Solutions 4 Financial Independence: 11/15/18

Published: Nov. 15, 2018 at 8:11 AM EST
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Question: My son is getting married and I’d like to give him gift of $20,000. I have an IRA account, an Annuity and a Roth IRA. Where should I take the money from? And will I have to pay any penalties?

Answer: That's a fair question, and I love the fact that you’re trying to do something for your son, I think that’s great, but you got to understand, there's going to be some rules that you’re going to have to follow. IRAs and Annuities are designed to be 59-and-a-half’s. So, you tax deferred the money, and you are not 59-and-a-half, then you are going to have to pay a penalty on taking the money out early. Also, on the IRA, depending on the Annuity, and what the cost basis is, your also going to have to pay some taxes. So, if you were going to take money out, $20,000, that counts as taxable income, plus, the 10% penalty if you’re not 59-and-a-half. Now, you say you have a Roth IRA, and the thing about a Roth IRA is it's accessible after 5 years, and so there is going to be a cost basis, so whatever your cost basis is, or whatever you put into it, if you put in more than $20,000, you do have access to that. Now, do I like taking money from a Roth? I don't. The reason why? Roths are 100% tax-free after 59-and-a-half, but if I had to choose between the three, I would assess the cost basis of my Roth, because number one, there is not going to be any taxable gain, and number two, there is no penalty. So that's where you should take that money.