- If you are 59½ or over, you may withdraw as much as you want, as long as your Roth IRA has been open for at least 5 years.
- If you are under 59½, you may withdraw the exact amount of your Roth IRA contributions with no penalties.
- There are special exemptions for first-time home purchase and college expenses.
No doubt, Roth IRAs are a good deal for U.S. retirement savers, but don’t go in blind to a Roth IRA withdrawal situation. There are several key rules and distinctions you should know before taking out any funds. Otherwise, you may be tagged with a 10% early withdrawal penalty.
Here are five Roth IRA withdrawal rules you should know, no matter what (as always, consult with a trusted financial advisor before making any big decisions about an IRA withdrawal):
Tax-free in/tax-free out. An investor can take out the exact amount of his or her Roth IRA contributions at any time, for any reason without having to pay any tax or penalty—with one big caveat. The earnings from your principal cannot normally be withdrawn prior to age 59½ without paying the 10% early withdrawal penalty. Earnings can generally be withdrawn without penalties after age 59½, provided you meet the five-year rule (see below).
2) Roth IRA Five-Year Rule
Withdrawals from your Roth IRA will only be classified as qualified distributions if it has been at least five years since you first opened and contributed to your Roth IRA, regardless of your age when you opened it. An IRA owner can make penalty-free withdrawals at age 59½, for instance, but if he or she made the first contribution at age 58, the plan participant would need to wait until age 63 to withdraw any earnings made on that portion of the original contributions.
3) Qualified Versus Non-Qualified Distributions
Before making any Roth IRA plan withdrawals, know the difference between “qualified” and “non-qualified” distributions.
As long as an IRA plan participant meets the five-year rule requirement (meaning it’s both tax- and penalty-free), any withdrawal is considered qualified by the IRS.
A qualified distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met:
- Over age 59½
- Death or disability
- Qualified first-time home purchase
“Let’s say, for example, that you opened a Roth IRA in 2012 and have contributed $5,000 annually for six years or a total of $30,000. In 2018, your Roth IRA balance is $39,000. If you reach 59½ in 2018, you will not be subject to taxes or penalties on a distribution because you satisfy both the five-year holding period and the age qualifications,” says Marguerita Cheng, CFP®, CRPC®, RICP, CDFA , CEO, Blue Ocean Global Wealth, Gaithersburg, Md.
These are subject to taxation of earnings and a 10% additional tax unless an exception applies. For Roth IRAs, you can always remove post-tax penalty contributions (also known as “basis”) from your Roth IRA without penalty.
Several exceptions exist that enable Roth IRA plan participants to withdraw cash from Roth IRAs that otherwise would be subjected to ordinary income taxes and the 10% early withdrawal penalty:
- The distributions are part of a series of substantially equal payments (minimum five years or until the Roth IRA owner reaches age 59½, whichever is longer).
- You have unreimbursed medical expenses exceeding 10% of your Adjusted Gross Income (AGI). [Note that under the new tax law, the medical-deductions threshold is scheduled to be 7.5% for 2018, and revert to 10% after that.]
- You are paying medical insurance premiums after losing your job.
- The distributions are not more than your qualified higher education expenses (for yourself or eligible family members).
- 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.
[Visit this IRS web page for more information on Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).]
4) First Home Purchase Exception
There are other loopholes that enable you to take money out of a Roth IRA without fear of incurring a tax penalty. One is for a first home purchase, up to a $10,000 lifetime maximum amount, per individual IRA account. According to IRS rules, first home purchase assets can be withdrawn for the account holder, or for the account holder’s children or grandchildren.
5) College Expenses Exception
Uncle Sam also “allows penalty-free withdrawals from a Roth IRA for assets earmarked toward higher education expenses for the individual, the individual’s spouse, children, grandkids and great-grandkids,” says Joe Inskeep, CFP®, an advisor with Advanced Wealth Strategies Group, Round Rock, Texas.
Once again, check with a qualified financial professional before making any big decisions on a Roth IRA withdrawal. But if you play close attention to the rules listed above, you will be well on your way to a solid withdrawal plan that protects your assets, while allowing your retirement cash to take care of your family.