Your Roth IRA (Individual Retirement Account) allows your income to grow and increase tax-free, for you to enjoy after retirement. However, sometimes, situations arise that cause the need for you to withdraw from your Roth IRA account early. While you can withdraw money from your Roth IRA at any time, be aware that there are penalties associated with withdrawing from your IRA early.
Contributions Versus Earnings
It’s important to note that there are no fees associated with withdrawing early from your contributions but there are fees associated with withdrawing early from your earnings. This is because you’ve already paid taxes on your contributions, so you can withdraw money from that at any time you please, without penalty. However, your earnings differ as you have not paid taxes on your earnings. To withdraw from your earnings and avoid paying taxes on it or occurring a fee, you have to meet certain criteria.
What Requirements Do You Have to Meet?
For penalty-free withdrawals on your earnings, to make a “qualified distribution”, you have to have met specific requirements. This includes: being 59.5 years old and also being five years past when you first started contributing to your Roth IRA fund. If not, you will have to pay taxes on this income and a 10% penalty fee for early withdrawal. Again, this is only for your earnings and not your contributions.
There are different rules according to your age level.
If you’re younger than 59½ and have been contributing to a Roth IRA for less than five years, you will typically have to pay a penalty and will pay income taxes if you withdraw earnings early. However, you can bypass the penalty fee if you are withdrawing up to $10k to buy your first home; you are withdrawing $5k after either the birth or adoption of your child; you are withdrawing for unreimbursed medical expenses; you’re withdrawing for disability purposes and other qualifying circumstances.
If you’re younger than 59½ and have been contributing to a Roth IRA for more than five years, you can bypass paying taxes and the penalty fee on your earnings withdrawn from the account if you are withdrawing up to $10k to purchase your first home, you’re withdrawing due to disability purposes or if a withdrawal is made to a beneficiary or your estate after your death.
If you’re older than 59½ and have owned a Roth IRA for less than five years, you will have to pay an income tax on your withdrawals but you will not incur a penalty fee.
If you’re older than 59½ and have owned a Roth IRA for more than five years, you can withdraw your earnings at any time and not have to pay taxes or a fee.
While you can withdraw from your Roth IRA account at any time you wish, the time when you should take money out from the account varies according to your circumstances and what you are using the money for. While there are circumstances that allow you to bypass the penalty fees (such as if you’re purchasing your first house), other instances for withdrawal do require both fees and taxes to be paid. We hope this guide has helped to provide you guidance on when you should take money out of your Roth IRA.
Are you looking to establish a retirement plan, like a Roth IRA? With Care Financial, you can speak with a financial planner to help you choose a retirement plan that fits your needs and budget, and they can answer any questions you may have about financial planning.
Care Financial is a privately owned and operated business providing companies, individuals and businesses with comprehensive wealth management strategies. Contact us online at www.carefinancial.com or call us at 251-633-7122.