You can withdraw your contributions from a Roth individual retirement arrangement (IRA) at any time and for any reason with no penalties or taxation.
Whether withdrawing funds early is a good idea will depend on your financial situation. In some cases, it may benefit you. In others, you may find a number of reasons why you might want to think twice before taking an early withdrawal from a Roth IRA. Learn more about how withdrawing funds from a Roth IRA works.
Key Takeaways
- You can withdraw Roth IRA contributions (but not gains on investments) without penalty or tax at any time.
- Withdrawing gains from a Roth IRA before you are 59½ can result in potential taxes and penalties.
- Funds in a Roth IRA account can provide emergency savings and avoid the need for a loan.
- If you don't repay the money, you will reduce your retirement savings.
When you make deposits to a Roth IRA, you are using money that has already been taxed. Got get the tax advantage when you make withdrawals, which are tax free. After age 59½, you can withdraw the earnings on your investments tax-free as well.
In some cases, withdrawing money early from your Roth IRA can make sense. However, it does have downsides to consider.
Pros
Withdraw contributions for free
Exceptions to early-withdrawal penalties
Pay for emergency expenses
Cons
Potential taxes and penalties
Lost retirement savings
Loss of future earnings
Advantages to Withdrawing Contributions Early
Withdraw Contributions for Free
A Roth IRA offers a unique tool for accessing money in certain circ*mstances.
Your total Roth IRA balance includes both contributions and earnings—the interest and dividends that your contributions have accumulated since they were invested. Contributions are the money that you deposited into your Roth account.
You make Roth IRA contributions with after-tax money, so you will have already paid the taxes on your contributions. You can withdraw contributions at any age, for any reason, without owing any income taxes or penalties.
Note
If you withdraw earnings, you may owe taxes and penalties. It depends on your age, how long you have held the account, and how you plan to use the money.
Exceptions to Early-Withdrawal Penalties
If you wait until you’re at least age 59½ and your account is at least five years old, you can withdraw contributions and earnings without owing taxes or penalties.
If you need the money sooner, you may qualify for an exception to the early-withdrawal penalty. You can avoid the penalty if you use the money for:
- A first-time home purchase (subject to a $10,000 lifetime limit)
- Qualified higher education expenses
- Unreimbursed medical expenses (7.5% of adjusted gross income (AGI))
- A series of substantially equal periodic payments
- To pay back taxes because of an Internal Revenue Service (IRS) levy placed against the IRA
Pay for Emergency Expenses
Conventional wisdom suggests that you have an emergency fund with three to six months worth of expenses. That way you can better pay for unexpected expenses. If you don't have an emergency fund, you can potentially rely on your Roth IRA funds to pay for unexpected expenses instead of turning to credit cards or other high interest rate loans.
Disadvantages to Withdrawing IRA Funds Early
Potential Taxes and Penalties
You may have to pay a 10% early-withdrawal penalty and income taxes if you withdraw any earnings from your Roth IRA. You can avoid both the taxes and the penalty if the account is at least five years old and you are59½ years old, or if you meet a few other specifications:
If you have had the account five years or more and are:
- Under age 59½: Withdrawals of earnings are subject to taxes and penalties. You may be able to avoid both if you use the money in certain circ*mstances such as for a first-time home purchase.
- Age 59½ and older: No taxes or penalties.
If you have not had the account five years or more and are:
- Under age 59½: Withdrawals of earnings are subject to taxes and penalties. You may be able to avoid the penalty (but not the taxes) in certain circ*mstances.
- Age 59½ and older: Withdrawals of earnings are subject to taxes, but not penalties.
Lost Retirement Savings
With IRAs, you cannot borrow money long term from an IRA. Instead, any money that you take out is a withdrawal, not a loan. You have 60 days to redeposit the money into the same IRA or another qualified account. After that, it is considered a permanent withdrawal—with tax and penalty consequences.
Loss of Future Earnings
If you don't repay the money, you will miss out on future earnings, and that can affect your retirement savings. A major advantage to a Roth IRA the power of compounding interest with its tax advantages. If you withdraw money from your Roth IRA early, you won't get the benefit of compounding.
How Can You Avoid Withdrawals from a Roth IRA?
If you need money, other sources of funding in addition to funds in a Roth IRA account may include: a 401(k) loan, personal loans, home equity loans or lines of credit, credit cards, or income from another job,
How Much Is the Early-Withdrawal Penalty on a Roth IRA?
The penalty for withdrawing earnings early from a Roth IRA is 10%. You will have to pay this penalty if your Roth IRA is less than five years old and you withdraw earnings before you reach age 59½. (You can withdraw your contributions at any time without penalty.) You also may have to pay taxes on your withdrawal. There are exceptions to these rules such as if you use the funds to buy your first home.
Can You Repay Your Roth IRA?
Removing money from an IRA is not like taking out a loan. You have 60 days from when you withdraw the funds to put it back into the same account or into another qualified retirement account. After that, the money is considered permanently withdrawn. You also may have to pay a penalty and/or taxes on the withdrawal.
The Bottom Line
When you have no other option, you can consider taking an early withdrawal from your Roth IRA. Weigh the pros and cons carefully and establish a plan for repaying the fund as soon as possible. Consult with a qualified financial planner or investment advisor for more guidance on the options for your specific situation.
