Roth IRA Penalties

The Roth IRA is the gold standard of retirement accounts; however, Roth IRA penalties can be pretty punishing if you aren’t careful. Note the following rules apply to withdrawing earnings from a Roth IRA.  Roth contributions, of course, can be withdrawn tax-free at any time for any reason since you’ve already paid income tax on them.

If you have two or more Roth IRAs, the Internal Revenue Service (IRS) will consider them as one when it comes to making withdrawals. In addition, the IRS also stipulates that these distributions have to be made in a certain order, which applies in all cases. The law states that distributions must first be made from non-taxable yearly contributions to a Roth IRA, and then from conversion contributions, on what accountants refer to as a first-in, first-out or FIFO basis.

Roth IRA Penalities

With a few exceptions, most Roth IRA distributions before age of 59½ are subject to a 10% early withdrawal penalty. Note that this early-withdrawal penalty is in addition to and not instead-of the regular income taxes that are imposed on non-qualified distributions.

The early-withdrawal penalty is applied when conversion money from the account is distributed if:

• the event takes plans within the five-year tax period that begins with the year when the conversion was distributed from a traditional IRA, and
• to the extent that the distribution can be attributed to funds that were included in the account owner’s gross income because of that conversion.

The early-distribution penalty does not apply to any Roth IRA distribution that:

• occurs because the owner of the account dies or becomes disabled,
• is part of a series of “substantially equal periodic payments” that are made over the IRA owner’s life expectancy,
• is used for payment of unreimbursed medical expenses exceeding 7½% of the account owner’s adjusted gross income (AGI),
• is used tor payment of medical insurance premiums and the IRA owner has been receiving unemployment compensation for more than three months,
• is used to cover the expenses of a first-time home purchase, with $10,000 as the lifetime limit,
• is used to pay for the allowable expenses for higher education of the account owner and/or eligible family members., or
• is used for payment of back taxes when the IRS has placed a levy on the Roth IRA.

So if you foresee that you may need funds to put toward the non-retirement goals listed above, you can take some of it out of your Roth IRA with out incurring any Roth IRA penalties or taxes.