When Can You Cash Out a Roth IRA?
A Roth IRA account can build up to be a significant source of wealth. Depending upon circumstances the money in the Roth IRA can look like a useful source of cash. If you have built up some money in your Roth IRA, you might be wondering when you get to take it out. You can actually get it at any time, but there can be some nasty tax consequences if you don't do it right.
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Considerations
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With a Roth IRA, there are actually two pools of money to be considered. First, the money that was actually contributed by the Roth IRA account holder is one pool. The second pool represents all of the earnings and interest on those contributions. For example, if a Roth IRA account holder put $3,000 a year into a Roth IRA for 3 years, then the contributions are $9,000. If, over those three years, the account grew to have a current value of $12,000, then $3,000 are earnings. The rules are different for each pool.
Effects
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Because Roth IRAs are funded with money on which taxes have already been paid, the contributions can be withdrawn at any time without any taxes or penalties. Thus, in the example above, $9,000 could be withdrawn without penalty or taxes at any time. However, the earnings have different rules. To cash out the earnings without penalty, the account holder must be age 59 1/2 or older. Cashing out the earnings before age 59 1/2 subjects them to a 10% tax penalty.
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Misconceptions
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Roth IRAs and Traditional IRAs are often lumped together because they have many similar features. However, a Roth IRA is funded only with post-tax dollars, while a traditional IRA can be funded with pre-tax dollars, so withdrawals are not treated the same. A withdrawal from a traditional IRA is subject to ordinary income tax regardless of the holder's age. A Roth IRA withdrawal is tax-free as long as the holder is age 59 1/2 or older.
Warning
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Just because you can cash in a Roth IRA doesn't mean you should. The money inside the account grows tax-free, and that can be a huge advantage for both overall net worth, and for retirement savings. In addition, just because you can get the money out, doesn't mean you can get it back in. In our example, the account owner can withdraw $9,000 but can only replace $4,000 in 2008 due to contribution limits. Since he normally would have contributed $3,000 anyway, he is really only replacing $1,000 of the withdrawn amount.
Expert Insight
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All other options should be exhausted before withdrawing from any retirement accounts. The amount of money it takes to have a comfortable retirement is very large, and the best hope for getting it is a long period of time compounding the earnings and interest. Any withdrawal severely hampers this process. Never cash in a Roth IRA just to buy something or to pay some bills. Cashing in a Roth IRA should be a last resort to avoid a disaster, not a way to "help out."
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