Roth IRA Withdrawal Rules

The Roth IRA is a wonderful investment option that many people take advantage of every year mainly because of it’s tax free growth and because it allows you to diversify your tax situation at retirement if you also invest in some pre-tax investment types like a 401k or IRA.

While the ideal situation is to max out your contributions to your Roth IRA every year, and then not take any money out until retirement, sometimes you might find yourself in a situation where you need money now – before the usual distribution age of 59 1/2.  Luckily the Roth IRA is one of the more flexible retirement account types and withdrawing your contributions (or the money you put in) can be done tax and penalty free at any time.

You do need to be careful, however, that you understand when and how you are allowed to withdraw your earnings (the interest you earn on your contributions) – before your retirement age, because if you’re not careful you could be subject to a 10% early withdrawal penalty by the IRS, and be taxed at your normal tax rate.

When Can You Make  A Roth IRA Withdrawal?

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  The earnings off of your principle can’t be withdrawn until you reach the age of 59 1/2 without paying a 10% early withdrawal penalty.    No one wants to pay that.  There is also one proviso on being able to withdraw your earnings after 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.  For example, if you opened your account at 56, you would need to wait until you were 61 with withdraw any earnings on your principle.

Qualified Reasons For Roth IRA Distribution

Here are the main reasons you can receive a distribution from your Roth IRA without taxes or penalties:

• You are age 59½ or older.
• The distribution was made to your beneficiary after your death.  (too bad for you – you’re dead!)
• 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

Sometimes you may still need to take a distribution from your Roth IRA for a non-qualifying reason.  You can still get around the 10% early withdrawal penalty (while still paying income taxes) if you find yourself in any of these situations:

• 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.

Order Of Roth IRA Distributions

When withdrawing your money the distributions come out in this order according to IRS publication 590

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.

So as you can see the order of distributions is setup in order to help you avoid paying fees or penalties. Your contributions (tax and penalty free) come out first.  Next come conversion or rollover amounts followed by earnings on your contributions – which could be assessed penalties if not a qualified distribution.

Conclusion – Don’t Withdraw Until Retirement

So as you can see there are ways that you can withdraw money from your Roth IRA without having to worry about paying taxes or penalties on your money. The question remains, however, as to whether or not it’s a good idea.  The whole point of a retirement account is to have the money going in, growing tax free using the power of compound interest – and withdrawing the money short circuits that whole process.    My suggestion?  Do your best not to take any money out, but if you do, make sure it’s for a qualified reason.

Good luck!

Have you taken  an early withdrawals from your Roth IRA?  Have you had to pay any penalties or taxes on that money?  Have you considered using it to buy your first home or pay for your or your children’s education? Tell us your thoughts in the comments.