open the first one. Even if you later close it and move that money into one of those other 14 Roth IRAs, it still goes by the day you opened your first one, okay?

Now what does this five year clock mean? So we've got Roth IRA distribution ordering rules. So when you make a distribution out of a Roth is your contributions, the money you put into the Roth five years ago or two years ago, that amount, there's never any tax on that or penalty, okay? Does this make sense that you put 10,000 in a Roth three years ago and now you want to take some money out of it and it's now worth 12,000 because you earned some money in there.

Well, there's never any tax or penalty on that 10,000 that you put in and that money comes out first anyhow. There you go. Well, we got to head to a break, but we want to remind you that this show is brought to you by Cardinal Guide, cardinalguide.com and there you're going to find the Seven Worries tab and clearly one of those is IRAs and so the show will be there as well as the show notes and a video right along these same lines to help you get more information and resources including Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement and of course the contact page which we're hoping you know you have questions that's what they're there for. Tom and Hans both are there at cardinalguide.com. We'll be right back with a whole lot more of getting your money out of a Roth IRA.

We'll be right back. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a Registered Investment Advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner Hans Scheil and today's show is getting your money out of a Roth IRA and as we left our heroes earlier we're describing this five-year rule and and some of the nuances along those lines Hans so take it away. Okay so let's kind of make this simple we were talking in a circle before because if you put money in a Roth IRA either through conversions or contributions or a combination of the two and you have $50,000 in a Roth IRA and now you want to take some money out of it you're over fifty nine and a half and it's been five years or more since you started your first Roth IRA there's going to be no tax and no penalty on any of that money coming out of there it's all tax-free. So that I can state if you've met the five-year rule you're over fifty nine and a half you can take all the money you want out of there pay no taxes. So that simplifies it for some people but what people have done when they get that they say well then if I take it out within the five years I'm going to pay tax and penalty well no no no you're not because number one I just went over earlier any contributions you put on there are never going to be taxed or penalized because you already paid the tax on those and it's going to be contributions first and then earnings second so the only way you're going to pay some tax and penalty is within the five years if you withdraw the whole thing you know or you withdraw enough of the contribution that you're into the earnings. Now with conversions and a Roth conversion for those of you new to listening is where we take a traditional IRA and we take a appropriate chunk of it we've already calculated the tax beforehand and then we move it let's say a hundred thousand dollars from where it is in a traditional IRA pre-tax we move it into a Roth and now we've got to pay the income taxes and let's just say you're in the 24% bracket well we got to pay $24,000 of federal tax to make that move and if you're in a state with state income tax like North Carolina you got to pay another four so now we're paying $28,000 in taxes voluntarily and that almost sounds stupid but people have trouble getting their arms wrapped around this it's not necessarily stupid because if you pay the tax at this when I were talking about conversions out of the first hundred thousand well then you're only going to have seventy two thousand over in the Roth but you're going to have now a tax-free account for life and even beyond your life if you leave an inheritance to your kids and an even better way to do it if you've got the money is to convert the hundred thousand but take the whole hundred thousand over to the Roth and pay the income taxes out of other money if you have that now you've got a hundred thousand dollars sitting there tax-free for life so I'm back on contributions and conversions and all that kind of stuff what the show's about is getting the money out and so if you just want to take a little bit of money out in the first five years go for it because it's not going to be penalized or taxed but most people don't do that most people leave the money in the Roth as long as they possibly can and some people leave it there for their whole life knowing that it's their last stash of money they're going to tap and then they pass it on to their kids and their kids inherit tax-free so if that's your goal that's what we're going to plan for but other people like mine I'm already taking money out of my Roth because the annuities I put it in are over ten years old and I'm I just decided to turn them on and so I get a tax-free check every month my wife does for life I mean as long as either one of us is alive they're sending us a check so it's a combination of and we don't have to pay any taxes on that check forever it's pretty sweet and we're not paying any penalties or any tax I'm over fifty nine and a half we're both over fifty nine and a half and we don't we're beyond the five-year clock so we're good yeah you know about the five-year plan long before most of us so that's it points back to the quicker that you can you know even if you're 20 years old right you go get one going and obviously that you'll be ready when you know when the time comes and of course it if you can get one going at 20 and talk about the law of multiplication right it'll you'll be shocked at what you've got you know when when you when you begin to get to 60 or 59 and a half as the case may be right well yeah I could I can add a few kind of sweet thoughts to that is when you buy your first house your it has to be your first home that you bought you can tip pull money out tax-free principal and earnings to buy your put the down payment on your first house a lot of people don't know that so but people that are smart enough to put money in a Roth at 20 when they get to be 26 and they're buying their first house they're probably not going to take the money out there because they're going to see once you take it out of there it's out of there and you know they're going to find the money somewhere else but that's an option and then another thing is that I always thought about doing I wish I had but I didn't he is once my kids started earning money working like part-time or at 16 17 18 in college and you know I I'm not going to go to my kids and say you made $10,000 I think you ought to put half of that in a Roth IRA they you know they that isn't going to work very well with a 18 year old okay but what you can do as a parent or a grandparent if you have the extra money because they had that 10,000 of earnings you can make a Roth contribution just essentially give them the money but you put it straight in the Roth so they don't spend it he and you can make a Roth contribution up to the like the $7,000 limit every year for your teenagers so you can start one of these for a grandchild or a child or anybody else you care about there's a lot of there's a lot of angles with these things but there's a lot of advantage to having 40 or 50 years of compounding of tax-free money so and you know then the biggest problem is to stop the kids from robbing it when they've got some new Corvette they want to buy or some motorcycle or something like like kids do so I'll leave that up to you but I want to talk about something with this is that like I'm collecting on my Roth because I put it into the annuity in my 50s in my early 50s before I really and put together the Roth conversion stretch so it was already in the annuity that promised an income that started later and then I converted the annuity it's an IRA annuity to a Roth so now I started to look at the tax-free thing and I started to look at the compounding beyond 10 years and I said I might as well just turn this thing on now and we'll start collecting the tax-free money and that way I got more years to beat it you know what I mean by beating it is Rhonda lives to like 84 or 85 we've we've beat the thing well can't you then I mean this may be a crazy thought but it's way my mind thinks can you just take that money and put it back in another Roth no you can't do that no more rules I'm unaware no so when you take money out of an any IRA it's out of the IRA there ain't no putting it back okay I mean if you put it in another Roth I guess but who's to say it's the same money because you if you can make a contribution to a Roth anyhow you could for sure you could you could kind of go on a circle and say that I mean but yeah comes out of your checking account I know because I make contributions to my Roth out of my checking account if the money is somehow another ended up in my checking account then I wrote a check for the Roth contribution you know again for me and and it's just you know Robbie at 68 my strategy you know however diluted it may be based on my learning is that hey when I have extra money I stick it in there because like yeah if if the earnings on that or a freebie like why wouldn't I yeah well I mean you is definitely at 68 you're gonna do that but I'm already taking maximum advantage of every money I can throw in a Roth and I have to do this roundabout back door Roth because I got too much income but just I want to make the point with people is is that once you get the money in the Roth now there's an inclination I want to leave it there as long as I can now I violated that rule myself just by giving you the example but I got other money in Roth besides this one amount and I am going to leave that there as long as I can because when I start collecting Social Security and even if it's later when I'm collecting Social Security and I'm not working if that day ever comes I want to be making deductions then from my Roth because it's tax-free out of the Roth and then it's no taxes on the Social Security because I look like I got no other income so that's really it at the root of my plan but when I get there I may not even do it I'll just leave the money in the Roth because that money is going to go tax-free to my kids and if I got plenty of choices my priorities may have changed by 75 or 80 does that make sense oh absolutely but unfortunately as often we've run out of time before we've run out of show was there any like final point you want to make sure you got in there Hans yeah get involved with Ross I mean just you know if you need to call me up and talk if you want to debate for a while if this still sounds like there's something wrong with it I'll do that with you you're a listener of the show but I I just encourage you to open yourself up to this idea because it's going to save you taxes in the long run no absolutely okay well we want to remind you one more time this show is brought to you by Cardinal guide cardinal guide calm where you can find a seven worries tab one of which is again IRA's and this show will be there as well as the show notes and the video from Cardinal advisors and then of course Hans's book the complete Cardinal guide to planning for a living or in retirement and the contact page where you can get the phone number to call and debate Hans which I'm sure he would debate you on any subject that you want just do it Cardinal guide calm I thank you so much for listening great show Hans and God bless you the opinions expressed by Hans Shile and guests on this show or their own and do not reflect the opinions of this radio station all statements and opinions expressed are based upon information considered reliable although it should not be relied upon as 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