kaitainen wrote:
here is the complete quote that you misleadlingly truncated:
"EXAMPLE 1: On January 12, 1998, Georgia, age 52, opened a Roth IRA at Ace Financial Organization with a $2,000 contribution. Later in the year on April 10, 1998, Georgia completed a conversion of $10,000 from her Traditional IRA to a Roth IRA and elected to and paid all of the taxes on the conversion for 1998. All of Georgia’s Traditional IRA dollars that were converted were pre-tax dollars.
Georgia was let go from her job in May 1999. In July 1999, Georgia withdrew $1,000 from her Roth IRA to pay the mortgage. Georgia may think that this distribution would be subject to the 10% early distribution penalty. Georgia, however, will not have a 10% early distribution penalty because the ordering rules state that the first assets out will be a return of contributory assets if the Roth IRA holder has contributory assets in any of his or her Roth IRAs. Therefore, Georgia’s $1,000 distribution is considered to be made from the $2,000 contributory Roth IRA assets. Because the $2,000 represents contributory (not conversion) assets, the $1,000 is tax and penalty free. Remember that the 10% penalty does not apply to nonqualified distributions attributable to contributory assets.
EXAMPLE 2: In the previous example, if Georgia needed to take a $12,000 distribution in May 1999, $2,000 would be tax and penalty free as a return of contributory assets. The remaining $10,000 attributable to taxable preconversion assets would be tax free, but would be subject to a 10% penalty unless Georgia met one of the exceptions under IRC Sec. 72.
EXAMPLE 3: Assume from example 1 that Georgia needed to take a distribution of all of her Roth IRA assets: $13,000 (i.e., $2,000 contributory assets, $10,000 taxable preconversion assets and $1,000 earnings). The $2,000 return of contributory assets would be tax and penalty free. The return of the $10,000 taxable preconversion assets would be tax free, but would be subject to the 10% early distribution penalty (unless an exception applies). The distribution of the $1,000 in earnings would be taxable and subject to the 10% penalty (unless an exception applies). The earnings are taxable since the distribution was nonqualified as defined previously."
This example CLEARLY states that withdrawing contribution assets is not penalized. That is what I said and for some reason you are not willing to believe it.
You can contribute to your Roth to your heart's content knowing that in an emergency the contributions can be reclaimed penalty free.
You pay a penalty on withdrawing the gain. That's not what I was talking about. And it is not minutiae in the short term. The large majority of your Roth account will be contributory assets for the first 5+ years (assuming annual contributions of similar sizes of course).
And as for your self-righteous crap about whether putting money into an IRA causes it to gain interest - I was answering the OP's question. He asked a valid question for someone new to this and I explained it to him accurately. You will notice that he then started another thread asking about what assets he should put in his IRA. He needed the information that I provided and it was accurate.
Finally, the Roth IRA would not be set up with the intention of taking money out of it before retirement, and you will notice that I advocated an emergency fund on top of the Roth, but a Roth (as opposed to a traditional) will indeed be an effective emergency fund to the extent of contributions. For someone who is young and who reasonably expects income increases in the near future, it probably makes long-run financial sense to put as much into a Roth as possible and forgo the emergency fund, depending on that person's details. I'm risk averse so I still wouldn't do it, but that doesn't mean my actions would be rational.
Good grief again brother! Damn! Who cares that you can take your contributions out penalty free? I know that. Again, you are getting in to details that aren't necessary to answer that guy's original question. MOST people (at least I hope so anyway) have an IRA that has a value that is MOSTLY from the gains, not the contributions; I know mine is that way. People should NOT use a RETIREMENT ACCOUNT as a rainy day fund. Go get 5% in a Money Market account for that purpose. Then, you don't have to worry about any penalties at all.
Not sure why you think you can teach me anything here. I've been investing money in various types of vehicles for almost 20 years. I know how all these things work. There's not enough time in the day to put every possible scenario down when someone asks a basic question.
I'll tell you who the people are who create a Roth IRA and then plan to take money out of it (even if they stick to just their contributions to remain penalty-free)...people who will not be rich, or people who will not meet retirement goals. I'll take money out of a retirement account if I have to pay for a life-saving operation for a family member. Short of that level of emergency, that stuff is sacred, and it should be viewed that way by all who have one. Unfortunately, too many people dip into theirs when they want a new car or some furniture, etc.