Q: I just completed 5 years with the school district and have become eligible to purchase air time. This option will end January 1, so it's really making me think it's something I should seriously consider. It's pretty expensive, about $6,000 per year purchased. I was wondering what the penalty would be if I cashed in my Roth IRA - about $10,000 - to use as a down payment on the air time ($3,000 for 5 yrs). I haven't looked at my statements lately, but I think much of it is not earned, but is original principal. Do you have to pay a penalty if all the funds are your own? CalPERS will not allow a rollover from a Roth IRA.
I sure appreciate your help.
A. If you take an early withdrawal from a Roth IRA, the 10% section 72(t) excise tax applies to the portion that is includable in income. Remember, the $50 will also be subject to the regular income tax, as well.
Assuming that the contributions to your Roth IRA were made directly and not from a rollover from a regular IRA, only the portion of the withdrawal representing earnings on the contributions would be includible in income and, therefore, subject to the 10% penalty tax. For example, you contribute $1,000 in 2009. It earns an additional $50,so your withdrawal is $1,050. Only $50 would be includible in income and subject to the 10% excise tax.
An early withdrawal is one that is made within the five year period beginning with the first taxable year for which a contribution was made to the Roth IRA and before you reach age 59 and 1/2, with certain limited exceptions.
There is a wrinkle about which you should be aware. A distribution from a Roth IRA is subject to the 10% penalty tax as if it were includible in income if that distribution (or any part of it) is allocable to a "qualified rollover contribution", and is made within the five-tax year period beginning with the tax year for which the contribution was made. However, the 10% tax applies only to the extent that the amount of the qualified rollover contribution was includible in income.
"Qualified rollover contributions" include conversions of regular IRAs to Roth IRAs, whether by rollover or trustee-to-trustee transfer. So if you converted a regular IRA to a Roth IRA within the previous five years, more than just the earnings on the Roth IRA account may be subject to the 10% excise tax.
Referring the the example above, assume that the $1,000 initial contribution was a conversion from a regular IRA, and the entire initial contribution was subject to tax in 2009, the year of the conversion. All of the $1,050 withdrawal in 2012 would be subject to the 10% excise tax (although only $50 would be subject to the regular income tax) because the $1,000 initial contribution was a "qualified rollover contribution" which was withdrawn within 5 years of when it was contributed.