Roth IRA Early Withdrawals: What You Need to Know

Investing, Roth IRA

Retirement accounts aren’t always known for their flexibility, which is why the Roth IRA stands out for its relaxed early withdrawal rules: Because these accounts are funded with after-tax dollars, you’re free to pull out contributions at any time.

That means you can tap the account, up to the amount you’ve contributed, for any reason, ranging from the responsible (there’s a hole in your roof and your kitchen is now a swimming pool) to the frivolous (you want to build a rooftop swimming pool above your kitchen).

That doesn’t mean you should tap the account — more on that below.

Quick rundown: Roth IRA early withdrawals

  • If you want to withdraw contributions: After-tax contributions — commonly called “basis” — can be withdrawn at any time, for any reason, with no taxes or penalties
  • If you want to withdraw earnings: You must satisfy two requirements for a qualified distribution to avoid taxes and a 10% penalty. First, you must have held a Roth IRA account for at least five years, a clock that starts ticking at the beginning of the year of your first contribution. Second, you must be at least 59½, disabled, dead (the distribution is taken by heirs) or using up to $10,000 toward a first-home purchase.

If you don’t satisfy both points, a withdrawal of earnings is likely to come with income taxes and penalties. Some exceptions, outlined below, allow you to avoid the 10% penalty — but not taxes — on certain early distributions that aren’t qualified.

Early withdrawals of Roth IRA contributions

It’s important to remember that with great flexibility comes great responsibility. You contributed to a Roth IRA for retirement; it’s wise to avoid raiding it before you make it to that finish line.

If it were as simple as taking a quick dip into your contributions to meet a short-term expense, then replenishing that money soon after, there wouldn’t be much issue, provided you trusted yourself to actually replenish that money. But Roth IRAs have contribution limits of $5,500 a year ($6,500 if you’re 50 or older) and loans aren’t allowed, so you can’t easily replace money you’ve pulled out if you already make the maximum contribution each year.

However, it might give you peace of mind to know your Roth IRA contributions can be there for you in a pinch. They’re not a replacement for an emergency fund or an excuse to live above your means, but if things get dire, they can be a source of quick cash.

If you take an early withdrawal from a Roth IRA, contributions come out first, which is a rare move by the IRS to make things easier on you. You don’t have to worry about taxes — or about accounting for which portion of your distribution comes from earnings, and which from contributions — unless you pull out more than you’ve contributed.

Amounts converted into the Roth IRA come out next, on a first-in, first-out basis, and earnings come out last.

Early withdrawals of Roth IRA earnings

Need to tap earnings? That’s where things get hairy.

The Roth IRA’s tax treatment has a lot of people swooning: Because you’ve made those after-tax contributions, you get to take qualified distributions tax-free. The trouble is that the IRS’s definition of a qualified distribution is narrow, and a distribution of earnings before age 59½ probably won’t meet it.

First, to avoid income taxes and a 10% penalty, you must have held a Roth IRA for at least five years. Note that is “a Roth IRA” — meaning this condition is satisfied if five years have passed since you first made a contribution to any Roth IRA, not necessarily the one you plan to tap. The exception is when it comes to conversions: If you’ve converted assets from a traditional IRA or 401(k) into a Roth IRA, each converted amount has its own five-year clock.

Second, you must be age 59½ or older, permanently and totally disabled or using the money for a first-time home purchase (and for that last one, there’s a $10,000 lifetime limit). Beneficiaries are also able to take qualified distributions after the death of the account owner.

If you don’t meet both rules for qualified distributions, the IRS will waive the penalty, but not the taxes, if you take the distribution for one of these reasons:

  • Qualified education expenses
  • Unreimbursed medical expenses that exceed 10% of your adjusted gross income for the year
  • Health insurance premiums while you are unemployed
  • Qualified reservist distributions (for members of the military reserve called to active duty)
  • A series of substantially equal periodic payments — recurring distributions designed to help you weather prolonged financial hardships before retirement age — which generally require that you take at least one distribution each year for five years or until you turn 59½, whichever comes later

Outside of those criteria, you may be taxed and penalized on an early withdrawal of earnings. Depending on your tax rate, that could eat a third to half of the taxable portion of your distribution.

In other words: With the exception of rare and dire circumstances, it’s not worth it.

For other ideas on finding cash to pay for unexpected costs, see our page on quick ways to borrow money.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.