A Roth IRA is one of the best retirement accounts you can have, because it lets you earn interest on your money tax-free. This means your money will grow and you won’t pay taxes on any of the growth when you take it out in retirement. Roth IRAs also give you the flexibility to withdraw the money you put in—though you don’t necessarily want to.
“It’s the crème de la crème of retirement accounts,” says Cassandra Cummings, founder of The Stocks & Stilettos Society, a community for women investors. “Everybody has a bank account and a debit card. Everybody should have a Roth IRA.”
More than 35% of U.S. households have an IRA, according to the Investment Company Institute, a trade association for investment companies. Of those accounts, nearly 21%, or 26.3 million, are Roth IRAs.
The idea is to save money for your retirement with a Roth IRA. That means that one day you’ll withdraw your funds to replace or supplement your other income. If you pull your money out too soon, not only will you lose out on years of compound interest amounting to potentially thousands of dollars, but there may also be penalties to consider.
Let’s take a look at how and when to optimally withdraw cash from your Roth IRA.
Roth IRA Withdrawal Rules
Before we get into Roth IRA withdrawal rules, know that you can withdraw any amount you have contributed into a Roth IRA without penalty. The real question is whether you want to.
In 2022, you can contribute $6,000 annually into your Roth IRA (if you’re under 50), or $7,000 a year into your Roth IRA if you’re 50 or older. Keep in mind, there are income limits. If you file as a single person, your Modified Adjusted Gross Income (MAGI) must be under $144,000 for tax year 2022. If you’re married and filing jointly, your MAGI must be under $214,000 for tax year 2022. If you exceed these income limits, you can still contribute. You just have to do what is called a backdoor Roth IRA, which is using a traditional IRA conversion to deposit the money. This is a totally legitimate way to deposit your $6,000 into your Roth. Follow the steps here.
You contribute after-tax money into a Roth, which is the money you’ve already paid taxes on. There are zero penalties to withdraw the funds you initially put in, but that does not include earnings or interest, which are considered profits. If you start tapping into your earnings, you may be taxed or incur a 10% penalty, depending on your age and situation. Experts agree it’s best not to tap into your Roth IRA funds unless it’s absolutely necessary. You want your money to stay in your Roth IRA as long as possible to take advantage of the interest that is accruing.
Unlike a traditional IRA, which has required minimum distributions (RMDs) starting at age 72, a Roth IRA doesn’t have these requirements. This means you aren’t forced to take money out of your Roth IRA after reaching a certain age, so your earnings can grow tax-free for as long as you wish. This only applies if you are the original owner of the account.
Withdrawing If You’re Under 59 ½
Retirement accounts are intended for just that — retirement — which is defined as beginning at age 59 ½ for these account purposes. If you withdraw your earnings and gains before this age, you’ll pay a 10% penalty and income taxes. But there are qualified exceptions, which we’ll cover below.
Remember that you do have the option to withdraw your initial contributions without penalty but again, you don’t really want to because you want your money to grow. Plus, since you are only allowed a certain contribution a year, if you pull your money out, you’ll never be able to put it all back in. If at all possible, use money from other sources, like an emergency fund, so your investments get more time to grow tax-free.
You can withdraw Roth IRA contributions any time tax-free and penalty-free, but experts recommend you avoid that. You want your money to be left alone in a Roth IRA in order to build wealth. The best portfolios are usually the ones that are in the market the longest.
If You’re Over 59 ½
If you’ve had your Roth IRA for more than five years, you can withdraw your contributions and earnings without taxes or penalties at any time when you’re over 59 ½. This is why Roth IRAs are so special, so invest early and often if you can.
The Five-Year Rules for Roth IRAs
There are three five-year rules that all Roth IRA owners must adhere to, or pay taxes and/or penalties.
- The first is that you must wait five years from when you made your first contribution to avoid taxes or penalties on your earnings, if you’re 59 ½, regardless of your age when you opened the account.
- The second rule says that you must wait five years before you withdraw any Roth IRA funds from conversions into your account. If you have several conversions, IRS rules state that your oldest conversion gets withdrawn first. If you’re under 59 ½ and make a withdrawal before five years have passed, you’ll pay a 10% penalty unless you qualify for an exception.
- The third rule is for those who inherit a Roth IRA. You’re required to empty the account within five years, either spreading out over time or with a lump sum. Either way, there is no penalty on contributions or earnings if the account is more than five years old. There are stiff penalties of up to 50% if you take longer than five years to empty an inherited Roth IRA, so this is a five-year rule you’ll definitely want to remember if you find yourself in this situation.
The table below shows Roth IRA withdrawal rules by age.
Table of Withdrawal Rules
|Age||Five-Year Rules Met?||Taxes and Penalties for Withdrawals|
|Under 59 ½||No||Taxes and 10% penalty on earnings. You can possibly avoid the 10% penalty, but not the tax, with a qualified exception|
|Under 59 ½||Yes||Taxes and 10% penalty on earnings, with some qualified exceptions for both taxes and penalty|
|59 ½ or over||No||Taxes on earnings, but no 10% penalty. Wait 5 years|
|59 ½ or over||Yes||No taxes and no 10% penalty|
How to Withdraw From a Roth IRA Early Penalty-Free
While Roth IRAs are not intended to be a savings account, Roth IRAs do allow you to withdraw funds without the 10% early withdrawal penalty — but only for a number of exceptions.
If you meet the five-year rule, you won’t pay taxes on these withdrawals if you’re over 59 ½. But if your account is younger than five years, you’ll be responsible for income taxes on the earnings portion (not the contribution portion, which never has taxes or penalties) of your withdrawal.
Here are some of the exceptions to the early withdrawal rules.
First-Time Home Buyer
You can be considered a first-time homebuyer if you or your spouse haven’t owned a home in the previous two years. In that case, you’re eligible to withdraw up to $10,000 from your Roth IRA to buy, build, or rebuild a home. You’re also able to use the money for a parent, child, or grandchild who fulfills the first-time homebuyer criteria.
Note that $10,000 is a lifetime maximum. And once you have the money, you have 120 days to spend it on eligible expenses.
Higher Education Expenses
You can withdraw up to the amount of your yearly higher education expenses for yourself, spouse, children, grandchildren, or great grandchildren to pay for qualified expenses at a college, university, post-secondary educational or vocational school, including:
- Room and board (if you’re enrolled at least half-time)
- Any other required equipment or materials
While your Roth IRA (and other retirement accounts) aren’t counted to calculate your financial aid, withdrawals do count as income and could reduce the amount you receive. Because of this, be sure to run the numbers and make sure it’s worth it before you take the funds.
According to the IRS, there are a number of other exceptions, including:
- Total and permanent disability
- Unreimbursed medical expenses that exceed 10% of your adjusted gross income
- Health insurance premiums if you’re unemployed
- Qualified expenses related to birth or adoption, up to $5,000
- Qualified disaster recovery
- Military leave of at least 180 days
- IRS levy
- And a few other specific reasons
If you really need to grab your money and have one of these reasons, you can avoid the 10% penalty.
If you’re really in a bind, you can withdraw your contributions for a short time and redeposit them within 60 days to avoid penalties. You’ll lose out on earning interest, but if you’re fast, you can get the money back in and keep your Roth IRA contribution limit intact.
This only works if you withdraw your contributions — not your earnings. Keep in mind, you have until tax day of the following year to make contributions for the current year up to the annual limit. If you withdraw contributions from previous tax years, you have 60 days to return the funds to avoid penalties.
Consult with a tax professional to see if taxes or penalties would apply for your situation or if you’d be eligible for any exceptions. If you do make an emergency withdrawal, you’ll need to report it on IRS Form 8606 as part of filing your tax return.
What to Know About Tax Years
According to the IRS, the tax year begins in the year you made your first contribution. Because you always have until mid-April of the following year to make contributions for the previous tax year, your five-year waiting period might not be five full calendar years.
For conversions, the tax year begins on January 1 of the year you make the conversion. And for Roth IRAs you inherit, the tax year started when the original owner made the first contribution, not when you received it.
As an example, you can fully fund your Roth IRA for 2022 all the way to April 15, 2023. Even if you make your deposit that day, your tax year will begin on January 1, 2022, a full 15 months earlier than your contribution date.
Alternatives to Withdrawing From a Roth IRA
Since experts agree not to pull money out of a Roth IRA unless absolutely necessary, there are other options for you.
“From a financial planning perspective,” explains Katherine Fox, CFP, CAP, Philanthropic and Investment Advisor at Arnerich Massena, “the first and most important would be having an emergency savings fund — a cash account that has anywhere from three to 12 months of living expenses saved in it,” depending on your situation.
That, she recommends, should be the first source of funds. Then, if you have other taxable accounts or non-retirement accounts, look to those before you pull from your IRAs.
The reason you want to consider using your Roth IRA as a last resort is because “the tax benefits are so strong and you are limited on how much you can [contribute]. So the more you can leave in there to compound, grow, and save for retirement, the better,” Fox says.
Cummings agrees and also explains that some people use their Roth IRA as an emergency fund, but she doesn’t recommend it. It can be a way to save for retirement and also have for extra funds in case of an emergency, but the best strategy is to have separate accounts, such as a sinking fund, for separate purposes.