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Some Key Exceptional Roth IRA Withdrawal Rules Which Might Assist You To Take Money Out Of A Roth IRA
Roth IRAs are governed by the IRS; as such there are lots of 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 could be taken, when and if they're taxable, when and if penalties might apply, and any exceptions to the Roth IRA withdrawal rules.
Generally, distributions that are considered "qualified" and distributions which 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 ), are also not taxable.
But, Roth IRA withdrawals that are not "qualified" or is not a return of your original contributions may be subject to taxes and/or fines.
Roth IRA Contributions Could Be Withdrawn Tax Free at Any Time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 anytime, for any reason, without taxes or fines. Most people are unaware of this rule, and it's a vital one. The ability to get your contributions out tax and penalty free makes 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 objective. Let us hope Congress doesn't ever change this rule!
Qualified Distribution Rules for Taking Earnings Out of a Roth IRA
While you are able to get your contributions out at anytime 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 should follow the "qualified distribution" rules.
Therefore what is a qualified Roth IRA distribution? According to the IRS, a qualified distribution is a Roth IRA withdrawal that:
1. Is made 5 years after the Roth IRA is set up 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 information later)
Any withdrawals that meet the requirements above won't be subject to income taxes. However, if you take a distribution that is not considered a qualified distribution, you may need 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 might be subject to a 10% penalty (the IRS calls this extra tax). Thankfully, there are many exceptions to the 10% early withdrawal penalty.
Following are several situations in which the 10% early withdrawal penalty might 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 first home),
- The distributions are part of a series of substantially equal payments (i.e., these payments must usually last for 5 years or until you reach age 59 1/2, whichever is longer),
- You're 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 some other exceptions, but these are the major ones.
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