Can I Take Money out of a Roth IRA for an Emergency?
The main function of a Roth IRA is to invest money for your retirement. If you follow the IRS rules, the money you withdraw after retirement will be exempt from income taxes. Unfortunately, life doesn't always go the way you plan, so you may need to take mosey out of a Roth IRA for an emergency. This should be a last resort. In most cases, you'll lose the tax break and probably will have to pay a penalty tax as well.
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Contributions
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You can withdraw money you've contributed to a Roth IRA at any time. Because you do not receive any income tax deductions for contributed funds, the IRS does not impose any conditions on withdrawals of contributed funds. There's no tax or penalty. However, you must be sure the withdrawn money counted as a contribution, according to IRS ordering rules. You can withdraw money up to the total of your lifetime contributions to a Roth IRA. If you take out more, that money counts as rollover funds or earnings, and you are likely to owe taxes and penalties on that amount.
Penalties
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There's no law that prevents you from withdrawing more funds than you contributed to a Roth IRA. However, unless the withdrawal counts as a qualified distribution, you have to pay income taxes on the withdrawn money that exceeds the contributions amount. In addition, unless the non-qualified distribution falls into one of the IRS exception categories, you'll be assessed a penalty tax of 10 percent of the amount withdrawn.
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Qualified Distributions
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You pay no penalties or income taxes on qualified distributions from a Roth IRA. To be considered a qualified distribution, a withdrawal of earnings or rolled over funds must meet two conditions: First, the Roth IRA must have been open for at least five tax years and rollover funds must be in the account for at least five years. Second, if you become disabled or you inherit the IRA (situations that might involve a financial emergency), a distribution may be considered qualified. Withdrawals made after you reach age 59 1/2 or for the purchase of a first home are also qualified distributions provided the five-year rule is satisfied.
Early Withdrawal
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The IRS provides a number of exceptions to the penalty tax for early withdrawals, mainly for emergencies. However, you still must pay income taxes on the withdrawn funds. You won't be assessed the 10 percent penalty if the money is used to pay health insurance premiums when you are unemployed for 12 weeks or more. You can also withdraw funds without penalty to pay medical expenses not covered by insurance that exceed 7.5 percent of your income. Withdrawals used to pay an IRS levy are also exempt from the 10 percent penalty tax,. If you become disabled, use the money for the purchase of a first home or inherit the Roth IRA, you generally won't be assessed the penalty even if the withdrawal isn't qualified. Other exceptions to the penalty are certain types of annuity and payments for higher education expenses. In each case, income taxes must be paid on the amount withdrawn.
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