Roth IRA withdrawal rules
Basically any withdrawal made before the owner has reached age 59 ½ will incur some type of penalty (10% of the amount withdrawn). However there is an important distinction that must be addressed; an early withdrawal and a withdrawal which is classified as non-qualified. Non-qualified withdrawals are taxed the full rate of income tax. In cases where the withdrawal or distribution is qualified, the rate of income tax is charged in addition to the 10% penalty fee. There are a few exemptions to the rules:
a) The IRA owner becomes disabled in a way considered to be serious. This is a limited definition, and full details of the disabilities allowed can be found in the IRS Code documentation.
b) If the owner dies, then the necessary closure and withdrawal of funds does not incur the penalty
c) If ‘substantially equal periodic payments’ have been made over the owner’s life expectancy, the penalties are waived
d) If the distribution or withdrawal is used to pay for medical expenses which have not been reimbursed and do not exceed 7 and a half percent of the MAGI (modified adjusted gross income).
e) If the owner has been unemployed for more than twelve weeks, and has been receiving unemployment compensation in that time, then distributions can be made penalty free for the purpose of medical premiums.
f) A single penalty free distribution can be made for a first time home purchase, although this is limited to a maximum of $10,000 in any case.
g) Penalty free early distributions can be made to pay for qualified expenses in relation to higher education fees, applicable not only to the IRA owner but also certain family members
h) If the IRS places a levy against the Roth IRA, then any taxes due can be paid back using a penalty free early withdrawal.
Moreover, there are a few things to keep in mind:
- Principal can be withdrawn anytime penalty-free
- Earnings generally cannot be withdrawn before age 59 ½ penalty-free
- Earnings generally can be withdrawn after age 59 ½ penalty-free
- Earnings on your principal contribution must be invested for at least 5 years.
