Roth IRA withdrawal rules can be very confusing; however, they are not impossible to understand. To withdraw earnings and not just contributions, more than one set of rules must be met in order to make a withdrawal without penalties and taxes. At any point in time a distribution may be taken of up to the total amount of your contributions. Distributions of earnings must be qualified or they will suffer penalties and taxes.
There are four Roth IRA qualifications to withdraw earnings from a Roth IRA account. One of these Roth IRA withdrawal rules must be met in order to withdraw without penalties or taxes. These Roth IRA withdrawal rules are:
1) The owner of the Roth IRA must be 59 and one half years of age or more,
2) The withdrawal must be made to the Roth IRA owner’s beneficiary or estate, after their death,
3) The withdrawal may be made to the Roth IRA owner after they are determined disabled, and
4) If the withdrawal will be used to pay for qualified first time home-buyers expenses (up to $10,000 in a lifetime).
On top of these qualifications, Roth IRAs also have a Five Tax Year Roth IRA withdrawal rule. The five tax year rule is only applicable to the distribution of earnings. Tax years are not the same as calendar years. Tax years end April 15 of each year, so any contribution made to a Roth IRA by April 15, 2010 will be counted towards the 2009 tax year. Therefore, in order to withdraw earnings without taxes or a Roth IRA early withdrawal, you must meet one of the distribution Roth IRA withdrawal rules and the five year tax rule.
The five tax year rule clock begins ticking for the first year the first contribution is credited towards, and is not reset with other contributions or opening other Roth IRAs. Therefore, if a contribution is made April 15, 2010, the block began ticking January 1, 2009 and the five tax year rule is met January 14, 2014.
If a distribution is taken while meeting the five year tax Roth IRA withdrawal rule, but not qualifying under one of the four qualification requirements, any amount above what has been contributed will be charged income tax plus a 10% early withdrawal penalty on all earnings.
There are a few other exceptions to the Roth IRA withdrawal rules. Withdraws of earnings may be made without penalties and taxes if:
1) The withdrawal is in a series of “substantially equal periodic payments” made over the life expectancy of the IRA owner.
2) The withdrawal is used to pay medical expenses that are a) not reimbursed, and b) exceed 7.5% of the Roth IRA owner’s adjusted gross income (AGI).
3) The withdrawal is used to pay for medical insurance premiums after the Roth IRA owner has received unemployment compensation for 12 weeks.
4) The withdrawal is used to pay for qualified higher education expenses for either the Roth IRA’s owner or their eligible dependents.
5) The withdrawal is used to pay taxes to the Internal Revenue Service after a levy has been placed on the Roth IRA.
IRA withdrawal rules may be a little different if you have an inherited IRA or if you did a 401k rollover to Roth IRA. Check with your local professional for more details.
