What are the Roth IRA Distribution rules?
You need to know, especially if you plan on withdrawing money from a Roth any time in the near future.
The cost of ignorance, in the form of unexpected taxes or penalties, could be quite high.
So to make sure this doesn't happen to you, it's essential to make sure any withdrawal is a "qualified distribution."
Why?
Because a qualified distribution is free of both taxes and penalties...
That's nice, you say.
So what's a qualified distribution?
While that's a more in-depth discussion, all you need to know for now are the following points:
• You can always withdraw your principal penalty-free
• Usually earnings can NOT be withdrawn before age 59 ½ penalty-free
• Usually earnings can be withdrawn after age 59 ½ penalty-free
• Your account must be open at least 5 tax years before earnings withdrawal
Learn these rules governing Roth IRA withdrawals, and you'll know about withdrawing funds from your account than you need to know (accountants can worry about the rest)...
Your Roth IRA Principal Contributions
You can always withdraw funds from your Roth tax-free and penalty-free as long as you're withdrawing a dollar amount equal to or less than your original contribution amount.
This isn't the case with most retirement accounts, such as the traditional IRA.
Since your account is funded with after-tax income, the IRS views you as having already paid income tax on the contribution.
As a result, don't worry about triggering taxes or penalties when you withdraw a principal contribution...
However, you should worry about triggering taxes and penalties if you withdraw the earnings which resulted from your original principal contribution.
For example, say you contribute $1,000 to your Roth IRA in Year 1.
In Year 2, disaster strikes and you need the $1,000 after all...
However, the $1,000 is now worth $1,200 because your investment gained 20% during the course of the year.
Under the withdrawal rules, you can take out the original $1,000 contribution without triggering taxes or penalties.
But if you withdraw the $200 in earnings, you trigger an early withdrawal penalty of 10% as well as income taxes...
Roth IRA Withdrawals Before Age 59 1/2
As previously stated, when you make a principal contribution withdrawal, it's always free of penalties and taxes.
However, withdrawal of your investment gains is not.
For those younger than age of 59 1/2, investment gains withdrawals from a Roth are most likely subject to a ten-percent early withdrawal penalty and income taxes.
Exceptions do exist...
But, generally speaking, any investment gain withdrawals prior to age 59 ½ trigger both taxes and penalties.
Roth IRA Withdrawals After Age 59 1/2
The day you turn 59 ½, and any day after that...
You can withdraw investment gains free of penalties and taxes.
For example, let's say at the age of 35, you invested $4,000 in your Roth IRA and never made another contribution.
At age 60, your account is worth $17,500.
Since you've surpassed the minimum age of 59 1/2, you withdraw every penny of that $17,500 free of penalties and taxes.
However, this assumes your Roth IRA has met the minimum five-year holding period...
Roth IRA Earnings Must Be Invested Five Years
In order to withdraw investment earnings free of penalties and taxes, even once you're past the age of 59 ½, your original contribution or conversion must have been made at least five tax years previous to the withdrawal...
For example, let's say you start a Roth in 2005 at age 57 and contributed $4,500.
In 2008, even though you're 60 years old, you can NOT take a withdrawal of any investment gains on the $4,500 contribution without being subject to penalties, taxes, or both.
Why?
Because your Roth IRA never met the minimum five-year tax holding period.
Instead, you must wait until January 2009 before withdrawing any investment gains free of penalties and taxes.
Why 2009?
Because five tax years will have passed by then... 2005... 2006... 2007... 2008... and 2009.
Roth IRA distribution rules
Roth IRA distribution rules