If you absolutely need to, you can take an early withdrawal from Roth IRA contributions under certain conditions. Compared to a Traditional IRA or 401k plan, this is a huge advantage because those plans generally have a 10% penalty tax (on top of the regular taxes you’ll pay) if take the money out before age 59-1/2. BUT don’t pop the champagne and run to the bank just yet! The rules are a little more stringent than you may realize at first.
The IRS Rules for an Early Withdrawal from Roth IRA Contributions:
First of all, you’re only allowed to take the money out of your contributions – the money you put in. This is different from your earnings – the money you make from your investments. Similar to the Traditional IRA and 401k, your earnings are subject to the 10% penalty tax all the way up to age 59-1/2 unless you qualify for special hardship conditions.
In terms of the contributions, one of the most misunderstood statements is that you can take them out for any reason after only waiting five years from when you first invested them. However, after a little closer review of the rules, you will find that this is not true!
According to the IRS’s official publication on the Roth IRA rules, a distribution (money taken out of the IRA) is only “qualified” if it meets the following:
- Made on or after the date you reach age 59½,
- Made because you are disabled,
- Made to a beneficiary or to your estate after your death, or
- One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).
The IRS has a great flow chart that summarizes these rules:
Basically as you can see, unless you’re using your money for a home, disability, or death, you will not be able to withdraw your funds without paying the 10% excess penalty tax.
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Michael @ The Student Loan Sherpa says
This is great information. Yet another Roth IRA advantage… if you play by the rules.