| Roth IRA Withdrawal Rules | |||
|---|---|---|---|
| Your Age | Five-Year Rule Met? | Taxes and Penalties on Withdrawals | Qualified Exceptions |
| 59 ½ or older | Yes | Tax-free and penalty-free. | N/A |
| 59 ½ or older | No | Tax on earnings but no penalty. | N/A |
| Younger than 59 ½ | Yes | Tax and 10% penalty on earnings. You may be able to avoid both if you have a qualified exception. | - First-time home purchase - Due to a disability - Made to a beneficiary or your estate after your death |
| Younger than 59 ½ | No | Tax and 10% penalty on earnings. You may be able to avoid the penalty but not the tax if you have a qualified exception. | First-time home purchase; Qualified education expenses; Unreimbursed medical bills; Health insurance premiums while you're unemployed; Due to a disability; Childbirth or adoption expenses |
You can withdraw your own contributions to your Roth IRA penalty-free at any time, regardless of your age. But that rule doesn't apply to any earnings that result from those contributions.
First-Time Homebuyer Exception
Several IRS exceptions let you withdraw money from your Roth IRA without paying a penalty. A primary exception is for first-time homebuyers. You may still qualify as a first-time homebuyer even if you've owned a home in the past.
You can avoid taxes on the withdrawal if you meet the five-year rule but you'll pay income taxes on the earnings portion of the distribution if it's been fewer than five years since your first IRA contribution. Withdrawals from a Roth IRA come in a specific order:
- Contributions
- Money converted from another account such as a 401(k) or traditional IRA
- Taxable earnings
There’s a lifetime cap of $10,000, so this is a one-time deal for most investors. But many investors won't have to dip into their earnings because contributions come out first. This means they can avoid taxes.
You have 120 days to use the money to buy, build, or rebuild a home after you withdraw it. You can also use the money to help a child, grandchild, or parent who meets the first-time homebuyer definition.
Note
The IRS considers you to be a first-time homebuyer if you and your spouse haven’t owned a home during the previous two years.
Higher-Education Expenses
You can take penalty-free withdrawals from your Roth IRA to pay for higher education expenses at a college, university, vocational school, or other post-secondary educational institution. But you'll still be on the hook for income taxes on the earnings portion. Qualified expenses include:
- Tuition
- Fees
- Books
- Supplies
- Required equipment
- Room and board (if you're at least a half-time student)
The distribution can be used to help out your spouse, children, grandkids, or great-grandkids (and, of course, you). But the withdrawal can't exceed your higher education expenses for the year no matter who benefits.
Keep in mind that Roth IRAs and other retirement accounts aren't counted as assets on the Free Application for Student Aid (FAFSA). However, withdrawals count as income. It could reduce the amount of financial aid you receive if you use your Roth IRA to pay for education expenses.
You Can Take a Withdrawal, But Should You?
A Roth IRA withdrawal may be the easy solution if money is tight, but if you can find another way to make ends meet, you should do so. You'll avoid any potential taxes and penalties and you'll keep your retirement savings intact and on track. You can't repay the money that you take out of your Roth IRA. That money and its potential earnings are gone forever once you take a withdrawal.
Roth IRAs boast tax-free growth and tax-free withdrawals on qualified distributions. You could miss out on years or even decades of tax-free earnings and growth if you withdraw money. That can take a big bite out of your retirement nest egg and it's the biggest drawback of taking an early withdrawal.
Pros
You can withdraw contributions, tax- and penalty-free
You can withdraw earnings under some special circ*mstances
You can avoid paying interest on a loan
Cons
Withdrawing earnings incurs penalties and taxes if you haven't had the account for five years or are under 59½
You can't repay the money
You miss out on future tax-free growth
Required Minimum Distributions (RMDs)
Unlike traditional IRAs, there are no required minimum distributions (RMDs) for Roth IRAs during your lifetime. You can leave the account alone if you don't need the money. Your contributions and earnings can continue to grow.
And you can leave your Roth to a beneficiary tax-free if you've had the account for at least five years. This makes the Roth a fantastic wealth-transfer strategy.
Should You Have Cash in Your Roth IRA?
Many investors like to keep an emergency fund in their Roth IRAs because of the flexible withdrawal rules. A small portion can be dedicated to cash or other low-risk investments, such as certificates of deposit (CDs). But there's a limit to how much you can contribute to your Roth IRA, so it might be a better idea to keep your cash in a non-retirement account.
Take advantage of the Roth IRA's tax-free growth and invest in more aggressive options like mutual funds, exchange-traded funds (ETFs), or a real estate investment trust (REIT) and dividend-paying stocks. These options would be taxed very heavily in a taxable account or one where you pay taxes on growth and distributions like a traditional IRA.
Can You Get Money From a Roth IRA Before Retirement?
Yes, you can withdraw your own contributions from your Roth IRA penalty-free at any time, regardless of your age. But you can't withdraw the earnings on those contributions tax- and penalty-free until you reach age 59½ and you've had the account open for at least five years.
Can You Use Your Roth IRA as Life Insurance?
A Roth IRA transfers to your heirs tax-free, so it can be used as a form of life insurance. Starting a Roth IRA at a young age and continuing to contribute to it should cover your funeral costs and help you in retirement as well.
Is a Roth IRA the Easiest Retirement Account to Withdraw From?
The Roth IRA is the easiest common retirement account to withdraw from because of the ability to take out contributions at any age and the flexibility to withdraw gains before retirement age for certain circ*mstances. But individuals with a 457 plan or a Roth 457 plan have even more withdrawal flexibility than people with Roth IRAs. They can take money out of the 457 plan with no penalties, but face income tax after they leave the job that sponsored the 457, usually state or local government work. They can take money out at any time after separation, for any reason with no taxes or penalties if they have a Roth 457 plan.
The Bottom Line
Financial implications such as taxes, penalties, and loss of future earnings can make an early withdrawal from your Roth IRA a bad idea. But it can be comforting to know that your Roth is there for you if you have no other options.
It’s always a good idea to check with a qualified financial professional before making any big decisions about Roth IRA withdrawals. But you’ll be well on your way to a solid withdrawal plan that protects your assets while allowing your retirement cash to take care of your family if you pay close attention to the rules.
