How to Make Early Roth IRA Withdrawals

I will begin early Roth IRA withdrawals later this year. When I said that I’ll be living off my retirement funds and making withdrawals, SVB at The Digerati Life wanted more information. There are a few options on how to access funds while I’m still in my 20s.

Roth IRA Withdrawals

It’s easy to get confused as to when you can withdraw money from your Roth IRA. Is it after 5 years? Is it at age 59.5? Is it anytime?

You can withdraw your contributions at any time. No tax and no penalty! Keep a spreadsheet of how much you contribute each year so you know the total value of your contributions. If you make a withdrawal, it is considered to come out of your contributions first (which is different from a traditional IRA).

You can make a qualified withdrawal of earnings after five years. The five year clock begins on January 1st of the tax year of your first contribution. For example, if you opened your Roth IRA for the tax year 2005, the five year test will be satisfied on January 1, 2010.

The 5 year period starts with the year that you made your initial contribution, conversion or rollover. Once the 5 years have elapsed, it is complete for all your Roth IRA contributions.

In addition you must meet one of the qualified distribution reasons:

1. Withdrawals at age 59.5.
2. Withdrawals for your beneficiary after you die.
3. Withdrawals if you become disabled.
4. Withdrawals for qualified higher education expenses.
5. Withdrawals for unreimbursed medical expenses.
6. Withdrawals for first time homebuyers.
7. Withdrawals for a series of substantially equal payments (SEPP).

You can withdraw taxable conversions after five years. Money placed in a Roth IRA from a tradional IRA to Roth IRA conversion can be withdrawn tax free and penalty free after five years. Conversions made in different tax years will have to satisfy a separate 5 year period.

Converted Roth IRAs that are withdrawn before the 5 years elapses could have the 10% early penalty applied. This is an exception to the above rule that uses one 5 year time period to satisfy all Roth IRAs.

You can withdraw nontaxable conversions at any time. If you converted money from a traditional IRA to a Roth IRA, without taking a deduction at the time of the contribution to the traditional IRA, your withdrawal will be tax free and penalty free.

Order of Roth IRA Withdrawals

There are multiple ways above to access your Roth IRA tax free and penalty free. However, you must make withdrawals in a predetermined order. All your Roth IRAs are considered as one Roth IRA for the withdrawal order.

1. Regular Roth IRA contributions.
2. Taxable rollover conversions (on first-in first-out basis).
3. Nontaxable rollover conversions.
4. Repeat of steps 2 & 3 for each conversion.
5. Earnings.

Warning: I have explained the withdrawals here as part of a plan to access funds for early retirement…. I don’t recommend tapping your retirement funds for other purposes!

More on Roth IRA Withdrawals:

• Roth IRA Withdrawals as an Emergency Fund
• Taxation of Roth IRA Withdrawals
• Early IRA Withdrawals using 72(t) discussed in the Retire Early Home Page forums

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