Almost every Roth IRA investor has had it beat into their heads that they cannot withdraw their investment earnings from a Roth until you reach the age of 59 ½ without paying penalty. (You can always withdraw your contributions at any time.) But, what if there was a way to get at your capital gains, dividends, and interest earnings earlier than that? What are those lucky few who want to retire early supposed to do? Are they just stuck watching their investments that they would use to live on just sit idly in an account? No! There’s a rule just for you. Rule 72(t) lets you get access to your Roth IRA money, all of it, without penalties.

Your Contributions are Always Yours to Withdraw

Withdraw from Roth earlyMost financial planners do not like advertising the fact that money that you invest in a Roth IRA is yours to do with as you like. If the need arises, you can withdraw the principle that you put into a Roth IRA penalty free. You are not allowed to touch any interest, dividends, or capital gains that have accrued without triggering an early withdrawal penalty from the IRS, but the amount that you contributed is free for you to withdraw.

The IRS also considers the first amount of money that you withdraw to be part of the principle that you invested. So, for example, if you contributed $5,000 into a Roth IRA each year for five years and your account grew to be worth $30,000 and you then withdrew $10,000, the IRS would consider that entire $10,000 to be part of the principle that you invested. So, your account in this example, would have an ending balance of $15,000 that you contributed and $5,000 in investment gains still.

There are Exceptions to the 10% Penalty

There are already several exceptions that can keep you from paying the 10% early withdraw penalty. For example, the IRS allows you to withdraw both principle and interest from your Roth IRA for a first time home purchase, qualified higher education expenses, if you are severely disabled, and several other specific scenarios that do not apply to most individuals. You can see the entire list of exemptions to the 10% penalty on the Internal Revenue Service’s website.

Rule 72(t) Can Help Early Retirees

If you want to retire and have access to your Roth IRA investment, including the principle, capital gains, and interest, before you reach the age of 59 ½, you can do so penalty free thanks to a specific IRS clause called Rule 72(t). There are a few hoops that you have to jump through though. If you are withdrawing funds early based on Rule 72(t), you are required take distributions from your Roth IRA in a series of equal payments, either monthly or annually, over what the IRS considers your future life expectancy. The IRS will determine your life expectancy based on a table that they provide.

Once you start taking the withdrawals from your Roth IRA, you are stuck and cannot stop them from occurring. Rule 72(t) withdraws are a great way for those retiring early to have access to their money without the early withdraw penalty, but they are not something to be started or taken lightly. While there are ways for an investor to tap into your Roth IRA money before the typical age of retirement, that does not mean that you necessarily should.

Rule 72(t) provides early retirees a way to tap into their retirement investments but lock them into a distribution schedule of those funds. Withdrawing the principle from your Roth IRA, while an option, is not always the best idea. You are sacrificing a lot of future gains by not letting your investments grow. A Roth IRA was not created to ultimately be a type of savings account that you can dip into when the going gets tough, the best way to use them are for retirement funds to be drawn on late in life.

Photo by alex roberts via Flickr

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