When Can I Start to Get Distribution on a Roth IRA?
Despite the intention of Roth IRAs being to help you save for retirement, you can actually begin taking distributions from your account at any time. However, to encourage the use of Roth IRAs for retirement savings, the Internal Revenue Service (IRS) imposes early-withdrawal penalties on certain nonqualifying distributions.
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Defining Qualified Distributions
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Your Roth IRA must be open for a minimum of five years from the first day of the first tax year you made a contribution. For example, if your first Roth IRA contribution occurred during the 2010 tax year, you satisfy the five-year rule beginning in 2015. In addition to satisfying the five-year rule, you must also be either 59-1/2 years old, permanently disabled or taking out no more than $10,000 for a first home.
Splitting Early Distributions
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When you take an early distribution, the distinction between contributions deposited in the account and earnings made on those contributions becomes significant. When you take an early distribution, the IRS permits you to remove your contributions first. You do not have to pay taxes or penalties when you take out your contributions, even when it is an early distribution. When you deposited the money in your Roth IRA, you did not deduct it, so the IRS does not penalize you for taking it out. However, the IRS does hit you with taxes and penalties if your early distribution dips into the earnings.
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Calculating Taxes and Penalties
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The early-withdrawal penalty is 10 percent of the taxable portion of your early distribution. If you have no earnings in your distribution, you owe no taxes or penalty. To figure the penalty on earnings, multiply 0.1 by the amount of the distribution. For example, if you took out $3,000 in earnings, multiply $3,000 by 0.1 to find you owe a $300 penalty. Next, to find the income taxes, multiply your tax rate by the amount of earnings distributed. For example, if you pay 26 percent in taxes, multiply $3,000 by 0.26 to find you owe an additional $780 in income taxes.
Avoiding Penalties
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You can avoid the penalties on your early distribution if you meet one of the exceptions permitted by the IRS. These are the same exceptions as for traditional IRAs, and include medical expenses greater than 7.5 percent of your adjusted gross income, medical insurance premiums while unemployed, and college costs. If you are permanently disabled or taking out no more than $10,000 for a first home, but your Roth IRA does not satisfy the five-year requirement, you do not have to pay the early-withdrawal penalty.
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