Roth IRA Withdrawal Rules: Taxes + Exceptions to Know

Roth Ira Withdrawal Rules

Dipping into your retirement savings isn’t a one-size-fits-all affair. If you have a Roth individual retirement account (IRA), know the withdrawal rules—including any taxes you could be hit with and exceptions to the status quo—before taking money out of your account.

Table of Contents

  1. Taxes and penalties for Roth IRA withdrawals
  2. Qualified exceptions for Roth IRA withdrawals
  3. So you can take a Roth IRA withdrawal — but should you?
  4. Bottom line on withdrawing money from your Roth IRA

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Taxes and penalties for Roth IRA withdrawals

According to the Internal Revenue Service (IRS), Roth IRA contributions are not tax deductible (this key aspect differentiates them from traditional IRA accounts). However, qualified withdrawals in a Roth IRA are not taxed on their way out. This is because you already paid taxes on your contributions before depositing them, and the government won’t tax you twice as long as you follow the rules.

To avoid taxes and penalties, make sure you withdraw:

    1. After you reach 59.5 years of age

and

  1. At least five years after your first Roth IRA contribution (aka the five-year rule).

Even if you don’t follow these rules, your contributions themselves aren’t taxed at withdrawal. However, you may have to pay capital gains taxes on your Roth IRA earnings if you don’t follow these rules.

FYI

  • Looking for a place for long-term investments? Check out Public.com, a social investing app that lets you build community and wealth in one fell swoop.


Qualified exceptions for Roth IRA withdrawals

If you make an early withdrawal before age 59.5 and/or before the 5-year rule is up, you may face penalties.

However, you can avoid these penalties if you use the funds for qualified distributions, such as:

  • A first-time home purchase (homebuyers get a $10,000 lifetime maximum for Roth IRA withdrawals for this purpose)
  • Higher education expenses
  • Expenses related to child birth or adoption
  • You become disabled or die (in the event of death, you can rollover your Roth IRA to your heirs, who have a full 10 years before they must withdraw from the inherited Roth IRA)
  • Unreimbursed medical expenses or health insurance premiums (if you’re unemployed)
  • Qualified donations

You’ll still have to pay capital gains taxes on any Roth IRA income from the withdrawn funds even if you aren’t subject to penalties. You must also withdraw money in substantially equal periodic payments (aka avoid a lump sum withdrawal, if possible).

If you’re over the age of 59.5 years old but have had the account for less than five years, your gains are still taxable, but you won’t face penalties.

And again, if you meet both criteria listed above, withdrawals are tax-free and penalty-free for your Roth IRA! How’s that for a sound retirement plan?

So you can take a Roth IRA withdrawal — but should you?

Did you know?

  • Roth IRA account holders are not subject to required minimum distributions (RMDs). This means you don’t actually have to withdraw funds while you’re alive and can even pass your account to your kids.

Even though there are instances when you can withdraw from your Roth IRA without an early withdrawal penalty, it’s not always wise to do this. Roth IRAs give your money the chance to grow tax-free, which is a big deal. Liquidating investments can stall your long-term growth.

An alternative is to create a separate long-term investment account that grows at the same time with your Roth IRA.

While the Public app does not offer tax-deferred or tax-advantaged retirement accounts at this time, you can withdraw at any point for any reason, only for the price of capital gains taxes (and even then, you can reduce your taxes by holding longer and harvesting losses with the help of a tax professional). Plus, if you’ve already hit the Roth IRA contribution limit for the year, you’ll have somewhere to stow those excess retirement savings!

Did you know?

  • Public’s instant transfers let you withdraw and deposit funds on the fly. Avoid those Roth IRA downsides with a flexible brokerage account.


Bottom line on withdrawing money from your Roth IRA

Roth IRA owners reap the rewards of tax-free money growth. By working around the rules, you can avoid taxes and penalties.

And by supplementing your retirement savings with long-term holdings in a brokerage account, you can solidify your future financial independence.

Own your future. Build your portfolio.

Saving for retirement means setting future you up for success. Like meal prepping, but better.

Sign up for free

Frequently asked questions

Is withdrawing money from a Roth IRA penalty-free?

There are certain cases when you can withdraw money from a Roth IRA penalty-free. However, non-qualified distributions may face penalties.

Is a Roth IRA the easiest retirement account to withdraw from?

Roth IRAs are generally considered more flexible than other types of retirement accounts, but there are still stipulations.

How long does money have to be in a Roth IRA before you can withdraw?

The five-year rule for Roth IRAs says your first account contribution should be 5+ years before your first withdrawal. Otherwise, you face penalties that could hinder your wealth-building.

Can you use your Roth IRA as life insurance?

You cannot purchase life insurance within a Roth IRA.

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