A Roth IRA Withdrawal may seem like a complicated and difficult process with many rules, and a lot of potential penalties. It’s really not that difficult though, once you break it down. An IRA (or Individual Retirement Account) is an account intended to provide income after retirement, hence the name. With this in mind, the government gives you certain breaks in these accounts, and a Roth IRA is no exception. After being so generous with their breaks, the government doesn’t appreciate you withdrawing your funds prior to retirement, and this is where you might incur a Roth IRA withdrawal penalty.
Roth IRA Withdrawal Rules
Whether or not a withdrawal is penalized depends on whether or not it is a qualified withdrawal. First and foremost, you can withdrawal your principal, or contributions at any time. This is because money you’ve put into a Roth IRA has already been taxed. It is not like other retirement vehicles where the money is contributed before taxes. Where you run into trouble is when you try to make an unqualified withdrawal of your Roth IRA earnings. In order for the withdrawal of your earnings to be tax and penalty free, it must be a qualified withdrawal, which means it much follow the following rules:
Roth IRA Withdrawal Without Penalty or Taxes
- You must be at least 59 ½ at the time of withdrawal.
- Or, the withdrawal must be on behalf of a beneficiary after the account holder has deceased
- Or, the withdrawal has been made after the account holder has become disabled
- Or, it must be a Roth IRA withdrawal for home purchase up to $10,000 for first-time home buyers only.
In addition to falling under one of the scenarios above, the account must fall under the 5 year rule, which simply means the account must have been initially opened and contributed to at least 5 years prior to withdrawal. On the first day of the 5th year, it’s considered a qualified withdrawal.
Roth IRA Withdrawal Without Pentaly, but With Taxes
Adhering to the above rules will avoid both the 10% penalty as well as taxes. There are also some situations that allow for withdrawal of your earnings that avoid penalty, while being taxed as income. Those situations are as follows:
- It is a qualified reservist distribution for those reservists called into active duty after September 11th, 2001
- It is a qualified disaster recovery distribution
- The distribution is a result of an IRS levy against the account owner
- The distribution is less than your total qualified higher education expenses, including those of qualified family members
- You have lost your job, and are paying your own health insurance premiums
- You have medical expenses that exceed 7.5% of your gross annual income, and those expenses are not reimbursable
You can always withdrawal both your earnings, and your contributions from your Roth IRA at any time, but unless it falls under one of the above rules or situations it will be subject to a 10% penalty as well as normal income taxes. The best way to avoid both of these things is to truly use this as a retirement account. Open a Roth IRA account early (like when you’re 18) and you shouldn’t have to worry about the 5 year rule. Then, just leave it alone until you retire. Of course, that’s easy to say, but that’s 40 years of living where outstanding situations may arise that require early withdrawal, so just keep the above rules in mind if you are in such a situation.