Roth IRA Withdrawal Rules and Regulations

When You Can Withdraw Money from Your Roth IRA

Senior couple using latop in home
••• Image Source/Image Source/Getty Images

Roth IRAs are an excellent retirement planning tool available to just about anyone within certain income limits. In addition to employer-sponsored or self-employed retirement plans like a 401(k) or SEP IRA, Individual Retirement Accounts (IRAs) are retirement savings vehicles for individuals that possess important tax benefits are are available to everyone simply by opening the account and having an earned income. There are two types of IRAs: Traditional IRA or Roth IRA. Here we will explore the rules that govern Roth IRAs.

What is a Roth IRA?

Like Traditional IRAs, Roth IRAs allow you to save up to $5,500 each year (or $6,500 if you are age 50 or older) into a retirement savings account depending upon your modified adjusted gross income (which determines your Roth IRA contribution limits). Also like Traditional IRAs, you can contribute to a Roth IRA even if you are already covered by an employer-sponsored plan like a 401(k). Having an IRA will allow you to put away more tax advantaged money above and beyond your other plan's annual limits.

The primary difference between a Traditional IRA and a Roth IRA is that contributions to a Roth IRA are not tax-deductible in the year they are made, meaning you will be contributing with after-tax dollars. Though you are paying taxes on that money now, the payoff of a Roth IRA is that both the original contributions and their earnings will be tax-free when you make withdrawals from the account in retirement or other defined circumstances. But what if you make withdrawals before you are retired?

This is another place where Roth IRAs differ from Traditional IRAs.

See Traditional vs. Roth IRA for more information on the differences between these accounts.

Roth IRA Qualified Distributions

Roth IRAs have several rules governing the tax treatment of withdrawals. Ideally, all of your withdrawals from your Roth IRA will be qualified distributions, which is a distribution that meets certain requirements. Those distribution criteria include:

  • You have held the account for five years (learn how this five-year rule calculated)
  • You are age 59 ½ or above

Withdrawals made under other circumstances, such as disability or death, can also be defined as qualified distributions. Another potential qualified distribution is one that meets the requirements listed under a first time home purchase exception (up to a $10,000 lifetime limit).

The most important benefit of a qualified distribution is that it is income tax-free, which can be extremely beneficial in retirement. But what if you want to make a withdrawal that won't meet the requirements for treatment as a qualified distribution?

Roth IRA Non-Qualified Withdrawals

When you are ready to make a withdrawal from a Traditional IRA, whether you are retired or not, the entire distribution will be subject to income taxes. But with a Roth IRA, that is not the case. You can withdraw money from your Roth IRA at any time, and money you contributed will always be available to your without income taxes or penalties. The reason for this difference is the fact that you already paid taxes on that money before contributing it to your Roth IRA.

Account withdrawals of any growth on your original contributions, however, will be subject to taxes and possible penalties if they are not considered qualified distributions. Any non-qualified withdrawals above and beyond your initial contributions will be subject to income tax. And if you are under age 59 ½, those withdrawals will also be subject to a 10% early withdrawal penalty unless you meet one of the few exceptions. If you are age 59 1/2 or older and make withdrawals from a Roth IRA and haven’t met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

It is important to keep in mind that you can leave assets in your Roth IRA as long as you live as these accounts are not subject to required minimum distribution rules. 

If you're considering a Roth IRA withdrawal before retirement, or a withdrawal that otherwise would not be considered a qualified distribution, be sure to learn about the specifics surrounding the tax treatment of nonqualified distributions.