Roth IRA Withdrawal Rules

Here's how to avoid taxes and penalties

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The withdrawal rules for Roth individual retirement accounts (IRAs) are generally more flexible than those for traditional IRAs and 401(k)s. Still, you’ll want to do your homework before making any Roth IRA withdrawals. If you don’t meet certain requirements, you could end up owing taxes and a 10% early withdrawal penalty.

Key Takeaways

  • Withdrawal rules for Roth IRAs are more flexible than those for traditional IRAs and 401(k)s.
  • Account-holders can always withdraw the money they contribute 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 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.

Contributions and Earnings

Roth IRA withdrawal rules differ depending on whether you take out your contributions or your investment income. Contributions are the money you deposit into an IRA, while earnings are your profits. Both grow tax-free in your account.

You can withdraw your Roth IRA contributions at any time, for any reason, with no tax or penalties. That's because you make contributions with after-tax dollars, so you've already paid income taxes on that money.

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.  

The annual contribution limit to both traditional and Roth IRAs is $6,000 for 2021 and 2022. Individuals aged 50 and over can deposit a catch-up contribution in the amount of $1,000.

Roth IRA Income Limits

The annual amount you can contribute to a Roth IRA is limited and can be phased out, depending on how much income you earn. For the 2021 tax year, the income phase-out range for singles is $125,000 to $140,000. For 2022 contributions, the income phase-out range has been increased from $129,000 to $144,000.

In other words, contributions cannot be made to a Roth if your income exceeded $140,000 in 2021 or $144,000 in 2022. For married couples who file a joint tax return, the Roth income phase-out range for 2021, it's $198,000 to $208,000 and $204,000 to $214,000 for 2022.

Roth IRA 5-Year Rule

In general, you can withdraw your earnings without owing taxes or penalties if:

  • You're at least 59½ years old, and
  • It's been at least five years since you first contributed to any Roth IRA (the five-year rule).

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

The clock starts ticking on January 1 of the year you made your first contribution to any Roth. Because you have until April 15 of the following tax year to make a contribution, 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 of the year you made the conversion. And for inherited Roth IRAs, it starts when the original owner made the first contribution—not when the account is passed on by inheritance.

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 (a $10,000-lifetime maximum applies)

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're taking a series of substantially equal distributions
  • You have unreimbursed medical expenses exceeding 10% of your adjusted gross income (AGI)
  • You’re paying 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

First-Time Homebuyer Exception

There are several IRS exceptions that let you take money out of your Roth IRA without paying a penalty. One of the key ones 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 $10,000-lifetime cap, 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.

You Can Take a Withdrawal, But Should You?

If money is tight, a Roth IRA withdrawal can be an 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 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.

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

  • You can withdraw earnings under some special circumstances

  • 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

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).

Once you've set aside enough cash for emergencies, you can focus on investments that benefit from the Roth account's tax-free growth—choices like mutual funds, exchange-traded funds (ETFs), and dividend-paying stocks.

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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  1. Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), etc.," Page 3. Accessed Nov. 6, 2021.

  2. Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), etc.," Page 4. Accessed Nov. 6, 2021.

  3. Internal Revenue Service. "Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs)." Accessed Nov. 6, 2021.

  4. U.S. Congress. "H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019." Section 113. Accessed Nov. 6, 2021.