5 Things to Know About Roth IRA Withdrawals

David Lee Roth did Not Invent the Roth IRA Withdrawal Rules

David Lee Roth did Not Invent the Roth IRA Withdrawal Rules

We spend a lot of time talking about contributions to a Roth IRA and how to open a Roth IRA.

And rightfully so.

The hard part is starting up and sticking to a retirement investing plan. Pulling the money out is easy.

But there are some rules you should be aware of. If you are near retirement, I recommend you spend some money on a independent, fee-only financial advisor, who can explain your Roth IRA withdrawal options to you. In the mean time, I’ll present these 5 facts about Roth IRA withdrawals (or distributions) for you to be aware of:

1. You Can Withdraw Contributions at Any Time

One of the reasons the Roth IRA is so popular is because it’s flexible. You’re putting after-tax dollars into the account as annual Roth IRA contributions, and so you get to take those funds out when you please. There is no penalty or tax payment due on contributions withdrawn from a Roth IRA at anytime. For this reason, people use Roth IRAs to save for retirement, a house down payment, college tuition, and other things. In my opinion that’s a misuse of the account, but I don’t blame people for doing it.

2. You Can Withdraw Earnings at Any Time (but you will likely pay penalties and taxes)

Earnings (the money your contributions make) in a Roth IRA are growing tax-free. A nice benefit. So, the IRS has some rules about what you can do with those earnings. The rules are quite complicated. More complicated than the other Roth IRA rules. So sit back and get ready to have your mind blown. Okay, it’s not that bad. :) If it’s too complicated for you, then just remember what I’ve said above: Roth IRA earnings shouldn’t be touched unless you have some good reason which will help you avoid taxes and penalties. It is, after all, a retirement account. Leave it alone.

3. Retirement or Disability Provides a Clear Path to Tax and Penalty Free Earnings Withdrawal

If you reached retirement age (59.5) and/or you are disabled, you can take your earnings tax and penalty free. These are called “qualified distributions.” You are considered at the end of your earning stage of life and the IRS says you’ve earned your reward: tax free earnings. Congrats! Keep in mind there is a “5 year rule” to be aware of here. Your initial contribution to a Roth IRA needs to have been made 5 or more years prior to the time you withdraw for retirement.

4. First Homes, College, and Hardships Allow for Penalty Free Earnings Withdrawal

If you have an exception, you can take Roth IRA earnings withdrawals without having to pay the 10% penalty. These exceptions include all sorts of things related to health and hardship. See IRS Pub 590 for more. They also include an exception for your first home (up to $10K) and any college expenses (unlimited). Remember, although you can avoid the 10% penalty, you’ll still have to fork over the taxes for these withdrawals.

5. Withdrawals Aren’t Required Until You Die

Unlike some other retirement accounts, the contributions and earnings in a Roth IRA aren’t required to be withdraw at a certain time. You can keep the funds in there till you die. When you die, the funds must be withdraw similar to a Traditional IRA, which is to say they are to be distributed before 5 years after your death.

On that positive note, this sums up my 5 points on Roth IRA withdrawal. Do you have anything to add? Share it in the comments below…

Sources: IRS Publication 590: Individual Retirement Arrangements and Roth IRA Withdrawal Rules.

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Last Edited: June 24, 2011 @ 11:27 am
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

11 comments
Philip Taylor
Philip Taylor

That is a shame that they have a penalty like that. As far as I know you have to follow IRS rules regardless of what the custodian (Ins Company) charges you. If I were you, I would talk to the Ins Co. about the penalty, why you are paying it, and ask if they are collecting it on behalf of the IRS.

Stacey Wilbur
Stacey Wilbur

They are saying an early withdrawal penalty. Have it thru an insurance company. Do I still have to pay taxes on the $162.76 even though they're charging $166.50 before they dispurse?

Philip Taylor
Philip Taylor

@Stacey - I'd like to know more about the penalty the "company" is charging you. What is that for?

Your earnings so far look to be the difference between 2900 and 3062.76, or 162.76. You will have to pay taxes and a penalty on the $162.76 unless you have some type of qualifying hardship. In that case, you can avoid the penalty.

Stacey Wilbur
Stacey Wilbur

I have put in $2900 on my Roth IRA. The accumulated balance is $3062.76. The company will charge me $166.50 penalty to withdraw. Will I have a tax penalty for early withdrawal? The policy is only 3 1/2 years old and I'm 38 years old. As I see it, I've got no "earnings" only contributions, right?

PT
PT

@Kaye - Thanks to you for including me. I submit all the time to that carnival and you are the first host in a while who has included me.

Kaye Swain - SandwichINK for the Sandwich Generati
Kaye Swain - SandwichINK for the Sandwich Generati

Thanks! That's the best explanation I've seen for the Roth IRA! I appreciate the info and I appreciate your including it in the latest Boomer and Senior: News You Can Use Blog Carnival at SandwichINK. Very useful information!

Kacie
Kacie

We are going to set up an IRA with my husband's next paycheck. It'll be intended for retirement, but it also might be tapped to help our house down payment, or if something catastrophic happens and we wipe out our emergency fund and other savings. (hope not!).

I do think it's worth it for people to consider any other avenues before tapping their retirement accounts.

I want the money to grow and to be there in my old age, ya know?

At the same time, owning a house free and clear is a part of our retirement plan, so it might help us get to that point a little quicker (and then be able to invest in other areas to even potentially make up for the withdraw.)

Mike Piper
Mike Piper

Ha! I think that applies to every tax- and investing-related topic for me.

With writing, we get the time to research stuff beforehand rather than being put on the spot. :D

PT
PT

Good point, Mike. The 5 year rule is something I could have expanded on a bit. I made the change above to reflect your comment there.

Agree on your conversion comment. That whole tax basis thing is just hairy. As a CPA, ironically I'd rather write about them than actually do them. :)

Thanks!

sportsbiz
sportsbiz

As I understand it, the five year rule only applies to withdrawals for retirement.  It doesn't apply to withdrawals made under the exceptions for house purchase, education expense or the  other penalty free exceptions. Am I correct?

Mike Piper
Mike Piper

It's admittedly a small point, but I'd suggest changing the above to say, "Your initial contribution to aRoth IRA needs to have been made 5 or more years prior to the time your withdraw for retirement."

Also, I think it's worth mentioning that if you've executed a Roth conversion from a traditional IRA for an amount that was not entirely deductible originally, things get a heap more complicated. :)

All told though, great job writing up a complicated topic!