Roth IRA Early Distribution Rules

Roth contributions may be withdrawn anytime free of penalty or additional tax. Capital earnings and conversions must meet a 5-year holding requirement before distribution to avoid penalty and or taxes. Qualified distribution or early withdrawal exceptions cannot be applied until the 5-year holding period is met, otherwise earnings distributions will be subject to a 10 percent penalty and assessed taxes at your marginal rate of interest. Secondly, conversions must each meet a 5-year holding period or your distribution will be taxed. Non-deductible conversions may be withdrawn anytime but must follow first-in, first-out (FIFO) basis.

Contributions are the first to be withdrawn in the ordering rules provision. Conversions following FIFO basis come next. If you have a mix of tax-deductible and non-deductible contributions, tax-deductible conversions come first and non-deductible conversions come second. The last in the ordering line is capital earnings, which again may or may not be subject to penalty and taxes depending on the holding period, and if you qualify for one of the qualified distributions or early withdrawal exceptions.

You must meet one of the qualified distribution criteria in order to withdraw capital earnings both penalty free and tax-free. Qualified distributions meet one of the following criteria: disability, review IRS Code Section 72(m)(7) and IRS Publication 590 to be clear on disability requirements; death and distribution of assets to beneficiary or estate; medical insurance premium payments if receiving unemployment compensation beyond 12 weeks; or you are at least age 59 ½. If you do not meet one of these criteria, you might qualify for an early withdrawal exception.

Early earnings withdrawals must meet one of the following exceptions to avoid being assessed an early 10 percent tax penalty. Withdrawals meeting one of these exceptions will only be subject to taxes at your marginal rate of interest. Here are the exceptions: series of substantially equal periodic payments; paying for unreimbursed medical expenses exceeding 7 ½ percent of your Adjusted Gross Income (AGI); a lifetime limit of $10,000 is used towards costs of a first time home purchase; paying for qualified higher education expenses (for the account owner or eligible family members); or paying an IRS tax levy.

Roth provisions benefit beneficiaries substantially in regards to distributions. Spousal beneficiaries are not required to withdraw from the Roth at anytime, which is beneficial if the account holding period wasn't met by the account owner before passing; therefore, a surviving spouse can avoid taxes on earnings and conversions by opting to withdraw funds sometime after the 5-year holding period or not at all. Non-spouse beneficiaries can wait up till the fifth anniversary of the account owner's death to take distributions, ensuring all distributions are tax-free. Or, a non-spouse beneficiary could stretch out distributions over her lifetime if starting distribution no later than December 31 of the following year of the account owner's death, which may be more suitable if the account owner met the holding period at the time of passing.