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You can take money out, but learn when and how to avoid taxes and penalties

Quick Summary

  • If you’re over 59 ½, you can withdraw as much as you want, as long as your Roth IRA has been open for at least five years.
  • If you’re under 59 ½, you can withdraw your Roth IRA contributions (but not earnings) without penalties.
  • There are special exemptions for first-time home purchases and college expenses.

5 Roth IRA Withdrawal Rules

No doubt, Roth IRAs are a good deal for U.S. retirement savers. But you’ll want to do your homework before making a withdrawal. If you don’t meet certain requirements, you could owe taxes and be tagged with a 10% early withdrawal penalty. Here are five withdrawal rules you should know.

1. Contributions and Earnings

Tax-free in/tax-free out. You can take out your Roth IRA contributions at any time, for any reason, without having to pay any taxes or penalties. Withdrawals on earnings work differently. In general, you can’t withdraw earnings before age 59 ½ without paying a 10% penalty.

In general, you can withdraw earnings without penalties after age 59 ½, provided you meet the five-year rule (see below).

2. Roth IRA 5-Year Rule

Withdrawals from your Roth IRA count as qualified distributions if at least five years have passed since you opened and contributed to the account. That’s true regardless of your age when you opened the account. You can make penalty-free withdrawals at age 59 ½, for instance, but if you were 58 when you made your first contribution, you’d need to wait until age 63 to withdraw any earnings.

3. Qualified Versus Non-Qualified Distributions

Before you withdraw any funds from your Roth IRA, it’s important to know the difference between “qualified” and “non-qualified” distributions.

Qualified distributions

Qualified distributions are tax-free and penalty-free. As far as the IRS is concerned, a Roth IRA distribution is considered qualified if your account meets the 5-year rule and the withdrawal is:

  • Made on or after the date you turn 59 ½ 
  • Taken because you have a disability
  • Made by a beneficiary or your estate after your death, or 
  • Used to buy, build, or rebuild your first home

Non-qualified distributions

Non-qualified distributions are withdrawals that don’t meet the IRS guidelines for qualified distributions. They are subject to taxes on earnings plus an additional 10% penalty. You may not have to pay the 10% penalty if one of these exceptions applies

  • The distributions are part of a series of substantially equal payments (minimum five years or until you reach age 59 ½, whichever is longer).
  • You have unreimbursed medical expenses exceeding 10% of your Adjusted Gross Income (AGI). 
  • You’re paying medical insurance premiums after losing your job.
  • The distributions are not more than your qualified higher education expenses (for you or eligible family members).

In addition, you may be able to avoid the 10% penalty if the distribution is:

  • Due to an IRS levy of the qualified plan.
  • A qualified reservist distribution.
  • A qualified disaster recovery assistance distribution.

4. First Home Purchase Exception

There are several IRS exceptions that let you take money out of your Roth IRA without paying a penalty. One is for first-time homebuyers. In the eyes of the IRS, you’re a first-time homebuyer if you (and your spouse, if you have one) haven’t owned a home during the previous two years. 

You must use the money to buy, build or rebuild a home. And keep in mind: There’s a $10,000 lifetime cap, so it’s a one-time deal for most investors. According to IRS rules, you can also use the money to help out a child, grandchild, or parent who meets the first-time homebuyer definition.

5. College Expenses Exception

Uncle Sam also allows penalty-free withdrawals from a Roth IRA to pay for higher education expenses for you, your spouse, or your children, grandkids or great-grandkids.

It’s recommended that you check with a qualified financial professional before making any big decisions on a Roth IRA withdrawal. But if you pay close attention to the rules listed above, you’ll 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.

 

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