A Roth IRA is completely funded with after-tax dollars you’ve already paid incomes taxes on. The money in your account compounds tax-free, and withdrawals in retirement also never get taxed.
While the contribution limits of a Roth IRA are fairly low compared to other retirement accounts (like the solo 401k), the withdrawal rules are more lenient. Every retirement plan requires that you turn 59½ before you can start taking qualified distributions, and the same rule applies to the Roth IRA. However, a Roth IRA also has a few different rules that other retirement plans don’t have.
How to withdraw from a Roth IRA
With a Roth IRA, withdrawals of contributions are treated differently than withdrawals of any earnings from your account. For example, if you contributed $1,000 but have an account balance of $5,000, the $1,000 you contributed is treated differently than the $4,000 in investment gains.
Contribution withdrawal rules
The first thing to note is that contributions you made to a Roth IRA can always be withdrawn, free of penalties or taxes, at any age.
For example, let’s say you contributed $10,000 into a Roth IRA. Over the years, the money compounded tax-free and tripled in value. You now have $30,000. You’re allowed to take out the $10,000 at any time, tax-free and penalty-free. You cannot withdraw the remaining $20,000 until you meet the earnings withdrawal eligibility rules.
You’re allowed to withdraw contributions at any time because you already paid taxes on the money when you contributed to your Roth IRA.
Earnings withdrawal rules
To make withdrawals of your Roth IRA earnings without any penalties or taxes:
- You must be at least 59½ years old.
- Your account must be at least 5 years old.
Other retirement plans don’t have the 5-year rule. As soon as you hit 59½ years old, you’re allowed to start taking distributions without any penalties. With a Roth IRA, reaching the age of 59½ meets only one part of the withdrawal requirements. Your account must be at least 5 years old.
When does the 5 year rule start?
The 5-year rule starts on January of the year you first contribute. For example, if you open an account in 2022, you have until the federal tax filing deadline next year to contribute to make your contributions. Even though you’re funding your account in 2023, you’re contributing for 2022. Therefore, the five year period would start on January 1, 2022. The 5-year period would end on January 1, 2027.
Conversion and rollover withdrawal rules
There’s another type of way to fund your Roth IRA: You can convert or rollover the funds from an after-tax account through a backdoor Roth conversion. Doing so allows you to bypass the income limits and contribution limits of a Roth IRA. Conversions are treated differently than contributions. There’s no limit to how much you can convert into a Roth IRA, so you’re not restricted by yearly contribution limits.
If you perform a conversion, the 5 year rule applies here once again. You cannot withdraw conversions until five years after the money has been converted into your Roth IRA.
Penalties and Taxes for early withdrawals
If you withdraw earnings from your Roth IRA before you turn the age of 59½ and/or before your account is 5 years old, you’ll be hit with a 10% fee plus income taxes on the amount withdrawn.
If you’re under 59½ years old it doesn’t matter if your account is at least 5 years old or not. You still can’t withdraw because you don’t meet the minimum withdrawal age. Contributions can still be withdrawn free of taxes and penalties at any time. Withdrawals of earnings are subject to a 10% fee plus income taxes on the amount drawn.
If you’re over 59½ years old, but your account is less than 5 years old, withdrawals of earnings will be subject to income tax, but not penalties.
Can penalties be waived?
Yes, there are certain instances where you can withdraw contributions and earnings from your Roth IRA without penalty or taxes, even if you’re under 59½ years old.
The conditions are slightly different whether your account is 5 years old or not.
If you’re under 59½ years old, and your account is under 5 years old, penalties (not taxes) can be waived if:
- You use the withdrawal (up to $10,000 lifetime maximum) to pay for a first-time home purchase.
- You use the withdrawal to pay for reimbursed medical expenses.
- You use the withdrawal to pay for health insurance if you’re unemployed.
- You use the withdrawal for qualified birth or adoption expenses.
- You use the withdrawal for qualified education expenses.
- You become disabled or pass away.
The 10% early-distribution penalty can be waived, but you’ll still have to pay income tax on the amount you withdraw.
If you’re under 59½ years old, but your account is over 5 years old, penalties and taxes can both be waived if:
- You use the withdrawal (up to $10,000 lifetime maximum) to pay for a first-time home purchase.
- You become disabled or pass away.
Does a Roth IRA have required minimum distributions?
A Roth IRA has no required minimum distributions (RMD). Most other retirement accounts “require” you to start taking distributions from your accounts when you reach the age of 73. Failure to withdraw the required amount results in heavy penalties. A Roth IRA is one of the only retirement plans without an RMD rule.
Having no RMD means that you can keep your money compounding tax-free in your Roth IRA for as long as you’re alive. If you pass down your Roth IRA to your beneficiaries after you pass, they have 10 more years of tax-free compounding before they’re required to empty out the account.
Do I need to pay taxes when I withdraw from my Roth IRA?
No. If you meet all the withdrawal rules, and make qualified distributions, you won’t have to pay any taxes on withdrawals of contributions or earnings from your account.
The beauty of a Roth account is that your money compounds tax-free and withdrawals are tax-free. As long as you wait until you’re 59½ years old, and your account to be at least five years old, you can withdraw your entire Roth IRA balance with zero penalties or taxes.