Can You Take a Roth IRA Withdrawal Without Penalties?
You can typically take penalty-free withdrawals from Roth Individual Retirement Accounts if you are over the age of 59 1/2. The Internal Revenue Service uses age 59 1/2 as the retirement age for tax purposes, and withdrawals from retirement accounts prior to that age are often subject to a premature withdrawal penalty.
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Roth Contributions
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You cannot deduct Roth IRA contributions from your taxable income; consequently, Roth contributions are funded with after-tax earnings. This means that you do not have to pay income tax on withdrawals of principal from your Roth account. You can use your Roth money to invest in a number of different instruments, and your account grows on a tax-deferred basis. The IRS tax code requires investors with other kinds of IRAs to begin making withdrawals no later than age 70 1/2 but there are no withdrawal requirements for Roths.
Five-Year Rule
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Generally, you do not have to pay taxes on withdrawals of principal or interest that you take after reaching the age of 59 1/2. However, the IRS tax code includes a five-year rule under which withdrawals of earnings, regardless of your age, are taxable if you make a withdrawal within five years of investing the money. In addition to paying federal income tax on the earnings, you also have to pay a 10 percent premature withdrawal penalty.
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Premature Withdrawals
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When you are under the age of 59 1/2, you can make withdrawals of principal without incurring a penalty. When you make a withdrawal from a Roth, the IRS assumes the first funds withdrawn are tax-free principal and consequently you pay no penalties for premature withdrawals unless you withdraw more than you invested. If you take earnings withdrawals prior to age 59 1/2, you must pay income tax on those earnings and a 10 percent tax penalty.
Other Penalty Free Withdrawals
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The IRS tax code allows people to take penalty-free withdrawals from Roth IRAs regardless of age in certain other situations. You can access funds without penalty if you become disabled, need funds to cover certain unreimbursed medical expenses, plan to use proceeds towards buying a first time home or need the funds to pay for college expenses. In each of these circumstances you avoid paying the 10 percent tax penalty. You can also avoid paying income tax on the withdrawals if you have held the Roth IRA for at least five years.
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