withdrawing from Roth
Hi everyone, thanks for this great forum! I started a few months ago and YNAB is really transforming things around here. I am also coming to understand some mistakes I've made in the past.
One mistake that I'm not sure how to resolve and would love your insight on. Due to excitement about the stock market, over the years I have put about 10K into a Roth IRA, not for retirement purposes, but for the purpose of a grand adventure with my son in the next few years. It was getting about 10% and that was lovely. Obviously, like everyone else, it just lost a lot of money, but amazingly, the balance right now is about the same as my contributions. It seems to have only lost earnings.
I can withdraw about 60% of it without penalty & I am inclined to do that. All the financial advice says let it sit . . but I never really intended it for retirement anyways. Understanding what I now do, I think it was a mistake to put it in a Roth in the first place. So I imagine withdrawing 60%, leaving that 40% in there to capture the rebound and support retirement, and kind of split the different between past self savings goals/present self understanding of the value of extra retirement funds. (I also contribute 15% of my income to retirement accounts through my employer and will have my house paid off by age 50 so I feel comfortable, overall, about my retirement profile, although I understand emergencies happen).
At my present savings rate having that money would mean the difference between it still being realistic to live this goal with my son in his elementary years, versus it not being realistic. Part of that is because taking the entire saved balance out of the budget for adventure just feels so dang discouraging.
Do you have any thoughts or responses on this potential pathway to share?
I think you can take out ALL of your contributions if you want to. I mean it's great to leave some in there to grow, but if you're regretting investing in it and want the cash back now, I believe you can withdraw up to the total of your contributions before retirement. To take out earnings you need something special (there is an exemption for buying your first home, I believe), but your contributions are yours. Double check me, but I actually had to withdraw my contributions recently so I called Vanguard to make sure and they told me I could.
I think it would be a huge mistake to take it out now. You can't go on any grand adventures with your son presently anyway. I would strongly suggest you wait until you need the funds in a couple years. The market is going to rebound and then some. You will be able to take a much grander adventure with your son if you wait to withdraw the funds until you need them. If you take them now, you just lock in your losses.
Also, my understanding with a Roth IRA is that you have to wait 5 years before you can withdraw your original investments without penalty if you're under 59 1/2 years of age. You're right that this wasn't the correct vehicle for it's purpose but I'd propose that you wait until you need it to withdraw it.
You can withdraw your contributions from a Roth IRA without penalty at any time. (The rules are different for converted and rollover IRAs; this is only for direct contribution.) There's no 5-year-rule in this case.
So if you contribute $10,000 to a Roth IRA, and the market goes up and you now have $15,000 in the account, you can withdraw $10,000 without penalty.
If you leave the $15,000 in place and the market goes down and the balance goes back to $10,000, you can withdraw $10,000. The path it took to get there is irrelevant! Only the nominal total of your contributions matters.
And that's about as much as I can say without veering into financial advice, which we don't offer. :)