Early Withdrawal From a Roth IRA

Basically defined, an IRA is an account to store money for retirement. Roth IRAs are unique in that the interest earnings that are accrued over the span of the account are not taxed during the life of the IRA or at the time of withdrawal. While the benefit of tax-free earnings can be great, there are many strict rules that the IRS actively enforces that can make early withdrawals from a Roth IRA very expensive.

Earning accrued from a Roth IRA must remain within the IRA either until the account owner reaches 59 and a half which is considered retirement age or five years from the time of deposit, whichever is later. Any earning withdrawal before these time constraints are met is considered an early Roth IRA withdrawal. Personal contributions can be withdrawn at any time as long as they were not contributions submitted directly from another retirement account.

An early Roth IRA withdrawal is  subject to expensive penalties. These penalties can be up to 10% of the amount withdrawn. The withdrawn amount can also lose its tax-free status. This will require that these funds be subject to regular tax regulation to which they would have been exempt if withdrawal requirements were met. These penalties can be assessed on earnings withdrawn before retirement age, or retirement contributions withdrawn before the 5 year requirement is met. Of course, every rule has its exceptions. There are a few reasons why funds can be withdrawn early without penalty

Early withdrawal from a Roth IRA is acceptable in situations involving disability, the purchase of a first home or if IRA funds are inherited by another person. Various rules and stipulations may apply to each exception.

Roth IRA’s are excellent way to save for retirement. However, it is critical to understand the rules associated with these IRA’s in order to avoid a costly Roth IRA withdrawal penalty.

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