Although it’s best to wait until retirement to use your retirement funds, so you fully benefit from the compounded interest made on your funds, there are times when you may need to make a withdrawal to cover an unexpected expense. Roth IRAs are different from Traditional IRAs when it comes to withdrawal rules, so you will want to understand to rules and regulations related to Roth IRAs before taking out funds. Taking too much, for instance, could result in additional taxes and penalties. Here is a basic outline explaining when you can withdraw, and how much, from a Roth IRA.
Before age 59 ½
If you are younger than the age of retirement, you can still take withdrawals, but you will be limited on how much you can take. Roth IRA owners are allowed to make withdrawals on their contributed funds tax-free and penalty-free at any time. However, withdrawals on earnings will be subject to both taxes and penalties. For instance, if you have only had your account for one year, you made $5,000 in contributions, and it appreciated to $5,200, you could only withdraw the $5,000 without taxes or penalties.
If you are planning on withdrawing more than just your combined contributions, there are a few points to keep in mind. First, the five-year rule may save you from having to pay penalties or taxes. If you have had your Roth IRA account for more than five years, you won’t have to pay a penalty on your earnings withdrawal. Below age 59 ½, you will still be subject to paying taxes on your earnings withdrawal unless you meet any of the following criteria:
- You use the funds for a first-time home purchase—up to $10,000 lifetime maximum
- You pass away or become disabled
- You use the funds to pay for unreimbursed medial expenses exceeding 10% of your AGI (7.5% for 2017-2018)
- You use the funds to pay for medical insurance after losing your job
- You use the funds to pay for higher education tuition for you, your children, or your grandchildren
- You use the funds as a qualified disaster recovery assistance
- The withdrawal is part of a substantially equal periodic payment plan—lasting for at least five years.
If you have had your account for fewer than five years, then you will still be subject to taxes, but not penalties on your earnings if you meet the above requirements.
Ages 59 ½ to 70
Again, Roth IRA plan holders can take distributions on their contributions at any time. However, within this window of time, you may be subject to taxes but not penalties on earnings if you have had your account for fewer than five years. After age 59 ½, if you have had your account for more than five years, you can take withdrawals on earnings without any taxes or penalties.
Age 70 ½ and older
If you have had your account for fewer than five years, withdrawals on earnings will be subject to taxes but not penalties. If you have had your account for more than five years, then you can withdraw earnings without paying any taxes or penalties.