What are the rules governing taking money out of a Roth IRA?
There are a number of rules for withdrawing money from a Roth IRA. These rules are designed to allow your retirement savings and investments to grow free of any taxes, and are more flexible than traditional IRAs when it comes to withdrawals. Here's what you need to know about Roth IRA withdrawal rules:
1. There is no mandatory age for withdrawal.
This is different than traditional IRAs. A traditional IRA requires that you begin to withdraw money at the age of 70 ½. (You can begin to withdraw money earlier, beginning at age 59 1/2.) No such rules apply for a Roth IRA.
2. No taxes on withdrawals-to a point.
Unlike traditional IRAs, your withdrawals are not taxed, because your contributions are made with already taxed income. As with most things, this rule is subject to particular rules and regulations. For example, any interest earned on your IRA will be taxed if withdrawn.
3. You can withdraw your principal contributions at any point in time free of any penalty. Of course, this is also subject to particular conditions, but you can find out the specifics for your Roth by contacting the institution that you opened it through.
So those are the general rules. Of course, there are some more specific rules that you need to know about that govern withdrawals from Roth IRAs. Let's go into some greater detail.
1. Remember that even if you have more than one Roth IRA, the government considers all of your Roth IRA accounts as one when you make a withdrawal.
2. Not only does the IRS look at all of your Roth IRAs as one when you are making a withdrawal, but you also have to make your withdrawals in a particular order from each Roth IRA. Here's the order for your distributions:
a. from non-taxable contributions made to a Roth IRA annually
b. from conversion contributions made on the first-in, first-out rule
c. from earnings
3. Remember how above I said that there's no mandatory withdrawal age? Well, there is a minimum withdrawal age. If you withdraw from your Roth IRA before the age of 59 ½ you will have to pay an early withdrawal penalty. This penalty will be charged in addition to the taxes that you'll have to pay on your withdrawal, which now is categorized as a non-qualified distribution. Now, there are a few exceptions to this rule:
a. IRA owner's disability (see IRS Publication 590)
b. IRA owner's death
c. the withdrawal is part of equal periodic payments that are paid out over the owner's life
d. you use the money to pay for any medical expenses that are more than 7.5% of your adjusted gross income
e. if you have been on unemployment for more than 12 weeks and you use the money to pay for your medical insurance premiums
f. you use the money to buy your first home (you can withdraw up to $10,000)
g. the money is used to pay either for the owner's higher education or a family member's higher education
h. the money is used to pay back taxes
4. Things are about to get even more complicated. Even if you meet the qualifications of making your withdrawal 1) after you're 59 ½; 2) in the case of your death; 3) after you become disabled; or 4) you buy your first house, you still have to meet another requirement: the five-tax-year requirement.
Essentially, the five-tax-year requirement states that it has been five tax years (not five calendar years-the tax year ends on April 15) since you made your first contribution to your Roth IRA. If you make your first withdrawal before this period, you will be subject to early withdrawal fees and you will have to pay taxes on your withdrawal amount.
In short, you can make withdrawals without fear after the age of 59 ½, if it has been five tax years since your first contribution. If you have met the five tax year requirement, but are younger than 59 ½, then you have to meet one of the exceptions listed above to avoid having to pay considerable taxes and fees for early withdrawal.