As a followup to my post about withdrawing contributions from your Roth IRA without paying taxes or penalties, I wanted to point out a small(ish) glitch that was brough to my attention by a reader…
Withdrawals from your Roth IRA may make you ineligible to take the extra “saver’s credit” on future contributions. The way it’s figured, you need to subtract withdrawals made in the past few years from the current year’s contributions. In other words, if you took $2000 out two years ago, and put $3000 back in this year, the saver’s credit calculation says you only deserve a credit based on $1000. And you are punished for the withdrawals in this way for several years. So it’s true that you don’t pay taxes or penalties for taking out Roth contributions, but it can still cost you.
Click here for an article on the saver’s credit.
Thanks to reader EC for the tip.