A Roth IRA (individual retirement arrangement) is a retirement account that allows you to save and invest money then withdraw it tax-free during your golden years. Unlike a traditional IRA, you make contributions to a Roth IRA from after-tax dollars. Show
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. Key Takeaways
You Can Access Contributions AnytimeYour 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. NoteNondeductible contributions can be withdrawn from your IRA at any time without penalty. A nondeductible contribution is one that you don't get a tax deduction for when you make it. 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 WithdrawalsThe 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. NoteThe timeline starts on the first day of the tax year for which you made your first contribution to the Roth IRA. So, if you opened your Roth IRA on April 15, 2020, and contributed money for 2020, your five-year period would begin on Jan. 1, 2020. 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
Your Age: Older Than 59½
As you can see, your age, the age of your account, and the reason you’re pulling money out all play a role in determining whether you’ll be paying fees and taxes. Qualified Early DistributionsQualified 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:
NoteIf you're not sure whether or not your distribution is qualified, talk to your accountant or financial advisor. They'll be able to tell you if you're eligible for a penalty-free withdrawal. How Roth IRA Withdrawals Work in RetirementIf 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. Frequently Asked Questions (FAQs)Under what condition are you unable to make tax-free withdrawals from your Roth IRA?To make tax-free withdrawals on your Roth IRA earnings, you must meet two qualifications. First, your Roth IRA must have been open for at least five years. Second, you must be over 59½ or have a qualifying event. What is the penalty for unqualified early withdrawals from a Roth IRA?If you're taking money out of your Roth IRA before it's been open for at least five years, you'll have to pay a 10% penalty on top of any applicable early withdrawal fees. Because of this fee, it’s important to keep track of how long you’ve had your account. This will help you adhere to the Roth IRA rules. 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! What is the 5The 5-year rule on Roth conversions requires you to wait five years before withdrawing any converted balances — contributions or earnings — regardless of your age. If you take money out before the five years is up, you'll have to pay a 10% penalty when you file your tax return.
How much can I withdraw from my IRA at age 60?For reasons now lost to legislative history, lawmakers set the age for taking penalty-free distributions from your IRA at 59 1/2. Once you reach this age, you're allowed to withdraw as much money as you want from your IRA without penalty.
How early can you retire with Roth IRA?Roth Conversions
If you plan to retire early, you can withdraw your contributions to a Roth IRA before you are 59½ years old, but you must wait until after that age to withdraw your investment earnings.
What happens if you withdraw from Roth IRA early?If you withdraw contributions before the five-year period is over, you might have to pay a 10% Roth IRA early withdrawal penalty. This is a penalty on the entire distribution. You usually pay the 10% penalty on the amount you converted. A separate five-year period applies to each conversion.
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