Many people invest in the Roth IRA because it offers tax free growth, tax free withdrawals during retirement, and tax diversification while contributing to the retirement account.
I know I’m all about “tax free”! Unfortunately though, there are times when you end up needing the money you’ve put in your Roth IRA before you retire.
Of all the retirement account options you have, the Roth IRA is one of the most flexible in that it does allow you to make withdrawals of money you contributed at any time, without hefty early withdrawal penalty fees or tax penalties, under certain conditions.
If you make an ineligible withdrawal from your Roth IRA before you reach retirement age, you could end up paying a 10% early withdrawal penalty.
The last thing you want do is give more to the IRS than they deserve.
Sorry, IRS. I don’t mind paying what is owed to you, but I’d rather not give you a dime more.
We can still be friends, right?
Understanding Roth IRA Withdrawals
For the most part, you can withdraw the money you personal contributed to a Roth IRA at any time without taxes or penalties. You’ve already paid taxes on the money you contribute to a Roth IRA so you don’t need to pay tax on that money again when it’s taken out.
You cannot withdraw any of the earnings your contributions have made without penalty until you reach the age of 59 ½ and have had your Roth IRA for at least 5 years.
If you opened an IRA at the age of 58, normally you could begin receiving distributions from it at the age of 59 ½ but you’ll need to wait until you’re 63, five years after opening it, before you can pull any earnings from your Roth IRA penalty and tax free.
As with any rule, there are exceptions to withdrawals and distributions for Roth IRAs.
Qualified Roth IRA Distributions
A qualified distribution is a withdrawal from a Roth IRA that will be taken tax and penalty free. Qualified distributions are made after the age of 59 ½ and after the account has been opened for at least 5 years. Other qualified distributions may be taken if you become disabled, or for your first home. If you use money from your Roth IRA toward the cost of your first home, or the first home of your children or grandchildren. You can take up to $10,000 per Roth IRA account. Payments to a beneficiary after your death are considered qualified distributions, as well.
Non-Qualified Roth IRA Distributions
A non-qualified distribution is a withdrawal of money from your Roth IRA which are subject to taxes and/or early withdrawal penalties. Most non-qualified distributions will be taxed as income, and charged a 10% early withdrawal penalty (don’t be generous to the IRS), except for the following exceptions which are only subjected to income tax but not the 10% penalty:
- Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
- Payment for medical insurance premiums after you lose your job
- Distribution is due to an IRS levy
- Distributions are less than your qualified higher educational expenses for you or for your spouse, children or their descendants.
Should You Take Money from Your Roth IRA?
Just because you can make penalty and tax free withdrawals from your Roth IRA doesn’t mean it’s a good idea! It’s kind of like going to the Chinese Buffet. Just because you can get your fourth plate of General Tso’s chicken, doesn’t mean you should! (Although, I will admit that the picture above is pretty enticing) While it may not cost you as much to take money from a Roth IRA when compared to other retirement accounts, it still has a potential negative effect on your long term retirement savings goals.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions apply.
Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.