A Few Of The Major Exceptional Roth IRA Withdrawal Rules Which May Help You To Take Money Out Of Roth IRA

A Few Of The Major Exceptional Roth IRA Withdrawal Rules Which May Help You To Take Money Out Of Roth IRA

Roth IRAs are controlled by the IRS; as such there're lots of Roth IRA withdrawal rules that must be followed before you take money from your account.

In this article we'll discuss Roth IRA distributions; when they can be taken, when and if they're taxable, when and if penalties might apply, and any exceptions to Roth IRA withdrawal rules.

Normally, distributions that are considered "qualified" and distributions which represent contributions you made to the Roth IRA are not taxable. Additionally, Roth IRA funds that are transferred from one account to another (Roth IRA account), are also not taxable.

But, Roth IRA withdrawals that are not "qualified" or isn't a return of your original contributions might be subject to taxes and/or fines.

Roth IRA Contributions Can Be Withdrawn Tax Free at Anytime

Let's talk about return of contributions first. What this means is that you can get the contributions made to your Roth IRA out at any time, for any reason, without taxes or fines. Most people are unaware of this rule, and it is a critical one. The ability to get your contributions out tax and penalty free makes Roth IRA a very flexible investment vehicle.

The ability to get your contributions out at anytime means you can use your Roth IRA as an emergency fund, to save for college expenses, or for any financial goal. Let us hope Congress doesn't ever change this rule!

Qualified Distribution Rules for Taking Earnings From a Roth IRA

While you're able to get your contributions out at anytime without worrying about paying taxes and/or penalties, this isn't true for the earnings on your contributions. To get the earnings out of your Roth IRA without paying taxes or penalties, you must follow the "qualified distribution" rules.

Thus what is a qualified Roth IRA distribution? Based on the IRS, a qualified distribution is a Roth IRA withdrawal that:

1. Is made five years after the Roth IRA is set up and contributed to, or

2. Is made:

- Once you reach age 59 1/2,
- As you are disabled,
- To a beneficiary (or your estate) after your death, or
- Meets the first time home buyer exception (more info later)

Any withdrawals that meet the requirements above won't be subject to income taxes. However, if you take a distribution that's not considered a qualified distribution, you might need to pay a 10% penalty on the amount withdrawn.

Exceptions to the Early Withdrawal Penalty

If you take a withdrawal from a Roth IRA that does not represent your original contributions, or is not a "qualified" distribution as defined earlier, then you may be subject to a 10% penalty (the IRS calls this extra tax). Thankfully, there are some exceptions to the 10% early withdrawal penalty.

Following are some situations in which the 10% early withdrawal penalty might not apply:

- You are age 59 1/2 or older,

- You're disabled,

- You qualify as a first time home buyer (distributions of up to $10,000 can be taken penalty free to be used towards the purchase of your very first home),

- The distributions are part of a series of substantially equal payments (i.e., these payments must normally last for five years or until you reach age 59 1/2, whichever is longer),

- You're using the withdrawal to pay for significant un-reimbursed medical expenses, or

- The distribution is being used to pay qualified higher education expenses.

There are a few other exceptions, but these are the major ones.

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