Think of a Roth individual retirement account (Roth IRA) as a financial tool that requires you to make a short-term sacrifice to reap a fﷺruitful outcome further down the road.

That's because, unlike money saved through its older cousin, the traditional IRA, the funds that you put into Roth accounts aren't subject to income tax when withdrawn because you pay it when you contribute to a Roth IRA. But you must meet certain requirements to withdraw tax-free funds once you’re age 59½ or older—without having to worry about 澳洲幸运5官方开奖结果体彩网:required minཧimum distributions (RMDs). What’s more, you can withdraw your Roth IRA contributions (not the earnings on those contributions) at any time, for any reason.

Understanding the rules surrounding Roth IRA withdrawals is absolutely imperative. Take the wrong type of money out of your Roth account too early, and you could face 澳洲幸运5官方开奖结果体彩网:income taxes and a 10% penalty on any earnings that you withdraw.

Avoiding Taxes and Penalties

A Roth IRA is a great solution for investors who seek tax diversification or for younger investors who expect to be in 𝐆a higher tax bracket later in life. If you’re paying a low tax now, starting a Roth helps you avoid paying a steeper marginal rate on the money put in, or taken out, in the future. And the ability to withdraw contributions makes the Roth particularly flexible—a sort of 澳洲幸运5官方开奖结果体彩网:backup emergency fund, although it’s unwise to use it that way except in dire circumstances.

The ability to enjoy completely tax-free withdrawals generally comes down to two requirements: You have to be age 59½ or older, and you must have owned the account for 澳洲幸运5官方开奖结果体彩网:at least five years.

The 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) outlines the specific requirements for taking 澳洲幸运5官方开奖结果体彩网:qualified distributions from a Roth IRA. If you reach the required age but have held the IRA for less than five years, you still avoid the 10% penalty but will need to pay income taxes on any earnings pulled out of your account (you already paid income taxes on the money that you initially put into the Roth, so withdrawals of the contribution amount are always tax-free).

Say that you opened a Roth account at age 58 with a $5,000🐲 contribution and it earned $1,000 in gains over a two-year period. At age 60, you decide to withdraw all that money, which you can do penalty-free. But because you only owned the IRA for only two years, you still face income taxes on the $1,000 in earnings. So, to maximize your return, you should wait until you meet both the age and ownership conditions.

What Happens When You’re Under Age 59½?

Where you really get into trouble is when you pull Roth IRA earnings money out of your account before age 59½. Suddenly, you’re on the hook for both income taxes and the penalty—unless you qualify for an ex♌emption.

Those under age 59½ who have owned the IRA for less than five years can withdraw earnings free of penalty—but not free of income tax—if they fall into one of the following categories:

• You become permanently disabled or deceased (with your 澳洲幸运5官方开奖结果体彩网:beneficiaries withdrawing the money if you have passed away).
• You use the money to purchase your first home (subject to a $10,000 lifetime maximum).
• You use the funds to pay for qualified education expenses.
• You take a withdrawal to pay for unreimbursed medical expenses that exceed 7.5% of your 澳洲幸运5官方开奖结果体彩网:adjusted gross income (AGI).
• You inherit funds from a deceased IRA owner.
• You use the money to pay an IRS levy on a qualified plan.
• The money can be classified as a 澳洲幸运5官方开奖结果体彩网:qualified reservist distribution.
• You receive benefits as part of an annuity, and you make the distribution in 澳洲幸运5官方开奖ꦆ结果体彩网:substantially equal periodic payments (SEPPs).

SEPPs are fixed withdrawal amounts that you make over your expected lifespan (yes, the IRS has a form that will show you exactly how long that is). As you might guess, it requires doing a little math.

If you’re not yet 59½ years old but have had the Roth IRA for at least five years, you may be able to withdraw earnings tax- and penalty-free. But the list of exemptions is shorter. You qualify if:

• You become permanently disabled.
• You use the money to purchase your first home (subject to a $10,000 lifetime maximum).
• The money goes to your beneficiary or estate after your death.

Figure 1. Pulling money out of your Roth IRA early can trigger income taxes and/or a 10% penalty.✅

How To Calculate Earnings

Of course, if you are making an unqualified withdrawal, this raises an important question: How much of the money that you pull out is considered a contribution (which can always be 澳洲幸运5官方开奖结果体彩网:taken out tax-free), and how much is earnings?

Fortunately, the answer is fairly straightforward. The IRS has an ordering system for withdrawals, as follows:

1. Regular contributions
2. Taxable conversion amounts from a traditional IRA (contributions for which the account owner paid income taxes during the conversion)
3. Nontaxable conversion amounts (no tax deduction was allowed when making the initial IRA contribution)
4. Earnings

Any funds from an 澳洲幸运5官方开奖结果体彩网:IRA conversion come out on a first-in, first-out basis. This means that the earliest contributions are the ones that you withdraw first.

Let’s say that the account owner is a 30-year-old who o♋pened a Roth IRA four years ago with a $25,000 contribution. Two years ago, she took $5,000 from a traditional IRA that she had and converted it into a Roth (paying income tax in the process). She also has $15,000 of investment gains in the account.

Now she wants to withdraw $40,000 to buy her first home. The IRS ordering system dictates which of those categories she’ll tap first. This means that her withdrawal includes the entirety of her $25,000 contribution as well as her $5,000 rollover the following year. Remember, she already has 𒁏paid income tax ꧋on these contributions, so she doesn’t have to do so again.

To arrive at $40,000, she also has to pull out $10,000 of earnings. Because this falls wi𝔉thin the lifetime limit for a first-home purchase exemption, she avoids the penalty—but not the taxes—on this amount. The remaining $5,000 in her account is classified as earnings.

The Bottom Line

When money is running a little short, it can be tempting to look at withdrawing from your Roth IRA as a quick fix. But before you do, be sure that you know the rules. Pulling money out too early can sometimes trigger income taxes on your earnin🀅gs—not to mention a 10% penalty. This means that an imprudent withdrawal can mean squandering the tremendous advantages that a Roth affords.