Early Roth IRA distributions without penalty

By Stew

On Monday, I answered five common questions about Roth IRA’s. Today I thought we could dwell on one aspect of Roth IRAs, namely, the rules governing Roth IRA withdrawals. In fact, there was one comment from a reader on that post asking for more clarification.

The basic rule of thumb is that you can take a distribution from a Roth IRA without penalty if you started the account at least five years ago and if you are at least 59 and 1/2 years old. The “five year” requirement is satisfied when your Roth IRA account has been open for at least five years. For instance, if you start contributing to a Roth IRA on June 2, 2010, all of the money will be eligible for withdrawal without penalty on June 2, 2015 – including the money that you contributed in May of 2015. The five year rule simply applies to the age of the account, not to how long certain monies have been deposited.

You may also withdraw your own contributions without penalty, as long as the account has been open for at least five years. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions. In other words, while it will not incur any penalty for you take a distribution of the money that you have personally contributed to the Roth IRA, the distributed money will be subject to your usual marginal tax rate.

Before age 59 and 1/2 or before the five year requirement is met, distributions from your Roth IRA will be subject to a 10% penalty in addition to your usual tax rates unless your withdrawal meets one of the following criteria:

  1. Distribution because of disability.
  2. Distribution to an estate or beneficiary in the event of your death.
  3. Distribution for first-time home buyers. You may receive up to $10,000 from your Roth IRA to buy, build, or rebuild a first home
  4. The distributions are part of a series of substantially equal payments. This is a complicated option and you must take the distributions according to the IRS distribution guidelines.
  5. Distributions for significant, unreimbursed medical expenses. The amount that you can take under this exception is found by subtracting 7.5% of your Adjusted Gross Income from your total unreimbursed medical costs.
  6. If you are paying medical insurance premiums after losing your job.
  7. Distributions are not more than your qualified higher education expenses. If you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax.
  8. If the distribution is due to an IRS levy of the qualified plan.
  9. If the distribution is a qualified reservist distribution.
  10. If the distribution is a qualified disaster recovery assistance distribution.
  11. If the distribution is a qualified recovery assistance distribution.

The most legitimate reason to take an early distribution from a Roth IRA is for early retirement. Most financial advisers (and me) do not recommend taking money from an IRA before retirement except under the most extreme circumstances.

Still do not have enough information about the Roth IRA? Check out irs.gov Publication 590 Part 2 Roth IRAs.

Article by Stew

Photo by lownote


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