How to Make an Early Roth IRA Withdrawal (and Why You Might Want to)

Roth IRAs are a great way to save for your retirement. Like Traditional IRAs, Roths are set up so that you will only have to pay income taxes on your money once rather than getting the double whammy of paying before you invest and again after you withdraw. Unlike Traditional IRAs, however, Roth accounts are funded with post-tax dollars; you can withdraw your money tax-free once you reach retirement.

But what if you need to access your money prior to the magical retirement age of 59 ½? While you can always withdraw your Roth IRA contributions without tax or penalty, the same is not true of the earnings in your Roth IRA. Unfortunately, though this money is yours, you will face a steep penalty for withdrawing early — a 10% fee of the amount of the withdrawal and tax on the amount withdrawn if it is coming from earnings rather than principal. In other words, you need to have a really good reason to tap into your Roth IRA prior to retirement.

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Penalty-free Withdrawal from Roth IRA

However, there are some specific ways you can withdraw from your Roth early.

Qualified Distributions

Luckily, the IRS agrees you should be able to. There are several exceptions to the early withdrawal penalties that will allow you to access that money without taking a big bite out of it. These are called “qualified distributions” and they are good to know.

The first qualified distribution is reaching at least the age of 59 ½ and having held the account for over five years. This is basically what the Roth IRA was created for, and it holds no surprises. Once you are retired, you can access your money penalty-free.

Home or College Expenses

In addition to waiting until you’re 59 ½, you can also make a qualified distribution if you are purchasing your first home. If you need to access your Roth account money in order to make a down payment for your home, you will pay no penalties. However, you can only use $10,000 of your Roth IRA to make your first home purchase.

Your Roth IRA can also help you out if you are looking to go back to school or help an eligible family member go to college. Not all higher education expenses are qualified for a distribution, so make sure you check IRS rules to know exactly what you can pay for out of this fund before you make a withdrawal.

Exceptions for Disability and Financial Hardship

Disability is another exception to the penalties. If you become disabled and are unable to work, you may withdraw funds to live on. (You will want to make sure you know the exact requirements for this particular distribution, as the IRS’s definition of disability is fairly narrow.) Similarly, if you have medical expenses that will not be reimbursed and that equal more than 7 ½% of your adjusted gross income, tapping your Roth IRA will be penalty-free. Finally, if you are unemployed for more than 12 weeks and are having trouble paying your medical insurance premiums, your Roth IRA can be used for that expense without penalty.

SEPP

One final option is available to Roth IRA account holders who are looking to withdraw early. Substantially Equal Periodic Payments (SEPP) allows you to withdraw the same amount each year (although there are three different methods for calculating that amount) for five years or until you reach 59 ½, whichever comes later. Be careful with this option, because if you terminate it early, you owe the IRS all of the penalty fees you avoided.

The Roth IRA was created specifically to aid regular taxpayers in saving for retirement. Thankfully, the accounts are also set up to make it easy to invest in yourself through home ownership or education, and to weather life’s ups and downs should your circumstances change.

Emily Guy Birken

Emily Guy Birken is a freelance writer, recovering English teacher, and stay-at-home-mom. She lives in Lafayette, Indiana, with her mechanical engineer husband and infant son. Her musings on life and parenting can be found at The SAHMnambulist.