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A Few Major Exceptional Roth IRA Withdrawal Rules Which May Assist You To Take Money Out Of A Roth IRA
Roth IRAs are controlled by the IRS; as such there're many Roth IRA withdrawal rules that should be followed before you take money out of your account.
Here we'll discuss Roth IRA distributions; when they can be taken, when and if they're taxable, when and if penalties might apply, and any exceptions to Roth IRA withdrawal rules.
Normally, distributions that are considered "qualified" and distributions that represent contributions you made to the Roth IRA aren't taxable. In addition, Roth IRA funds which are transferred from one account to another (Roth IRA account), are also not taxable.
But, Roth IRA withdrawals that are not "qualified" or isn't a return of your original contributions might be subject to taxes and/or penalties.
Roth IRA Contributions Could Be Withdrawn Tax Free at Any Time
Let's discuss about return of contributions first. What this means is that you can get the contributions made to your Roth IRA out at any time, for any reason, without taxes or fines. Most people are unaware of this rule, and it is a vital one. The ability to get your contributions out tax and penalty free makes the Roth IRA a very convenient investment vehicle.
The ability to get your contributions out at any time means you could use your Roth IRA as an emergency fund, to save for college expenses, or for any financial goal. Let us hope Congress doesn't ever change this rule!
Qualified Distribution Rules for Taking Earnings From a Roth IRA
While you're able to get your contributions out at any time without worrying about paying taxes and/or fines, this is not correct 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.
Therefore what is a qualified Roth IRA distribution? Based on the IRS, a qualified distribution is a Roth IRA withdrawal that:
1. Is made five years after the Roth IRA is setup and contributed to, or
2. Is made:
- When you reach age 59 1/2,
- Because you're disabled,
- To a beneficiary (or your estate) after your 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. However, if you take a distribution that's not considered a qualified distribution, you might have to pay a 10% penalty on the amount withdrawn.
Exceptions to Early Withdrawal Penalty
If you take a withdrawal out of a Roth IRA that doesn't 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 extra tax). Thankfully, there are some exceptions to the 10% early withdrawal penalty.
Following are some situations in which the 10% early withdrawal penalty may not apply:
- You're age 59 1/2 or older,
- You are disabled,
- You qualify as first time home buyer (distributions of up to $10,000 can 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., these payments must normally last for five years or until you reach age 59 1/2, whichever is longer),
- You are using the withdrawal to pay for vital un-reimbursed medical expenses, or
- The distribution is being used to pay for qualified higher education costs.
There are a few other exceptions, but these are the major ones.
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