What Is the Early Withdrawal Penalty for Roth IRA?

A 10% Penalty May Apply, But There Are Some Exceptions

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The best strategy for amassing retirement savings is to start early, contribute regularly, invest wisely, and let time in the market be an ally. However, life events may force even the savings-committed to take an early withdrawal from a Roth IRA.

Because Roth IRAs offer tax-free growth of invested funds, the IRS discourages using this money for non-retirement purposes by assessing a 10% early withdrawal penalty. This penalty applies to many Roth IRA earnings distributions before age 59½.

However, original contributions to a Roth can be withdrawn without early withdrawal penalties, and Roth IRAs offer exceptions to the 10% penalty. Learn about situations that might lead to a Roth early withdrawal penalty and important exceptions allowing earning withdrawals from a Roth IRA before age 59½.

Key Takeaways

  • Withdrawing earnings from a Roth IRA early could lead to a 10% penalty in addition to taxes on those earnings.
  • Some exceptions allow an individual younger than 59½ to withdraw earnings from a Roth IRA and not incur the 10% penalty.
  • Any amount contributed to a Roth IRA can be withdrawn at any time without penalty. Only the earnings from investments in a Roth are subject to early distribution penalties.
  • Ideally, leave retirement account investments alone to grow over decades and help fund your retirement.

How a Roth IRA Is Designed To Work

Unlike a traditional IRA or a work-sponsored 401(k), a Roth IRA is funded with after-tax dollars. The tax benefit of a Roth IRA is that investment earnings build up tax-free, and qualified withdrawals (withdrawals that qualify for this treatment) in retirement are tax- and penalty-free.

The IRS provides these tax-friendly advantages to encourage saving for retirement. To discourage individuals from withdrawing retirement savings before retiring, the IRS counters tax-friendly benefits with penalties on early withdrawals (before age 59½) that don’t meet certain IRS exceptions. 

A distinct advantage of Roth IRA accounts compared to traditional IRAs and 401(k) retirement accounts is that there is no required minimum distribution (RMD) after age 72 (or 70½, if you reached 70½ before Jan. 1, 2020). In fact, Roth IRAs don’t require withdrawals until the owner’s death.

Withdrawing Your Roth IRA Contributions

Funds deposited into a Roth IRA have already been taxed. So, a Roth IRA holder can withdraw any amount of contributions from the Roth without incurring a penalty. But the earnings of a Roth IRA—money gained from investing in stocks or other assets—are possibly subject to the 10% penalty and taxes.

For example, an individual investing $10,000 in after-tax dollars in a Roth IRA over months or years can withdraw up to $10,000 at any time without paying an early withdrawal penalty. According to the IRS, you don’t have to include these regular contributions’ returns in your tax year’s gross income. 

A person taking an early withdrawal of contributions misses out on the tax-free growth opportunity that a Roth IRA provides, but they do not incur a tax penalty.

Qualified vs. Non-Qualified Distributions

A qualified distribution from a Roth IRA refers to any earnings withdrawal after the Roth’s initial five-year period (this five-year holding period begins with the tax year of the account’s initial contribution) and meeting these IRS requirements:

  • On or after the date you reach age 59½ 
  • Because you’re disabled (requires proof that you can't do “substantial gainful activity because of your physical or mental condition” and physician determination)
  • For a beneficiary or your estate after your death, 
  • For first-time homebuyers up to a $10,000 lifetime limit, in certain circumstances

 Qualified distributions aren’t included in your gross income.

Non-qualified distributions fall outside of these requirements. The distribution portion made up of earnings could be subject to tax and the 10% additional tax penalty.

Exceptions to the Early Withdrawal Penalty

Some additional exceptions allow Roth account holders younger than 59½ to avoid the early withdrawal penalty. Roth account holders meeting the five-year rule can avoid the penalty if the money is used in specific ways, including the following:

  • Qualified higher-education expenses up to a certain maximum.
  • Qualified expenses not in excess of $5,000 for a birth or adoption.
  • Unreimbursed medical expenses or health insurance if you’re unemployed.
  • Unreimbursed medical expenses higher than a certain percentage of your AGI.
  • Your expenses incurred during a tax year affected by a qualified natural disaster.

A withdrawal may also be qualified if made on account of the account holder becoming permanently and totally disabled or made to a member of the military reserve called to active duty.

But if it hasn’t been five years, these exceptions do not apply; any earnings could lead to taxes and penalties. 

The specifics attached to these exceptions can be complex. Before withdrawing from a Roth IRA, consult with a professional tax advisor to determine if you qualify for any exceptions.

Penalties for Non-Qualified Distributions

Early distributions from a Roth IRA are subject to a 10% penalty in addition to those earnings being reported as income when filing that year’s taxes.

For example, a person who takes a non-qualified distribution of $5,000 in earnings from a Roth IRA must report the full $5,000 as part of their gross income on that year’s tax return. The individual would also pay a $500 penalty. 

If half of that amount were contributed to the Roth with after-tax dollars and the other half resulted from investment earnings, only the $2,500 in earnings would be subject to the 10% penalty ($250).

Other Roth IRA restrictions could lead to additional penalties. You’ll receive Form 1099-R for any distributions received. If codes 1 (early distribution, no known exception), 5 (prohibited transaction), or 8 (excess contributions plus earnings/ excess deferrals) appear, you may owe taxes or penalties.

The Bottom Line

Roth IRAs are a powerful tool for saving and investing for retirement. Money invested in a Roth grows tax-free and qualified distributions are also tax-free. Because the IRS wants to discourage people from tapping Roth IRA savings early, they have set significant penalties for early distributions.

The rules regarding qualified and non-qualified early distribution from a Roth IRA can be complex. If in doubt, it’s always best to consult with a tax professional before withdrawing earnings from a Roth account.

Frequently Asked Questions (FAQs)

When do you pay the penalty for early Roth IRA withdrawals?

A 10% penalty is assessed for non-qualified distributions from a Roth IRA and is usually withheld from any distributions. Federal and state taxes may also be withheld at distribution. If you decide not to have the Roth IRA tax withheld at the time of distribution, you may need to make estimated tax payments on the distribution.

Can you borrow money from your Roth IRA?

You cannot borrow against any IRA account, including Roth IRAs.

Can I withdraw from my Roth IRA to buy a house?

Up to $10,000 can be withdrawn from a Roth IRA without penalty or tax for a first-time home purchase for certain qualified individuals. Of course, any amount of original contributions can be withdrawn for any reason from a Roth without facing any penalties. 

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