Roth IRA Early Withdrawal Penalty Explained

Roth IRAs are excellent retirement vehicles, especially for younger investors.  But what happens if you need to withdraw money from your Roth IRA early?  Is it still subject to a penalty and taxes?

Roth IRA Distribution: Tax Free and Penalty Free

First things first – You can always withdraw your Roth IRA contributions early without penalty or taxes.  The earnings are usually in question for early distribution.

Simply put, if you meet both of these qualifications, all distributions (including earnings) from your Roth IRA should be tax-free and penalty free:

• You’ve reached age 59 ½
• Your Roth IRA has been funded for 5 years

If you don’t meet these qualifications, the earnings in your Roth IRA will be subject to a hefty withdrawal penalty equal to 10%, plus it will also be subject to taxes.

Early Roth IRA Distributions: Taxes and Penalties

If you are under age 59 ½, can you withdraw money from your IRA without penalty or taxes?

Remember the first rule?  Your contributions to a Roth IRA can be distributed at any time.  So the real question is this: Can you withdraw the earnings from your IRA if you’re under age 59 ½?

If you meet the 5-year rule, then you can withdraw the earnings in your Roth IRA early without it being subject to taxes – but you must meet one of these qualified distribution rules:

• Reached age 59 ½ or older
• The distribution is made after your death (to a beneficiary)
• You become disabled
• You’re using the money for a first time home purchase (up to $10,000)

If you don’t meet any of these qualified distribution reasons above, you might still be able to get past the 10% early withdrawal penalty  (for being under age 59 ½) and still withdraw the earnings (which may be subject to taxes) if you meet one of these non-qualified reasons:

Directly from Publication 590

• The distributions are part of a series of substantially equal payments
• You have significant unreimbursed medical expenses
• You are paying medical insurance premiums after losing your job
• The distributions are not more than your qualified higher education expenses
• The distribution is due to an IRS levy of the qualified plan
• The distribution is a qualified reservist distribution.

Order of Roth IRA Distributions

The IRS specifies the order as to how you can withdraw from your Roth IRA.  It makes sense when you read through it, since the contributions are distributed first (tax free), which are then followed by conversions, rollovers, earnings and so forth:

1. Regular contributions.
2. Conversion and rollover contributions, on a first-in-first-out basis (generally, total conversions and rollovers from the earliest year first). Take these conversion and rollover contributions into account as follows:

• Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the
• Nontaxable portion.

Just Because You Can Doesn’t Mean You Should

The point of a Roth IRA is to be a retirement account – not an emergency fund that you turn to when something bad comes your way.  While Roth IRAs can be flexible in terms of withdrawal options, do your best not to touch it if you can avoid it!

Your situation might be different than the average case, so make sure you consult with a CPA or financial advisor if you have specific questions about your Roth IRA.

Have you ever had to dip into your Roth IRA?  Have you considered it before as an option?