While a Roth IRA was designed primarily as a retirement plan for American citizens, the account’s flexibility allows it to be used for other financial goals besides retirement. The United States government has set up Roth IRAs to allow individuals to withdraw funds from the account early and allow the proceeds to be used to pay for other things besides retirement.

Typically investors cannot withdraw their earnings (including interest and income) from a Roth IRA until they are 59½ years old. (You can always withdraw your contributions penalty and tax free.) In addition, the account has to have been in existence for at least five years.

An early withdrawal of earnings that does not qualify for an exemption is considered a non-qualified Roth IRA distribution. Early withdrawals that are not exempt are subject to a 10 penalty and taxation by the Internal Revenue Service (IRS).

But a few alternative uses are permitted for Roth IRA earnings, even if you’re younger than 59½.

1. Use a Roth IRA to Buy a House

You may take an early withdrawal of earnings from your Roth IRA to buy a house. Your investment in the Roth IRA must have met the 5 year rule and must be used directly for purchasing a home as a down payment or closing costs. In addition, you cannot withdraw more than $10,000 of earnings from your Roth IRA for the home purchase. Early withdrawals of earnings for a home purchase from a Roth IRA are both penalty and tax-free.

2. Use a Roth IRA to Fund Education

Another alternative is withdrawing money for “qualified education expenses,” if you have to. The provisions for education are not quite as generous as for a first-time home purchase: If you withdraw earnings (not the original contribution), you have to pay taxes on the amount you take out. However, you do avoid the 10 percent early withdrawal penalty.

Qualified education expenses are tuition, fees, books, supplies, equipment, computer costs and room and board (in most cases). You can use the funds for educational expenses for yourself, your spouse, your children or your grandchildren.

3. Use a Roth IRA in an Emergency

You should have an emergency fund in place to help you in the event of an emergency. In fact most financial planners recommend that you should have three to six months of living expenses saved in an emergency fund. But, what if you don’t have an emergency fund available or if the emergency costs more than you saved?

For true emergency, money from your Roth IRA can help. Use it as a last resort. Prematurely withdrawing your money incurs both the 10 percent penalty and taxes.

You do have an option that Traditional IRAs don’t offer: If you just withdraw a portion of your contributions (not earnings), you won’t owe the penalties and taxes. You will, however, undermine the savings you were putting aside for your future.

One of the best features of a Roth IRA is its flexibility. Senator William Roth and his committee developed the retirement plan to mirror the American Dream. With a Roth IRA’s flexibility, you can withdraw money to fund different financial goals that you may have, such as buying a home or sending your children to college. But consider all of these very carefully: You are losing not just the money you saved but all the interest it would have earned if you’d left it alone.


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