Roth IRA Withdrawal Rules

Here's how to avoid taxes and penalties

Retirement accounts are designed to help people save money for when they leave the workforce. These accounts come with different tax advantages—the type of benefit depends entirely on the type of account in which they choose to invest their money. For instance, Roth individual retirement accounts (IRAs) give you after-tax contributions that grow tax-free until you begin making withdrawals during retirement, which are not taxed as income.

But there are rules that apply to these withdrawals that don't apply to traditional IRAs and 401(k)s. Roth IRA contributions are considered to be more flexible because they are already taxed (since the contributions use pretax dollars) and any account growth is tax-exempt. If you don’t meet certain requirements, you could end up owing taxes and a 10% early withdrawal penalty. Learn more about how Roth IRA withdrawals work and what to look out for if you ever need to take an early distribution.

Key Takeaways

  • Withdrawal rules for Roth IRAs are more flexible than those for traditional IRAs and 401(k)s.
  • Account holders can always withdraw their contributions without incurring taxes or penalties.
  • People over 59½ who've held their accounts for at least five years old can withdraw contributions and earnings with no tax or penalty.
  • Special exceptions apply for those who are under 59½ or don't meet the five-year rule if they make withdrawals for a first-time home purchase, college expenses, or other situations.
  • There are no required minimum distributions for Roth IRAs during your lifetime.

Roth IRA Contributions and Earnings

Roth IRA withdrawal rules differ depending on whether you take out your contributions or your investment income. As an investor, it's a good idea to know what each means:

  • Contributions are the money you deposit into an IRA
  • Earnings are your profits—both of which grow tax-free in your account

The annual contribution limit to both traditional and Roth IRAs is $6,500 for 2023, which is a $500 increase from 2022. Individuals aged 50 and over can deposit a catch-up contribution of $1,000 for each tax year.

You can withdraw your Roth IRA contributions at any time and for any reason with no tax or penalties. That's because the contributions are made using after-tax dollars, so you've already paid income taxes on that money. Put simply, if you make a contribution that you withdraw, it's as if you never made the contribution in the first place.

Withdrawals on the earnings in the account work differently. These distributions may be subject to income taxes and a 10% penalty, depending on your age and how long you've had the account. According to the IRS, you are only allowed to withdraw the earnings from your contributions after you turn 59½ and if you've held the account for at least five years. There are, of course, certain exceptions, which we go into below.

Roth IRA Income Limits

As noted above, there are limits to the amount you can contribute to a Roth IRA. But your income can also exclude you from contributing if you exceed the thresholds set by the Internal Revenue Service (IRS). This means that the amount you're allowed to contribute annually to a Roth IRA can be phased out, depending on how much income you earn.

The table below outlines when the contribution phase-out begins in addition to when the phase-out is complete. This means that if you reach the top of each income range, you are no longer eligible to contribute to their Roth IRA.

Roth IRA Eligibility Phase Out Income Ranges
 Filing Status 2022 2023
Single and Head of Household $129,000 to $144,000 $138,000 to $153,000
Married Filing Jointly $204,000 to $214,000 $218,000 to $228,000
Married Filing Separately $0 to $10,000 $0 to $10,000

Roth IRA 5-Year Rule

You can generally withdraw your earnings without owing any taxes or penalties if:

  • You're at least 59½ years old
  • It's been at least five years since you first contributed to any Roth IRA, which is known as the five-year rule

The five-year rule applies regardless of your age when you opened the account. For example, if you are 58 years old when you make your first contribution, you have to wait to withdraw until you're 63 to avoid taxes.

The clock starts ticking on January 1 of the year you made your first contribution to any Roth. Because you typically have until April 15 of the following tax year to contribute (2022 IRA contributions may be made until April 18, 2023), your five years might not be a full five calendar years.For example, if you contributed to your Roth IRA in early April 2020 but designated it for the 2019 tax year, you'll only have to wait until Jan. 1, 2024, to withdraw your Roth IRA earnings tax-free, assuming you’re at least 59½ years old.

With Roth IRA conversions, the five-year clock starts on January 1 the year you made the conversion. For inherited Roth IRAs, it starts when the original owner made the first contribution—not when the account is passed on by inheritance.

For IRA roll-over contributions, any withdrawal of earnings within five years of the date of the contribution generating those earnings will be penalized, no matter when the account was opened.

Roth IRA Qualified Distributions

Qualified distributions are tax-free and penalty-free. As far as the IRS is concerned, a Roth IRA distribution is considered qualified if your account meets the five-year rule and the withdrawal is:

  • Made on or after the date you turn 59½
  • Taken because you have a permanent disability
  • Made by a beneficiary or your estate after your death
  • Used to buy, build, or rebuild your first home for which a $10,000-lifetime maximum applies

Follow these guidelines to avoid the 10% early withdrawal penalty:

  • Withdrawals must be taken after age 59½
  • Withdrawals must be taken after a five-year holding period
  • There are exceptions to the early withdrawal penalty for first-time home buyers and to pay for higher education expenses

Roth IRA Non-Qualified Distributions

Non-qualified distributions are withdrawals that don’t meet the IRS guidelines for qualified distributions. You'll pay taxes at your ordinary income tax rate on earnings plus an additional 10% penalty.

However, you may not have to pay the 10% penalty if one of these exceptions applies:

  • You take a series of substantially equal distributions
  • You have unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (AGI)
  • You pay medical insurance premiums after losing your job
  • The distribution is due to an IRS levy
  • You're taking qualified reservist distributions
  • You need the money for qualified disaster recovery
  • You're taking the distribution to pay for qualified education expenses
  • You're covering the cost of childbirth or adoption expenses, up to $5,000

Here's a quick rundown of the withdrawal rules for Roth IRAs:

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

Regardless of your age, you can withdraw your own contributions to your Roth IRA at any time, penalty-free. That rule does not 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. Interestingly, you may still qualify as a first-time homebuyer even if you've owned a home in the past.

If you meet the five-year rule, you can avoid taxes on the withdrawal. However, if it's been fewer than five years since your first IRA contribution, you'll pay income taxes on the earnings portion of the distribution.

Withdrawals from a Roth IRA come in a specific order:

  1. Contributions
  2. Money converted from another account, such as a 401(k) or traditional IRA
  3. Earnings

There’s a lifetime cap of $10,000, so it’s a one-time deal for most investors. But because contributions come out first, many investors won't need to dip into their earnings. This means they can avoid taxes.

Once you withdraw the money, you have 120 days to use it to buy, build, or rebuild a home. According to IRS rules, you can also use the money to help a child, grandchild, or parent who meets the first-time homebuyer definition.

The IRS considers you a first-time homebuyer if you (and your spouse, if you have one) 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 no matter who benefits, the withdrawal can't exceed your higher education expenses for the year.

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. That means if you use your Roth IRA to pay for education expenses, it could reduce the amount of financial aid you receive.

Account holders can withdraw up to $10,000 in Roth IRA earnings free of both taxes and penalties for a home purchase as they have held the account for at least five years.

You Can Take a Withdrawal, But Should You?

If money is tight, a Roth IRA withdrawal may be the easy solution. Still, if you can find another way to make ends meet, do so. You'll avoid any potential taxes and penalties and, more importantly, you'll keep your retirement savings intact and on track. You can't repay the money that you take out of your Roth IRA. Once you take a withdrawal, that money and its potential earnings are gone forever.

Roth IRAs boast tax-free growth and tax-free withdrawals on qualified distributions. If you withdraw money, you could miss out on years—or even decades—of tax-free earnings and growth. That, of course, can take a big bite out of your retirement nest egg. This is the biggest drawback of taking an early withdrawal.

Here's a quick look at the pros and cons of taking a withdrawal from your Roth IRA.

  • You can withdraw contributions, tax- and penalty-free

  • You can withdraw earnings under some special circumstances

  • You can avoid paying interest on a loan

  • 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. If you don't need the money, you can leave the account alone. Your contributions and earnings can continue to grow.

And if you've had the account for at least five years, you can leave your Roth to a beneficiary tax-free. This makes the Roth a fantastic wealth-transfer strategy.

Should You Have Cash in Your Roth IRA?

Roth IRAs offer great tax benefits. While you don't get a tax break when you contribute, your contributions and earnings grow tax-free. Of course, qualified withdrawals are tax-free, as well.

Because of the flexible withdrawal rules, many investors like to keep an emergency fund in their Roth IRAs—a small portion dedicated to cash or other low-risk investments, such as certificates of deposit (CDs). Since there is a limit to how much you can contribute to your Roth IRA, it may 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 at any point, penalty-free, regardless of your age. You cannot withdraw the earnings on those contributions before you retire tax- and penalty-free until you turn 59½ and you've had the account open for at least five years.

Can You Use Your Roth IRA as Life Insurance?

Since a Roth IRA transfers to your heirs tax-free, it can be used as a form of life insurance. For individuals just looking to cover their funeral costs, starting a Roth IRA at a young age and continuing to contribute to it should cover their funeral costs and help them in retirement.

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 withdraw contributions at any age and the flexibility to withdraw gains before retirement age for certain circumstances. Individuals with a health savings account (HSA) can save their receipts for qualified medical expenses and withdraw from their account at any time, which can make the account easier to withdraw from than a Roth IRA. While far less common, individuals with a 457 plan or a Roth 457 plan have even more withdrawal flexibility than people with a Roth IRA. After they leave the job that sponsored the 457 (usually state or local government work) they can take money out of the 457 plan with no penalties but income tax. If they have a Roth 457 plan they can take money out at any time after separation, for any reason, with no taxes or penalties.

What Is the Roth 5-Year Rule?

Roth IRA rules stipulate that five years must have passed since the tax year of your first Roth IRA contribution before you can withdraw the earnings in the account tax-free.

The Bottom Line

The financial implications, such as taxes, penalties, and loss of future earnings, can make an early withdrawal from your Roth IRA a bad idea. Of course, if you have no other options, it can be comforting to know that your Roth is there for you.

It’s always a good idea to check with a qualified financial professional before making any big decisions about Roth IRA withdrawals. But if you pay close attention to the rules listed above, 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.

Article Sources
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