Roth IRA Withdrawal Rules

The Roth IRA is an investment option that I love because of it allows your money to enjoy tax free growth and for the diversification it can bring to your tax situation at retirement.  It can be great to have some tax free investments like the Roth in addition to pre-tax investment types like a 401k or IRA.

It’s a good idea to try and put your money in, and never touch it until retirement so that you can enjoy the wonders of compounding interest, however, sometimes people run into situations where they’ll need to do an IRA Withdrawal .  Thankfully for those people the Roth IRA is an extremely flexible retirement account type and withdrawing the money you put in can be done tax and penalty free at any time.

Where you need to be wary is when you’re considering taking an early distribution on your earnings before retirement age.  If you aren’t making a qualified distribution, you could end up paying not only your regular tax rate on the money, but a 10% early withdrawal penalty to boot.

Make A Roth IRA Withdrawal Of Contributions With No Penalties

One of the great things about the Roth IRA is that you can make a withdrawal of your principle balance/contributions at any time you please – without penalty.  Where it gets a little stickier is when you try to withdraw the earnings off of your principle.  The earnings can’t be withdrawn without penalty until you reach the age of 59 1/2. Again, as mentioned above you can usually make a withdrawal of your principle contributions at any time. The earnings off of your principle can’t be withdrawn until you reach the age of 59 1/2 or you’ll end up paying a 10% early withdrawal penalty. You don’t want to pay penalties now do you?

There is one situation in which you wouldn’t be able to withdraw your earnings after 59 1/2 – it’s when you have started the roth IRA within 5 years of when you turn 59 1/2.  It’s called the 5 year rule.

Roth IRA 5 Year Rule

You can only withdraw your earnings from your Roth IRA at 59 1/2 and have them count as qualified distributions if it has been at least 5 years since your Roth IRA account was opened. However, for example, if you opened your account at 57, you would need to wait until you were 62 to withdraw any earnings on your principle.

Qualified Reasons To Withdraw Roth IRA Earnings

There are a few situations where you can withdraw from a Roth IRA without taxes or penalties:

  • You are age 59½ or older.  (see 5 year rule above)
  • The distribution was made to your beneficiary after your death. (you can’t take it with you!)
  • You are using the money to buy a home, and are a first-time homebuyer ($10,000 lifetime maximum per account)
  • You’re disabled.

Other Exceptions to 10% Penalty

Some people may find they need to withdraw money from their Roth IRA for a non-qualifying reason. They may still be able to  get around the 10% early withdrawal penalty in these situations:  (taxes will still be assessed)

  • You have un-reimbursed medical expenses that exceed 7.5% of your adjusted gross income.
  • You are paying medical insurance premiums after losing your job.
  • The distributions are not more than your qualified higher education expenses. (pay for schooling!)
  • The distribution is due to an IRS levy of the qualified plan.
  • The distribution is a qualified reservist distribution.
  • The distribution is a qualified disaster recovery assistance distribution.
  • The distribution is a qualified recovery assistance distribution.

Roth IRA Distributions Made In This Order

According to IRS publication 590 when you take your money out of your Roth IRA, the money comes out in this order.

  1. Regular contributions.
  2. Conversion and rollover contributions, on a first-in-first-out basis (generally, total conversions and rollovers from the earliest year first). Take these conversion and rollover contributions into account as follows:
    • Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the
    • Nontaxable portion.
  3. Earnings on contributions.

The distributions are done in such a way as to help you avoid paying taxes and penalties if at all possible.  Your contributions to your account come out first,  followed by rollover contributions and earnings on your contributions.

Try Not To Withdraw Until Retirement

Roth IRAs are great because they allow you to have flexibility when it comes to taking disbursements from your account.  Your contributions are always free to be withdrawn without taxes or penalties.  On the other hand, if you’re not careful – when you’re taking out the earnings on your principle – you could end up having to pay taxes and fees.  Not to mention – by withdrawing your money you’re killing the effects of compound interest.

If at all possible, try not to withdraw your money – and if you do, make sure you’ve got a qualified reason!

Now start saving!

Have you considered taking your money out of your Roth IRA early?  Was it for a qualified or non-qualified reason?  Are there other reasons you can think of that you might withdraw your money? Tell us what you think in the comments.

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I’m a thirty-something Christian Midwestern father of one son, and have been happily married for 9 years to my beautiful wife. I love playing tennis, shooting hoops, or taking part in the occasional flag football game. Of course, I love writing and financial topics as well, and that's how this site came into being! Check me out on Google +!


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