You'll pay a 10% penalty unless you qualify for one of these exceptions

Quick Summary

  • You can withdraw contributions at any time, for any reason, without paying taxes or penalties.
  • If you withdraw your earnings before age 59 1/2, you’ll owe a 10% penalty.
  • In certain situations, you can take an early withdrawal that’s penalty-free.

If you’re looking for a tax-advantaged way to save for retirement, a Roth IRA may fit the bill. With a Roth IRA, qualified withdrawals made after age 59 ½ are 100% tax-free and penalty-free. But what if you need to tap those funds a little earlier? Will you be subject to Roth IRA withdrawal penalties?

You can withdraw your contributions at any time, for any reason, without taxes or penalties. But early withdrawals of your earnings (not your contributions) are subject to a 10% penalty. However, you may be able to avoid the penalty in certain situations. Here’s a look at when and how you can withdraw money from a Roth IRA without being penalized.

A nest with eggs that say IRA and 401 k on them.

Qualified Distributions vs. Non-Qualified Distributions

The IRS distinguishes between qualified and non-qualified distributions when determining whether to apply a penalty to Roth IRA withdrawals.

Non-qualified Roth IRA distributions are subject to taxes on earnings plus an additional 10% penalty.

Qualified distributions are penalty-free. A Roth IRA distribution is qualified if your account has been open for at least five years (the “5-year rule”) and you’re 59 1/2 years or older or:

1. You have a permanent disability.

If you become disabled and can no longer work, the IRS allows you to withdraw money from your Roth IRA, regardless of age, without paying the 10% penalty. Just be aware that your plan administrator may require you to provide proof of the disability before signing off on a penalty-free withdrawal.

2. You’re inheriting a Roth IRA from someone else.

Inheriting a Roth IRA from someone else—be it a spouse or another relative—falls under the qualified distribution umbrella, according to the IRS.

3. You’re buying a first home.

If you need some cash to cover the down payment or closing costs on a first home, you can withdraw some of your earnings from a Roth IRA without a penalty, even if you’re under age 59 ½. The IRS does limit penalty-free distributions to $10,000. To qualify for the first-time buyer exception, the money must be used to buy, build, or rebuild a home. The IRS considers you a first-time homebuyer if you haven’t owned a home in the previous two years.

Exceptions to the 10% Penalty Rule

A Roth IRA withdrawal that doesn’t meet the definition of a qualified distribution is a non-qualified distribution. That doesn’t mean that you have no chance to escape Roth IRA early withdrawal penalties. The IRS gives you some leeway for making penalty-free withdrawals if:

4. You’re taking a distribution to pay unreimbursed medical expenses.

If you have out-of-pocket medical expenses that you need to cover, you may be able to get around paying the additional tax penalty on Roth IRA distributions. To qualify, your unreimbursed medical expenses must exceed 10% of your adjusted gross income (AGI).

5. You need to pay your health insurance premiums while you’re unemployed.

You could also avoid the tax penalty if you’re using some of your Roth IRA savings to maintain your health insurance premiums because you’re unemployed. The IRS will waive the penalty if you lost your job, you received unemployment compensation for at least 12 consecutive weeks, you took the distribution the same year you received unemployment or the next year, and you received the distribution no later than 60 days after going back to work.

6. You’re using the money for qualified higher education expenses.

A college degree is pricey these days. If you’re footing the bill for education expenses, your Roth IRA may be a valuable source of funding. It’s possible to avoid the 10% penalty if you’re using Roth IRA assets to pay for qualified education expenses for yourself, your spouse, or your child. Qualified education expenses include tuition, fees, books, supplies, and equipment required for enrollment. Room and board are also covered for students who are enrolled at least half-time (there are specifics about how much you can spend).

7. You’re taking substantially equal payments from the plan.

In some cases, you may need to make regular withdrawals from a Roth IRA before age 59 ½ instead of taking a single lump-sum distribution. If you’re taking periodic distributions of the same amount, the 10% penalty wouldn’t kick in. The IRS can use one of three methods to determine the amount of the payments you’re entitled to receive and the payments must be spread out over five years.

8. The withdrawal was due to a tax levy.

If you have unpaid federal taxes, the IRS can draw on your Roth IRA to pay the bill. The 10 percent penalty won’t apply if the IRS levies the money directly. If, on the other hand, you withdraw the money and use it to pay your tax bill, you’d have to pay the penalty if you don’t meet the qualified distribution guidelines.

9. You’re a qualified reservist.

The final exception applies to active duty military members. If you’re called to active duty, you can withdraw money from your Roth IRA without fear of a penalty.

Remember to double-check the Roth IRA withdrawal rules and consult a tax professional before taking money out of your account. Making sure that you’re meeting the requirements for a penalty-free withdrawal is a must for preserving the rest of your retirement assets.

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