Is a money market IRA considered a traditional or Roth IRA?
July 19th, 2010
I have a money market IRA that was converted from a Roth IRA over 2 years ago. I didn’t like the rate I was getting in the Roth and converted to the money market, but now I am unhappy with the return I am getting on the money market IRA. Is my money market IRA considered a traditional IRA? I’m 27 and would like to withdraw approximately 3,000 for something that would not qualify under any of the exceptions. Will I end up paying the 10% early withdrawal fee and will the 3000 be considered income?
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Tags: exceptions, money market, roth ira, traditional ira, withdrawal fee
My guess is that you still have a Roth IRA. I’m unaware of anyone converting a Roth IRA into a Traditional IRA. It’s usually the opposite. You probably just switched investment vehicles within your existing Roth IRA. However, your statement for the account should state the designation of “Roth IRA,” so that should be easy to determine.
Assuming you still have a Roth IRA, you can probably withdraw most of your money without triggering income taxes or an early withdrawal penalty.
Why?
Because your Roth IRA is funded with after-tax dollars. As a result, your original principal contributions can be withdrawn tax-free and penalty-free. It’s only the interest you earned on your principal which is subject to income taxes and a 10% early withdrawal penalty if withdrawn.
For example, suppose you made the following contributions to your Roth IRA and invested the funds in a money market account:
2008 – $3,000
2007 – $2,000
2006 – $1,000
Let’s say that in 2009, the account is worth $6,500.
Since your original contributions add up to $6,000, you can withdraw up to $6,000 tax-free and penalty-free. After all, you already paid income taxes on those contributions before you made them. However, the remaining $500 (interest earned) is subject to income taxes and a 10% early withdrawal penalty if withdrawn.
I hope this helps!
Before tax dollars are invested in an IRA so all withdrawals are taxes (the deposits and the growth are not taxed till withdrawn). A Roth IRA is funded after tax so the money that you deposit can be withdrawn without tax – I think the penalty holds if it is not for one of the approve reasons – but check here: http://www.irs.gov/publications/p590/ch02.html
The IRA statements will say Roth IRA or just IRA – that is how you know if you set it up right when you invested it in the MM.
The rate you were getting had nothing whatsoever to do with whether it was a Roth or not, you need to find a more intelligent adviser; the ONLY difference between a "regular IRA" and a "Roth IRA" is that the latter is funded with ‘after-tax’ dollars. You can invest (for the most part) in EXACTLY the same instruments in either type of account, the difference is the tax treatment, not the return!
A 27-year-old has no business holding retirement dollars in a Money Market account, you risk having nothing when you retire, and then the rest of us will have to feed & clothe & house you!
You would also be insanely foolish to take $3,000 out of an IRA at 27, it’s such a paltry sum and you would basically get $2,700 cash (after penalties) for money that would grow to between $679,273 & $850,303 if you put it in a Growth Fund (where it belongs at your age) and left it alone.
I think you are confused. Look at your IRA statements: do they say Roth IRA or conventional IRA? If you don’t know, call the IRA custodian and find out. You cannot "convert" from a Roth back to a conventional IRA – that makes no sense.
A money market fund is just the particular type of investment you chose, not a "type" of IRA. A money market account can be held in either a conventional or Roth IRA.
You cannot convert "from" a Roth IRA to an IRA (unless you undo an IRA to Roth IRA conversion with a recharacterization the same year as the conversion). So I suspect you originally had a traditional IRA and converted it to a Roth IRA. Look at something about the account and see what type of account it currently is.
If you did convert from IRA to Roth IRA you would have to pay income tax on the amount converted the year it was converted. If you withdraw a converted amount before 5 years pass, you would get hit with 10% penalty.
If you made Roth IRA contributions, contributions can be withdrawn at any time (without penalty) and come out of a Roth IRA first. But if the whole thing was an IRA to Roth conversion you cannot do that without a penalty until 5 years after the conversion.
It is all explained in IRS Publication 590.
A money Market account is a terrible choice for either a ROTH IRA or a regular IRA. An IRA (ROTH or regular) is put in an investment that should have a long term horizon. Stocks or stock Mutual Funds would be a great choice.
Worse yet…. worst than putting retirement money into a money market account… is taking the money out before retirement.
You need to read a book or two and understand IRA’s. You are killing your future.(Penalty + tax on income = ridiculous idea).
YES & YES! YOU WILL WIND UP PAYING THE PENALTY AND THE REGULAR TAXES. IT IS THE TYPE OF ACCOUNT THAT IS TAXED UPON WITHDRAWL, UNLIKE THE ROTH WHERE TAXES ARE PAID WHEN THE $ GOES INTO THE ACCOUNT.NOW DEPENDING ON THE STATE YOU’RE IN, YOU CAN HAVE UP TO 90 DAYS TO PUT THE AMOUNT U W/DRAW BACK WITHOUT PENALTY. U CAN CHOOSE TO PAY THE TAX AT THE TIME U W/DRAW OR AT THE END OF THE TAX YR. IF U WANT TO ENABLE UR IRA TO MAKE U A DECENT PROFIT & NOT EARNING ONLY INTREST! CHECK OUT THE ‘BETTER TRADES’ INVESTMENT SEMINARS. THERE IS A EDUCATIONAL INVESTMENT U NEED TO MAKE IN ORDER TO GET THE MOST OUT OF IT ALL, BUT BASED ON PERSONAL EXPERIENCE OF MINE & MY HUSBAND, I CAN HONESTLY SAY IT IS WORTH IT! THERE ARE ALSO PAYMENT PLANS U CAN GET IF U ASK FOR ONE, TOO. CHECK IT OUT, IT DOESN’T COST ANYTHING TO EXPLORE THE POSSIBILITIES! ALSO, SCOTTRADES HAS ONE OF THE BETTER, IF NOT THE BEST IRA ACCOUNTS AND E-TRADES AVAILABLE. THEY EVEN HAVE FREE TRADES TO PRACTICE WITHOUT LOOSING ANYTHING! CHECK THEM OUT TOO!
"Traditional IRA" and "Roth IRA" both pay a rate of zero because they are not investments; they are umbrella plan contracts with the custodian governing how your investments will be handled and eventually taxed.
Money contributed to either type of IRA can be invested in a money market fund if the custodian offers a money market fund (almost all do). If you change your money from one fund to another without executing a new plan agreement, your money market fund is still under the Roth agreement.
Don’t worry about the taxes on the withdrawal of the 3000. The huge damage will be in the form of the huge amount of tax deferred compound interest that you won’t have at retirement thirty years from now.
as others said, you are a bit confused because you can’t convert a Roth IRA to a traditional IRA. And to answer your question, yes, you will pay taxes and the penalty fee.