A Roth IRA account is an alternative option to many retirement savings plans. It is an account set up by the United States government that allows interest earnings to accumulate without being subjected to tax deductions. Depending on your yearly income, you can deposit up to five thousand dollars into a Roth IRA account each year, and the interest earned over time from that money is not taxed. You are free to withdraw any of the funds that you originally deposited whenever you like, but there are some restrictions involved with accessing the money that was earned as interest. These Roth IRA early withdrawal rules are a constant question among people utilizing the vehicle.
How Age Impacts Early Withdrawal
The main rule surrounding the withdrawal of interest earned in a Roth IRA account is very simple, and has to do with your age. If you are under the age of fifty-nine and a half years, you can withdraw the interest, but upon withdrawal the funds are subjected to the same taxes that were avoided by using the Roth IRA account, as well as an extra ten percent penalty. If you are over fifty-nine and a half years old, you may withdraw any funds from your Roth IRA account without these restrictions. This rule is imposed because the Roth IRA account is designed to be used as a retirement plan.
Exceptions To The Early Withdrawal Rules
Although you will always have to pay taxes on interest earnings from a Roth IRA that you withdraw before the age of fifty-nine and a half, there are a few ways to avoid the ten percent penalty. People with a Roth IRA account are not subjected to the early withdrawal penalty if they are withdrawing the money to cover some cost associated with a disability on the part of the owner, or to cover costs associated with the owner’s death. You may also withdraw earnings from a Roth IRA account without the early withdrawal penalty if you need to pay for unreimbursed medical expenses, as long as those expenses are greater than seven and a half percent of your adjusted gross income. If you are buying a home for the first time, you can withdraw up to ten thousand dollars worth of earnings without paying for the early withdrawal fee, and if you have had a Roth IRA account for more than five years, the withdrawal will not be taxed either. A withdrawal of earnings from a Roth IRA account is also exempt from the early withdrawal penalty if it is to pay for the secondary education of the owner or a member of the owner’s immediate family. Finally, owners of a Roth IRA account have the option to withdraw their earnings in a series of small periodic payments over the life expectancy of the owner.
Because of the Roth IRA early withdrawal penalty, you are not recommended to use a Roth IRA account to accumulate funds to use for business, recreation, or anything else that requires withdrawal of earnings before you reach the age of fifty-nine and a half years. The best way to use a Roth IRA account is to regularly make small deposits in the account, while investing the rest of your money elsewhere. That way, you will not have to touch any of the money in your Roth IRA account until you retire, and the interest is allowed to accumulate for many years.