Roth IRA Withdrawals

TL;DR: How to withdraw your Roth IRA money tax and penalty-free.

Let’s first review Roth IRA retirement accounts (I first introduced them here):

1. You can contribute up to $6,000 a year (as of 2020), with an extra $1,000 of catch up contributions if you’re 50 or over.
2. You are contributing after tax (hence, roth).
3. You have complete freedom over how to invest that money, and that your earnings are tax-free.
4. There is an income limit – in 2020, your income must be under $139,000 (if single, or $206,000 if married filing jointly) to contribute. (However, there are ways to do a backdoor contribution).
5. There are no age limits (min or max) but you must have earned income in that year.

In general, it is advisable to contribute as much as you can afford/are allowed to this plan to take advantage of the tax savings.

Roth IRAs are interesting in how you can take withdrawals. Your contributions you can withdraw whenever or however you like, tax-free and penalty-free since the contributions were after-tax.

Your investment earnings is where things get interesting. Typically, to take advantage of the tax savings and to avoid the 10% penalty, withdrawals of investment earnings must be made after the age of 59.5 and must be 5 years after Jan.1 of your first contribution year. (e.g., if you contributed in April 2020 (April is usually the latest) for 2019, then your 5 years would be up on Jan 1 2024). If you haven’t made the 5-year mark but you’re over 59.5, you will be taxed on investment earning withdrawals but with no penalty.

However, there are some exceptions. If you’re under 59.5 but have met the 5-year mark, you can withdraw tax-free and penalty-free if you:

• Are making a first-time home purchase. (Defined as someone who hasn’t owned a home in the last 2 years. Lifetime maximum of $10,000)
• are withdrawing due to a disability
• have passed and giving the withdrawal to a beneficiary or your estate

If you haven’t made the 5-year mark, you can avoid the penalty but not taxes with the above exceptions.

There are other exceptions that will allow you to avoid the 10% penalty (but you’ll still pay taxes) regardless of the 5-year mark:

• Qualified education expenses
• Unreimbursed medical bills or medical insurance premiums while unemployed
• Childbirth or adoption expenses

Note, lastly, that withdrawals from your IRA in general aren’t advised – you can’t re-contribute it back in since the annual limit is one way. However, if cash is tight, or if you’re on the fence about whether to contribute in the first place, these points are all great-to-knows.

Happy Roth IRA’ing!

TheJKW