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A Few Major Exceptional Roth IRA Withdrawal Rules That Might Assist You To Take Money Out Of Roth IRA
Roth IRAs are governed by the IRS; as such there are many Roth IRA withdrawal rules that must be followed before you take money from your account.
In this article we will discuss Roth IRA distributions; when they can be taken, when and if they're taxable, when and if fines might apply, and any exceptions to the Roth IRA withdrawal rules.
In general, distributions that are considered "qualified" and distributions that represent contributions you made to the Roth IRA are not taxable. Additionally, Roth IRA funds that are transferred from an account to another (Roth IRA account), are also not taxable.
But, Roth IRA withdrawals that aren't "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Roth IRA Contributions Can Be Withdrawn Tax Free at Anytime
Let's talk about return of contributions first. What this means is that you could get the contributions made to your Roth IRA out at any time, for any reason, without taxes or fines. Most of the 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 IRA a very flexible investment vehicle.
The ability to get your contributions out at anytime means you can use your Roth IRA as an emergency fund, to save for college costs, or for any financial goal. Let us hope Congress does not ever change this rule!
Qualified Distribution Rules for Taking Earnings Out of a Roth IRA
While you are able to get your contributions out at any time without worrying about paying taxes and/or penalties, this isn't true for the earnings on your contributions. To get the earnings from your Roth IRA without paying taxes or penalties, you must follow the "qualified distribution" rules.
Thus what's a qualified Roth IRA distribution? According to the IRS, a qualified distribution is a Roth IRA withdrawal that:
1. Is made 5 years after the Roth IRA is setup and contributed to, or
2. Is made:
- Once you reach age 59 1/2,
- As you are disabled,
- To a beneficiary (or your estate) after death, or
- Meets the first time home buyer exception (more info later)
Any withdrawals that meet the requirements above won't be subject to income taxes. But, if you take a distribution that is not considered a qualified distribution, you may have to pay a 10% penalty on the amount withdrawn.
Exceptions to the Early Withdrawal Penalty
If you take a withdrawal from a Roth IRA that does not represent your original contributions, or isn't a "qualified" distribution as defined earlier, then you may be subject to a 10% penalty (the IRS calls this extra tax). Thankfully, there're 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're disabled,
- You qualify as a first time home buyer (distributions of up to $10,000 could be taken penalty free to be used towards the purchase of your very first home),
- The distributions are part of a series of substantially equal payments (i.e., those 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 un-reimbursed medical expenses, or
- The distribution is being used to pay qualified higher education expenses.
There're a few other exceptions, but these are the major ones.
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