Roth IRA Early Withdrawal Rules

If you plan to use money from your Roth account, you need to make sure if there may be Roth IRA early withdrawal penalties or not.

Penalties

If the withdrawals are not qualified distributions, there may be the 10% additional penalty tax on withdrawals of earnings. In general, Roth withdrawals before age 59 1/2 are considered to be an 'early withdrawals'. Remember that you can withdraw up to the total amount of your annual Roth contribution at any time regardless of any reason. Then, how do you know whether the amount is attributable to the contribution or the earning? To make it clear, there are 'Ordering Rules for Distributions'.

Exceptions

If you are in the following situations, you may not have to pay the Roth IRA early withdrawal penalties.

• You are age 59 1/2 or older.
• You are disabled.
• You received the distribution because of the IRA owner's death.
• The distributions are used to pay the cost of a first-home purchase ($10,000 limit).
• The distributions are part of a series of substantially equal payments.
• The distributions are used to pay for significant unreimbursed medical expenses in excess of 7.5% of adjusted gross income.
• You are paying medical insurance premiums after losing job.
• You're using the distribution to pay qualified higher education expenses, as long as the distribution is not more than the expenses.
• The distributions are used to pay an IRS levy of the qualified plan.

Ordering Rules for Distributions

When it comes to early withdrawal, the IRS has specific rules for distributions order. If you have several Roth IRA accounts, they are considered as one for withdrawal purposes. Therefore, the distribution order applies regardless of which account is used for that distribution.

The ordering rules of deemed sources of the distribution are as follows:

1. From regular Roth IRA contributions. In contrast to a Traditional IRA, the first money you take from a Roth IRA is considered to be a return of your regular contributions. So you don't have to pay any tax on this distribution.



2. From conversion and rollover contributions.
   
   
   1. Taxable portion. If you withdraw any of conversion amounts before the 5-year holding period, you may have to pay the 10% Roth IRA early withdrawal penalty unless you are age 59 1/2 or older or meet any exceptions. If you have more than one conversion, the 5-year period applies to each conversion and the first conversion money you withdraw is considered to come from the earliest conversion.
   
   
   2. Nontaxable portion. (Not subject to income tax or to the 10% early withdrawal penalty)


3. From earnings. Ordinary income tax and the 10% penalty