Roth IRA Withdrawal Rules: When Can You Take Money Out of a Roth IRA?

IRAs are governed by the IRS; as such there are many Roth IRA withdrawal rules that must be followed before you take money out of your account.In this article we’ll discuss IRA withdrawal rules including when distributions can be taken, when and if they are taxable, when and if penalties might apply, and any exceptions to the withdrawal rules.In general, distributions that are considered “qualified” and distributions that represent contributions you made to the Roth IRA are not taxable. In addition, Roth IRA funds that are transferred from one account to another, are also not taxable.However, a withdrawal that is not “qualified” or is not a return of your original contributions may be subject to taxes and/or penalties.Roth IRA Contributions Can Be Withdrawn Tax Free at Any TimeLet’s talk about return of contributions first. One of the least known Roth IRA withdrawal rules is that you can take your contributions out at any time for any reason, without paying taxes or penalties. Most people are unaware of this rule, and it’s an important one. The ability to get your contributions out tax and penalty free makes the Roth a very flexible investment vehicle.The ability to get your contributions out at any time means you can use your Roth IRA as an emergency fund, to save for college expenses, or for any financial goal. Let’s hope Congress doesn’t ever change this rule!Qualified Distribution Rules for Taking Earnings Out of a Roth IRAWhile you are able to get your contributions out at any time without worrying about paying taxes and/or penalties, this is not true for the earnings on your contributions. To get the earnings out of your Roth IRA without paying taxes or penalties, you must follow the “qualified distribution” rules.So what is a qualified Roth IRA distribution? According to the IRS, a qualified distribution is a Roth withdrawal that:1. Is made 5 years after the account is setup and contributed to, or
2. Is made:
1. Once you reach age 59 1/2,
2. Because you are disabled,
3. To a beneficiary (or your estate) after your death, or
4. Meets the first time home buyer exception (more info later)Any withdrawals that meet the requirements above will not be subject to income taxes. However, if you take a distribution that is not considered a qualified distribution, you may have to pay a 10% penalty on the amount withdrawn.
Conversions or Rollover Contributions to a Roth IRARoth IRAs that were converted from traditional IRAs or were rolled over from a qualified retirement plan (401K, 403B, etc.) have special rules. In general, if you take a Roth IRA withdrawal from an account that was converted from a traditional IRA within 5 years of the original conversion date, you may have to pay a 10% penalty on the amount taken out.This rule applies to each conversion, so if you do a Roth conversion in 2008 you can’t take a withdrawal until 2013; if you do another conversion in 2010, you can’t withdraw that money until 2015, etc. The good news is the 5-year conversion period starts on January 1 of the year of the conversion. So if you did a conversion on December 15, 2009, the 5-year period starts on January 1, 2009, thereby effectively shortening the 5-year period for conversions made later in the year.Bottom line on amounts that were converted, unless you meet one of the exceptions (defined below), you will need to wait five years to take withdrawals tax and penalty free.Exceptions to the Early Withdrawal PenaltyIf you take a withdrawal out of a Roth IRA that does not represent your original contributions, or is not a “qualified” distribution as defined earlier, then you may be subject to a 10% penalty (the IRS calls this additional tax). Thankfully, there are several exceptions to the 10% early withdrawal penalty.Following are several situations in which the 10% early withdrawal penalty may not apply:* You are age 59 1/2 or older,
* You are disabled,
* The withdrawal is from an inherited IRA,
* You qualify as a first time home buyer (distributions of up to $10,000 can be taken penalty free to be used towards the purchase of your first home),
* The distributions are part of a series of substantially equal payments (i.e., these payments must generally last for 5 years or until you reach age 59 1/2, whichever is longer),
* You are using the withdrawal to pay for significant unreimbursed medical expenses,
* You are paying medical insurance premiums after losing a job, or
* The distribution is being used to pay for qualified higher education expenses.There are a few other exceptions, but these are the main ones.When you take distributions out of a Roth, there are certain ordering rules that apply to determine whether you are taking tax-free contributions out or if you are taking earnings out that may be subject to taxes and penalties.Roth IRA Withdrawal Rules: The Order of DistributionThe IRS considers any Roth IRA withdrawals to be distributed in the following order:1. Regular contributions are withdrawn first (this is beneficial as contributions can be taken out tax free at any time),
2. Conversions from traditional IRAs and rollover contributions from qualified plans come out second. This is also beneficial if you have met the 5-year period for any of these amounts.
3. Finally, your earnings come out last. Since earnings withdrawn that don’t meet the “qualified” distribution rules are subject to the 10% early withdrawal penalty, you want to take these out last.