Once you are 59 1/2 years old, a Roth IRA that is at least five years old is qualified. This means you can take out part or all of the money with no penalties and no taxes due. That's a huge incentive to keep money in your Roth until you retire. A financial crisis might force you to tap your Roth IRA early, but you will be able to withdraw at least some funds penalty-free, and perhaps tax-free as well.
There are three situations in which a Roth IRA is qualified even if you aren't 59 1/2. In each case, the Roth must be five years old. If you meet one of these conditions, there's no taxes or penalties for taking money out:
- You inherited the Roth IRA from someone else
- You become permanently disabled
- You withdraw earnings of no more than $10,000 for the purpose of repairing or acquiring a first home
Contributions to Roth IRAs are not tax deductible. Since this means you've already paid income taxes on money you added to a Roth, it's not taxed again when you withdraw it. In addition, Internal Revenue Service IRA rules do not impose a penalty for taking contributed funds out at any time The IRS counts withdrawals as contributed dollars up to the total amount you've put in the account.
For example, suppose you have a Roth with a balance of $50.000. Over the years, your contributions have added up to $20,000, with the rest reflecting gains made by the investments within the IRA. The first $20,000 you remove from the account counts as contributions, and therefore is exempt from penalties and taxes.
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Withdrawing Rollover Money
If you have taken out all of the money you contributed to a Roth IRA, the next dollars withdrawn are considered to have come from any funds from other IRAs that you have rolled over into the account. Since you must pay taxes on rollover funds, this money is not taxed a second time when you pull it out. However, a 10 percent early distribution penalty tax applies unless one f the following conditions is met:
- You are 59 1/2 years old
- The rollover was made at least five years prior to the withdrawal
- The reason for the withdrawal qualifies for an exception to the early distribution penalty. Examples of exceptions allowed by the IRS include using the money to pay qualified higher education bills, cover health insurance premiums while unemployed or pay an IRS levy.
Early Distribution of Earnings
If you take out more money from a Roth IRA than the combined total of all contributed and rollover funds, the withdrawal counts as earnings for tax purposes. If the distribution is not qualified, earnings removed from a Roth are subject to income taxes. The IRS does not make any exceptions to this rule. You also may have to pay the 10 percent early distribution penalty,. As with early distributions of rollover funds, the IRS will waive the penalty if the withdrawal qualifies for an exception.