Your contributions in a Roth IRA can be accessed at any time, for any reason. However, if you withdraw your earnings before you reach the age of 59½, you may have to pay a tax penalty unless you meet certain conditions. Let’s learn how the Roth IRA withdrawal process works, when you can access your earnings, and how to avoid paying penalties.
You Can Access Contributions Anytime
Your Roth IRA account holds both your contributions and earnings on them. The contributions are the money that you’ve put in after taxes. Your earnings are the money that your investments have made. You can access your contributions at any time, for any reason. You don’t have to pay taxes on them when you withdraw them and there’s no penalty for early withdrawal. This is one of the main benefits of a Roth IRA—you can access your contributions. Since you’ve already paid taxes on the money you’re contributing to a Roth IRA, the IRS doesn’t penalize you for withdrawing that money. No matter how old you are, you can withdraw the amount of money you put in without penalty. The IRS determines whether you’re pulling out contributions or earnings from your Roth IRA based on this order of withdrawal: So, you can withdraw as much as you’ve contributed then your withdrawals count as rollover contributions or earnings and taxes you accordingly.
The 5-Year Rule for Roth IRA Withdrawals
The 5-year rule can be a bit confusing, but it’s important to understand if you want to take money out of your Roth IRA without penalty. Essentially, the 5-year rule states that you can take earnings out of your Roth IRA without penalty as long as the account has been open for at least five years. If your account is less than five years old, you will have to pay a 10% tax penalty on the money you withdraw, in addition to any applicable early withdrawal fees. For example, let’s say you opened a Roth IRA in 2019 and contributed $2,000. In 2022, you want to withdraw $2,500. You can take out the $2,000 that you contributed. But since your account has been open for less than five years, you’ll have to pay taxes on the remaining $500. You may also have an early withdrawal penalty, depending on your age and why you’re withdrawing the money. Even if you are over 59½ or are taking the money out for a qualified reason, you’ll pay taxes (but not penalties) on earnings you withdraw if your account is younger than five years old. Your Age: Younger Than 59½
Qualified Early Distributions
Qualified distributions are those that are taken out for specific reasons outlined by the IRS. You can take qualified distributions without having to pay the 10% penalty, regardless of how long your Roth IRA has been open. However, you may still have to pay taxes on this money. Here are some examples of qualified distributions:
You’re over the age of 59½ You’re disabled You’ve recently had a baby or filed for adoption You’re using the money to purchase a first home The money is being used to pay for college tuition
How Roth IRA Withdrawals Work in Retirement
If you’re at least 59 1/2 and you’ve had your account open for at least five years, you can withdraw your earnings without having to pay a fee or pay taxes on your earnings. You’ll need to report it on IRS Form 8606. This form is used to keep track of your Roth distributions. Unlike traditional IRAs and other investment options, you aren’t required to start withdrawing money from your Roth IRA. There aren’t any required minimum distributions (RMDs). Instead, you can leave the money in there for as long as you’d like. Because of this feature, the Roth IRA is a good way to pass money down to your children or grandchildren. They can take advantage of the tax-free growth. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
