Roth IRA Withdrawal Rules

Roth IRA withdrawal rules are far more flexible than those for other types of retirement accounts, like 401(k)s and traditional IRAs.

This flexibility makes putting money into a Roth IRA—or a backdoor Roth IRA, if your income is above Roth IRA contribution limits—an excellent way to save and invest for anyone who has earned income or relies on a spouse’s earned income.

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Roth IRA Withdrawal Rules for Contributions

Contributions are the money you put in your Roth IRA. These are funds you’ve already paid income tax on. For 2023, you can contribute up to $6,500 or 100% of your earned income, whichever is less. If you’re at least 50 years old, you can contribute an extra $1,000.

Once you contribute money to a Roth IRA, you can withdraw your original contributions at any time without paying any sort of tax or penalty. This means there’s almost no reason not to squirrel away money in a Roth.

Roth IRA Withdrawal Rules for Earnings

Ideally, you invest your Roth IRA contributions so that your money has a chance to grow tax-deferred and eventually become tax-free if certain conditions are met. The goal is to end up with far more than you started with, even after inflation and investment fees.

However, you can’t withdraw Roth IRA earnings as freely as you can withdraw contributions.

If you want to withdraw earnings penalty free—taking what the IRS calls “qualified distributions”—you’ll typically need to wait until you’re at least 59½ and it’s been at least five years since you made your first Roth IRA contribution. Yes, this does mean that if you make your first Roth contribution at age 58, you can’t withdraw any earnings until age 63.

If you don’t follow these rules, you’ll usually pay a 10% IRS penalty tax on your distributed earnings.

Exceptions to Roth IRA Distributed Earnings Penalties

The IRS does grant a few exceptions to the early withdrawal penalty on Roth IRA earnings. You won’t pay a penalty if one of these circumstances applies:

• College: You’re using the money to pay for qualified higher education expenses, such as college tuition, fees or room and board.
• Disability: A doctor has determined that you’re disabled indefinitely and can’t work.
• Terminal illness: A doctor has certified that you’re likely to die within seven years.
• First home: You’re not withdrawing more than $10,000 and the money is going toward your first home—or the first home of your spouse, child, grandchild or parent.
• Medical expenses: You’re paying qualified, unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.
• Unemployed health insurance: You’re paying health insurance premiums after losing your job.
• New kiddo: You’ve given birth or finalized the adoption of a child in the past 365 days and you’re withdrawing no more than $5,000.
• Qualified reservist: You’re in the U.S. uniformed reserves and take the distribution after being called to active duty and before your active duty ends.

Even though no penalty applies to early distributions that meet one of the above requirements, if it hasn’t been at least five years since January 1 of the year you first contributed to a Roth (even if not your current one) and you have not satisfied one of these qualifying events–reaching age 59½, first time home purchase, disability or death–you will still owe ordinary income tax on distributed earnings.

Roth IRA Withdrawal Rules for Early Retirement

If you’re part of the financial independence, retire early (FIRE) movement, you might be concerned about putting too much of your savings in retirement accounts since you plan to start living off your savings well before age 59½. Don’t let this stop you from maxing out your Roth contributions every year, though.

Here’s why: Besides withdrawing Roth contributions, you could take substantially equal periodic payments from your Roth when you’re younger and access your earnings without penalty.

Withdrawal Rules for Roth IRA Conversions

If you want to withdraw Roth IRA money that was in another type of retirement account, such as a traditional IRA or 401(k), you have to follow the five-year rule to avoid paying the 10% penalty.

However, you can’t just move untaxed money into a Roth and never pay income taxes on it. When you convert untaxed money to your Roth, you will have to pay that tax.

You can minimize this tax by being strategic about when you do a Roth IRA conversion. Instead of converting your entire pretax account at once, you want to convert small amounts over several years, keeping yourself in the lowest tax bracket possible while doing so. This strategy is called a Roth IRA conversion ladder.

Roth IRA conversion ladders have many benefits. Once the money is in a Roth IRA, it grows tax free, future withdrawals are tax free and you don’t have to take required minimum distributions (RMDs). Avoiding RMDs can help you qualify for health insurance premium subsidies for a marketplace policy, pay less for Medicare, avoid the net investment income tax and avoid the additional Medicaid tax.

The ideal time to convert is when you’re unemployed or retired, especially if you’re retired and not getting Social Security retirement benefits yet. The years when your income is lowest represent the best opportunities to do conversions.

Inherited Roth IRA Withdrawal Rules

Once you’ve accumulated enough in your Roth IRA, it can act as a life insurance policy or as a tool for transferring wealth to your kids, your best friend’s kids or whoever your heirs may be. But the withdrawal rules change when a Roth IRA becomes an inherited Roth IRA.

How much the heir has to withdraw and when depends on their relationship to the person whose IRA they inherited and their age difference. The IRS imposes penalties if heirs don’t take enough money out when they’re supposed to.

Penalties can also apply to an heir’s withdrawals if the account holder established their Roth IRA fewer than five years ago.

Withdrawals When the Market Is Behaving Badly

The IRS does not let you take penalty-free early distributions of Roth IRA earnings during a stock market downturn, during a recession or to cover your living expenses (except health insurance) when you’re unemployed. However, as discussed earlier, you can withdraw contributions penalty free at any time for any reason (subject to the exceptions discussed above for Roth IRA conversions).

While market downturns can be a scary time to check on your Roth IRA returns, they’re generally a bad time to sell your investments.

If you insist on selling so you can sleep at night, know that you can get out of your investments without taking the money out of your Roth IRA. After the sale settles, you can leave the cash in your account and reinvest it when you feel more comfortable.

Contribute Fearlessly, Withdraw Carefully

Many people are skittish about taking money out of a regular savings account and putting it in a retirement account because they’re afraid they might need it later and won’t be able to get it back. That’s a valid concern. It’s important to have a source of emergency funds, and no one wants to pay a penalty to get their own money back.

If that’s you, then the Roth IRA is an ideal way to save for retirement. In fact, the flexibility to withdraw Roth IRA contributions any time without owing the IRS taxes or penalties makes this type of retirement account an excellent savings tool for anyone—even an adult who wants to set up a Roth IRA for a kid.

You can confidently contribute up to the maximum each year to a Roth IRA, knowing that you can always invest your contributions in something stable and liquid, like a money market fund. That way, you don’t have to worry about your contributions losing value if you need to withdraw them for an emergency.

Once you’ve saved more than you need for an emergency fund, you can take more risk on investments like a stock market index fund. Low-cost S&P 500 index funds have been one of the best ways to grow your money long term as long as you can leave your money invested while you weather the market’s ups and downs.

That said, while it’s nice to have the option to withdraw Roth IRA money before you’re 59½, once you take that money out, you usually can’t put it back. Withdrawals represent a lost opportunity to invest your money and have it grow tax-free for the rest of your life (and a few years of your heir’s life).

You’ll want to weigh this opportunity cost against the costs of getting money from other places, like a 0% APR credit card or low-interest personal loan, before taking any withdrawals from your Roth.