Understand Roth IRA withdrawal rules and how to avoid penalties.
The Roth Individual Retirement Account (IRA) is one of the best-known tax-advantaged retirement accounts. One reason it’s so popular is because withdrawals are, for the most part, tax-free during retirement. But there is a Roth IRA early withdrawal penalty. And there are a few other rules to keep in mind as well.
Here’s what you need to know about Roth IRA withdrawal rules.
With a Roth IRA, contributions are made with after-tax money. As a result, it’s important to understand the difference between your contributions and the earnings on those contributions.
The contributions you make can be withdrawn at any time, without penalty and without paying federal taxes. That’s because you paid taxes on that money up front.
However, your earnings are another matter. If you take an early distribution on earnings, you’ll have to pay taxes on the amount, plus a 10% penalty.
The IRS has made it relatively simple, though. When you take an early withdrawal, contributions come out first, and they should be disclosed to you by your custodian.
Yes. If you’ve held your Roth IRA for at least five years, there are some ways to avoid the early withdrawal penalty as well as taxes on the amount you withdraw. You can sidestep the Roth IRA penalty if:
It’s possible to avoid the 10% Roth IRA early withdrawal penalty but still pay taxes on the amount you withdraw if:
Additionally, even if you’re age 59 1/2, you’ll have to pay taxes on the earnings withdrawal from your Roth IRA if you haven’t had the account for at least five years. You need to have a Roth IRA for at least five years to avoid paying taxes on the earnings withdrawals in any situation.
Roth IRA withdrawal rules allow you to get rid of excess contribution amounts without penalty—as long as you take care of it before the tax filing deadline. You also need to withdraw any earnings that resulted from the excess contribution. The earnings will be considered earned income for the year in which the excess contribution was made.
Make sure to check your information to avoid excess contributions, and arrange to withdraw that money before the tax filing deadline if you made a mistake. If you file for an extension, you have until October 15 to make the change.
No. Unlike a traditional IRA, there are no RMDs for Roth IRAs. But if you're the beneficiary of an inherited Roth IRA (see below), you may have to take RMDs.
First of all, it’s important to note that the Roth IRA must have been open for at least five years in order to avoid taxes on the earnings. Other than that, there are two basic choices for the distribution of the assets in the account:
Also, if you’ve inherited an IRA from your spouse, you have a choice that no one else has—you can transfer the IRA to your name and treat it as if it’s your own Roth IRA. From that point, it would be subject to all the regular IRA rules.
If you have a traditional 401(k) and you roll it into a Roth IRA, you’ll need to pay taxes on any untaxed contributions. In general, contributions to a traditional 401(k) are pretax, so when you roll the money into a Roth IRA (where the earnings grow tax-free), you need to pay taxes. On the other hand, if you have a Roth 401(k), you can roll it into a Roth IRA without worrying about taxes.
Yes, it’s possible to convert a traditional IRA to a Roth IRA. However, you’ll have to pay taxes on contributions that were made pretax, as well as any gains.
In order to avoid a Roth IRA penalty when withdrawing earnings, you need to observe the five-year rule with Roth conversions. The five-year period starts on the first day of the tax year in which you made the conversion. This applies whether you’re converting a 401(k) or a traditional IRA to a Roth IRA. There are exceptions, but in general, a converted Roth is treated as a new IRA, with a new five-year period established.
Get access to tools to help you with retirement planning.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different. TD Ameritrade does not provide legal or tax advice. Please consult your legal or tax advisor before contributing to your IRA.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.