Understanding Roth IRA withdrawal rules helps you avoid taking money too soon, triggering taxes and penalties

Understanding Roth IRA withdrawal rules helps you avoid taking money too soon, triggering taxes and penalties
Roth IRA withdrawal rules are complex: contributions and earnings are subject to different withdrawal rules, and ignoring them can leave you open to income taxes and tax penalties.katleho Seisa/Getty Images
  • Roth IRA contributions can be withdrawn at any time without tax or penalty.
  • Roth IRA earnings can incur early withdrawal taxes and penalties, depending on your age and the account's age.
  • If you're under 59½, you can avoid early-withdrawal penalties for certain specific expenses.

Roth IRAs are often misunderstood. "You can take out funds tax-free at any time!" advice-givers often say.

Not quite. Roth IRA withdrawal rules may be more flexible than those for traditional IRAs, but that doesn't mean you get a free pass to take money out whenever you want. If you don't play by the rules, you could be on the hook for both taxes and a 10% tax penalty.
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When it comes to Roth IRA withdrawals, especially Roth IRA early withdrawals, a lot of factors come into play: the type of funds, your age, and how old the account is. Let's walk through it.
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What are the basic Roth IRA withdrawal rules?

The money in your Roth IRAs consists of two kinds: contributions and earnings. Contributions are the money you deposit into the account - up to $6,000 a year for 2021, or $7,000 if you're age 50 or older (subject to income limits).

On the other hand, earnings are your profits - the dividends, interest, and capital gains your investments have generated. The reason your nest egg (theoretically) ends up with more money than you put into it. Together, contributions and earnings grow tax-free in your account.

You can withdraw your Roth IRA contributions at any time, for any reason, without triggering taxes or penalties. The reason? You made those contributions with after-tax dollars, so you've already paid your dues on them, so to speak. As far as the IRS is concerned, it's your money, free and clear.
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It works differently if you withdraw your earnings. You could owe income taxes, a 10% penalty, or both if you fall afoul of the rules for taking out earnings - that is, if you take them out early. Whether you get a free pass (pr a partially free one) depends on:

  • Your age
  • How long it's been since you first contributed to a Roth IRA
  • How you use the money

What is a Roth IRA early withdrawal?

Roth IRAs define premature or early withdrawals (just on earnings, remember) in two ways. One has to do with your age - if you're 59½ years old. (As with traditional IRAs, this is the magic threshold at which you can start withdrawing.) The other has to do with the account's age - the "5-year rule." The Roth 5-year rule states that, for earnings to be withdrawn tax-free, a Roth account has to be at least five years old. That is, it has to have been five years since the first contribution was made to it.
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This can be tricky because it applies even if you first contributed to a Roth later in life. For example, if you made your first contribution at age 60, you would have to wait until age 65 to avoid taxes on the earnings - even though you already passed the magic threshold of 59½.

Even so, Roth IRA early withdrawals are a lot simpler if you're 59½ or older. You never incur a 10% penalty. However, if you want to withdraw earnings, bear in mind:

  • If you don't meet the 5-year rule, your withdrawal will be subject to taxes.
  • If you do meet the 5-year rule, your withdrawals will be tax- and penalty-free.

Avoiding Roth IRA early withdrawal penalties

The Roth IRA early withdrawal penalties primarily impact those under 59½.
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If you withdraw your Roth IRA earnings before you reach age 59½ and before you meet the 5-year rule, it's considered an early withdrawal. In this situation, the earnings may be subject to income taxes and a 10% penalty.

But, every rule has its exceptions. You can avoid the 10% penalty - or the taxes and the penalty - when you take an early withdrawal in certain situations. Here's a rundown of the different scenarios.

Roth IRA early withdrawals if you don't meet the 5-year rule

You can avoid the 10% penalty but not the taxes if you meet one of the following exceptions:
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  • You become disabled
  • You pass away, and the distribution is made to your beneficiary or estate
  • You schedule the withdrawal as a series of substantially equal periodic payments
  • You use the money to pay for certain costs and expenses. The IRS dubs these hardship provisions.

Expenses that count as IRA hardship withdrawals

  • A first-time home purchase (up to a $10,000 per person limit)
  • Certain college costs
  • Certain expenses related to a birth or adoption (up to a $5,000 limit per parent)
  • Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
  • Health insurance if you're unemployed

Roth IRA early withdrawals if you do meet the 5-year rule

You can avoid the 10% penalty and the taxes if you meet one of the following exceptions:
  • You become disabled
  • You pass away, and the distribution is made to your beneficiary or estate
  • You use the money to pay for a first-time home purchase (up to a $10,000 limit)

Do you have to withdraw money from your Roth IRA?

Actually, no.

If you have a traditional IRA, you have to take required minimum distributions (RMDs) starting at age 72. The IRS tells you how much you need to withdraw each year, and it also imposes a 50% on any missed RMDs.
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A substantial benefit of Roth IRAs is that they aren't subject to the same RMD rules. In fact, you don't have to withdraw anything from your Roth IRA during your lifetime. You can let your money grow tax-free for decades and leave the entire account to your beneficiaries. This makes the Roth an ideal wealth-transfer vehicle.

Still, your designated heirs may have to take RMDs from the account, depending on their relationship to you. If the beneficiary is your spouse, they can avoid RMDs by doing a spousal transfer, in which they transfer your IRA into their own. Any non-spouse beneficiary, however, must withdraw all the money from the inherited IRA within 10 years. If they are under 59½, they are spared the 10% early withdrawal penalty though.
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The financial takeaway

When it comes to withdrawals, Roth IRAs are more flexible than their traditional IRAs. But they still have their rules. And Roth IRA contributions and earnings are subject to different withdrawal rules.

Basically, you can withdraw your Roth IRA contributions (or a sum equal to them) at any time without taxes or penalty. And you can withdraw your earnings tax-free and penalty-free if you're at least age 59½ and you meet the 5-year rule.

Otherwise, it's considered an early withdrawal, and the earnings part may be subject to income taxes and a 10% penalty unless you qualify for an exception.
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The bottom line: If you need to withdraw money from your Roth, try to take out no more than you've put in. That way, you can avoid the financial hits.

And keep in mind that any withdrawal - even one that doesn't trigger taxes or a penalty - reduces your ability to build a substantial nest egg. In general, Roth IRA early withdrawals should be viewed as a last resort.

Related Coverage in Investing:

An IRA is one of the best ways to save money for retirement. Here's exactly how to open one.

9 ways to withdraw money early from your IRA - without paying a penalty

Opening a Roth IRA for your kids offers investment options, tax-free growth, and a great lesson in how to save

The difference between a Roth 401(k) and a traditional 401(k), and how to decide which retirement plan is right for you

How to withdraw from your traditional 401(k) account early - the strategies to avoid penalties and fees

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