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Roth IRA Withdrawal Rules: How to Avoid Penalties

Learn about the withdrawal rules that apply to Roth IRAs so that you can withdraw your retirement savings without incurring any penalties (or taxes).

You've made the smart move to build retirement savings in a Roth IRA.

That said, sometimes, people make it to retirement age without having to withdraw money from their retirement accounts prematurely.

Unfortunately, events do pop up that force people to consider accessing their retirement savings early.

Some retirement accounts require you to pay taxes and penalties if you withdraw certain funds before age 59 and ½. Roth IRAs also require this on certain withdrawals in specific circumstances.

Luckily, Roth IRAs have a handful of exceptions that can help you avoid an early withdrawal penalty and sometimes taxes, too.

Here are the Roth IRA withdrawal rules you should be aware of when planning how to take money out of your account.

Roth IRA Withdrawal Rules

Roth IRAs allow you to withdraw money tax and penalty-free if you meet specific requirements.

Age and account age

The most common method requires you to wait until you’re age 59 and ½ or older.

Once you reach this age, you must have also held the account open for at least five years.

If you meet both of these requirements, you can withdraw all of the money from your account tax and penalty-free.

Contributions only

Another Roth IRA rule allows you to access certain Roth IRA funds tax and penalty-free at any age.

Due to the fact you contributed after-tax money to a Roth IRA, you can always withdraw your contributions from the account.

The key is you can only withdraw the amount you contributed tax and penalty-free.

Any earnings withdrawn have different rules.

When you withdraw earnings before age 59 and ½ or before you have the account open for five years, you usually must pay taxes.

You may be able to avoid the penalties under certain exceptions.

Exceptions to Roth IRA Withdrawal Rules

As you’d expect with the IRS, there are exceptions to these withdrawal rules.

Certain exceptions exist that allow you to withdraw earnings from your Roth IRA potentially tax-free and penalty-free before turning age 59 and ½:

  • First-time home purchase
  • Disability or death

First-time home purchases

Rules allow you to withdraw up to $10,000 of earnings penalty-free if they’re used for a first-time home purchase.

Surprisingly, a first-time home purchase isn’t what it sounds like.

If you and your spouse haven’t owned a primary residence in the last two years, a home purchase is considered a first-time home purchase for this rule.

The $10,000 limit is a once-per-lifetime limit.

Disability or death

If you’re totally and permanently disabled, you can take qualified distributions of earnings without paying penalties.

If you die, your heirs can take qualified withdrawals of earnings without paying penalties.

Five-year rule exists for taxes

A five-year rule exists for determining whether you will owe taxes on the early withdrawals in the above cases.

  • If you’ve held the account for less than five years, you will have to pay taxes on the qualified early withdrawal.
  • If you've held the account for five years or longer, you do not have to pay the taxes owed on a qualified early withdrawal.

Other Penalty-Free, Tax-Applicable Exceptions

Other exceptions exist that may allow you to withdraw Roth IRA earnings penalty-free.

You do not have to meet the five-year ownership rule to qualify for these penalty exceptions.

These do not qualify for tax-free status:

  • Qualified education expenses
  • Qualified birth or adoption expenses
  • Certain health insurance or medical expenses
  • Substantially equal periodic payments

Qualified education expenses

You may withdraw funds from your Roth IRA for qualified educational expenses.

These expenses must be for you, your spouse, your children, or your grandchildren.

To qualify, the expenses must fall within certain guidelines.

The student must also attend a qualifying institution.

Qualified birth or adoption expenses

The CARES Act added a new penalty-free exception.

After the birth or adoption of your child, you may withdraw up to $5,000 penalty-free.

Certain health insurance and medical expenses

Medical expenses can add up quickly.

If your unreimbursed medical expenses exceed 7.5% of your adjusted gross income, you may qualify for a penalty-free withdrawal from your Roth IRA.

Unreimbursed health insurance premiums for unemployed individuals may qualify, too.

Substantially equal periodic payments

A special rule, Rule 72(t), allows you to take substantially equal periodic payments without penalties.

This rule can be complex. Consult an advisor for help.

How Roth IRAs Work

Roth IRAs are tax-advantaged retirement accounts.

To contribute to these accounts, you must have earned income. Most people earn earned income through a W-2 job or self-employment income.

People under the age of 50 can contribute up to $6,000 throughout the year in 2022.

People ages 50 and over get an additional $1,000 catch-up contribution. This brings their contribution limit to $7,000.

There are income limits that may reduce your contribution limit to a Roth IRA.

2022 Roth IRA Income Limits

Filing Status Modified AGI Contribution Limit
Married filing jointly or qualifying widow(er) Less than $204,000 $6,000 ($7,000 if you're age 50 or older
$204,000 to $213,999 Reduced
$214,000 or more Not eligible
Single, head of household, or married filing separately (and you didn't live with your spouse at any time during the year) Less than $129,000 $6,000 ($7,000 if you're age 50 or older
$129,000 to $143,999 Reduced
$144,000 or more Not eligible
Married filing separately (if you lived with your spouse at any time during the year) Less than $10,000 Reduced
$10,000 or more Not eligible

You make contributions to a Roth IRA with after-tax money. That means you don’t get a tax deduction when you contribute to a Roth IRA.

The money within a Roth IRA grows tax-free--including earnings.

The best part:

You get to withdraw the money tax-free in retirement.

You do have to wait until you’re older than age 59 and ½.

You must also have held the account for at least five years to qualify for completely tax- and penalty-free withdrawals.

When a Roth IRA May Be a Good Idea

Each person must evaluate whether a Roth IRA is a good idea for their specific situation.

That said, a general rule of thumb exists.

If you believe your tax rates in the future will be higher than they are today, a Roth IRA may be a good idea.

This works because you pay taxes on the money today. Then, you get to withdraw it tax-free in retirement.

If your future tax rate will be higher, you’ll potentially save money on taxes with this method.

Taxes could be higher in the future because tax rates change. They may also be higher in the future if you have more income in the future.

If you believe your tax rates will be lower, a traditional IRA may be a better fit.

Roth IRAs may be a good fit for other reasons, too. They provide some flexibility traditional IRAs may not. The flexibility options are discussed below.

Tips for Roth IRAs

Maximizing your Roth IRA could be a crucial part of your retirement strategy.

Here are a few tips to help.

Contributions can be made until the regular tax deadline

Roth IRA contributions can be made up until the tax return deadline for the previous year.

For instance, you can make 2022 Roth IRA contributions until April 15, 2023.

Those 50 or older get catch-up contributions

If you’re age 50 or older, make sure you’re taking advantage of the catch-up contribution.

In 2022, you can contribute an extra $1,000 to your Roth IRA if you qualify.

While this may not seem like a lot, every dollar counts.

You can’t make up withdrawn contributions

If you do decide to withdraw money from a Roth IRA early, that money is withdrawn forever.

Roth IRA withdrawals do not work like 401(k) loans.

You can’t pay the money back.

You can never recapture the tax benefits you’ll lose if you had left the money in the account. For this reason, withdrawing money from a Roth IRA is often a last resort.

You choose where you hold your Roth IRA

You can choose where you keep your Roth IRA. This is different than a workplace 401(k). For workplace plans, you can’t control who runs it.

A Roth IRA’s flexibility allows you to find a firm that offers suitable investments at low fees.

If you find a firm that lowers your fees by half a percent, your long-term return over decades could increase dramatically.

Of course, this assumes you’d earn the same returns with both options.

No minimum required distributions

You may want to use a Roth IRA because it doesn’t force you to take required minimum distributions (RMDs).

Traditional IRAs require RMDs because the money has not yet been taxed.

Because Roth IRA money has already been taxed, you can leave your contributions and earnings in the account to grow as long as you’d like.

Consult an Expert

It’s best to ask questions before you make a decision that could have a considerable impact on your retirement or tax situation.

After all, you can tweak a plan before you start making withdrawals. Once you’ve already made a withdrawal, it’s often too late to fix it.

If you’re only concerned about tax impacts, a Certified Public Accountant can likely give you the advice you need.

If you want advice about your entire financial situation, including taxation and retirement planning, a fiduciary fee-only financial advisor may be a better fit.

These advisors do not receive commissions so they don’t have a conflict of interest.

Instead, they charge you a fee for their time.

These professionals should be well versed in the rules surrounding Roth IRA withdrawals. They can help you develop an ideal withdrawal strategy to meet your needs both immediately and in the future.

Advisors should also be able to help you minimize any potential tax impacts you may face.

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