Traditional and Roth IRA Withdrawal Rules & Penalties
Table of Contents
The purpose of an Individual Retirement Account (IRA) is to save for retirement. Ideally, you sock away money consistently in an IRA and your investment grows over time.
However, IRAs have strict withdrawal rules both before and after retirement. It’s very important to understand the IRA rules for withdrawals to avoid incurring penalties.
Here’s what you need to know about IRA withdrawal rules.
Key Points
• Traditional and Roth IRAs have specific withdrawal rules and penalties.
• Roth IRA withdrawal rules include the five-year rule for penalty-free withdrawals, and required minimum distributions (RMDs) for inherited IRAs.
• Traditional IRA withdrawals before age 59 ½ incur regular income taxes and a 10% penalty.
• There are exceptions to the penalty, such as using funds for medical expenses, health insurance, disability, education, and first-time home purchases.
• Generally speaking, early IRA withdrawals might be thought of as a last resort due to the potential impact on retirement savings and tax implications.
Roth IRA Withdrawal Rules
So when can you withdraw from a Roth IRA? The IRA withdrawal rules are different for Roth IRAs vs traditional IRAs. For instance, qualified withdrawals from a Roth IRA are tax-free, since you make contributions to the account with after-tax funds.
There are some other Roth IRA withdrawal rules to keep in mind as well.
The Five-year Rule
The date you open a Roth IRA and how long the account has been open is a factor in taking your withdrawals.
According to the five-year rule, you can generally withdraw your earnings tax- and penalty-free if you’re at least 59 ½ years old and it’s been at least five years since you opened the Roth IRA. You can withdraw contributions to a Roth IRA anytime without taxes or penalties. (The annual IRA contribution limits for 2024 and 2025 are $7,000, or $8,000 for those age 50 and up.)
Even if you’re 59 ½ or older, you may face a Roth IRA early withdrawal penalty if the retirement account has been open for less than five years when you withdraw earnings from it.
These Roth IRA withdrawal rules also apply to the earnings in a Roth that was a rollover IRA. If you roll over money from a traditional IRA to a Roth and you then make a withdrawal of earnings from the Roth IRA before you’ve owned it for at least five years, you’ll owe a 10% penalty on the earnings.
For inherited Roth IRAs, the five-year rule applies to the age of the account. If your benefactor opened the account more than five years ago, you can withdraw earnings penalty-free. If you tap into the money before that, though, you’ll owe taxes on the earnings.
Required Minimum Distributions (RMDs) on Inherited Roth IRAs
In most cases, you do not have to pay required minimum distributions (RMDs) on money in a Roth IRA account.
However, according to the SECURE Act, if your loved one passed away in 2020 or later, you don’t have to take RMDs, but you do need to withdraw the entire amount in the Roth IRA within 10 years.
There are two ways to do that without penalty:
• Withdraw funds by December 31 of the fifth year after the original holder died. You can do this in either partial distributions or a lump sum. If the account is not emptied by that date, you could owe a 50% penalty on whatever is left.
• Take withdrawals each year, based on your life expectancy.
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Tax Implications of Roth IRA Withdrawals
Contributions to a Roth IRA can be withdrawn any time without taxes or penalties. However, let’s say an individual did active investing through their account, which generated earnings. Any earnings withdrawn from a Roth before age 59 ½ are subject to a 10% penalty and income taxes.
Recommended: Retirement Planning Guide
Traditional IRA Withdrawal Rules
If you take funds out of a traditional IRA before you turn 59 ½, you’ll owe regular income taxes on the contributions and the earnings, per IRA tax deduction rules, plus a 10% penalty. Brian Walsh, CFP® at SoFi specifies, “When you make contributions to a traditional retirement account, that money is going to grow without paying any taxes. But when you take that money out — say 30 or 40 years from now — you’re going to pay taxes on all of the money you take out.”
RMDs on a Traditional IRA
The rules for withdrawing from an IRA mean that required minimum distributions kick in the year you turn 73 (as long as you turned 72 after December 31, 2022). After that, you have to take distributions each year, based on your life expectancy. If you don’t take the RMD, you’ll owe a 25% penalty on the amount that you did not withdraw. The penalty may be lowered to 10% if you correct the mistake and take the RMD within two years.
Early Withdrawal Penalties for Traditional IRAs
In general, an early withdrawal from a traditional IRA before the account holder is at least age 59 ½ is subject to a 10% penalty and ordinary income taxes. However, there are some exceptions to this rule.
Recommended: What Is a SEP IRA?
When Can You Withdraw from an IRA Without Penalties?
As noted, you can make withdrawals from an IRA once you reach age 59 ½ without penalties.
In addition, there are other situations in which you may be able to make withdrawals without having to pay a penalty. These include having medical expenses that aren’t covered by health insurance (as long as you meet certain qualifications), having a permanent disability that means you can no longer work, and paying for qualified education expenses for a child, spouse, or yourself.
Read more about these and other penalty-free exceptions below.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
9 Exceptions to the 10% Early-Withdrawal Penalty on IRAs
Whether you’re withdrawing from a Roth within the first five years or you want to take money out of an IRA before you turn 59 ½, there are some exceptions to the 10% penalty on IRA withdrawals.
1. Medical Expenses
You can avoid the early withdrawal penalty if you use the funds to pay for unreimbursed medical expenses that total more than 7.5% of your adjusted gross income (AGI).
2. Health Insurance
If you’re unemployed for at least 12 weeks, IRA withdrawal rules allow you to use funds from an IRA penalty-free to pay health insurance premiums for yourself, your spouse, or your dependents.
3. Disability
If you’re totally and permanently disabled, you can withdraw IRA funds without penalty. In this case, your plan administrator may require you to provide proof of the disability before signing off on a penalty-free withdrawal.
4. Higher Education
IRA withdrawal rules allow you to use IRA funds to pay for qualified education expenses, such as tuition and books for yourself, your spouse, or your child without penalty.
5. Inherited IRAs
IRA withdrawal rules for inherited IRAs state that you don’t have to pay the 10% penalty on withdrawals from an IRA, unless you’re the sole beneficiary of a spouse’s account and roll it into your own, non-inherited IRA. In that case, the IRS treats the IRA as if it were yours from the start, meaning that early withdrawal penalties apply.
6. IRS Levy
If you owe taxes to the IRS, and the IRS levies your account for the money, you will typically not be assessed the 10% penalty.
7. Active Duty
If you’re a qualified reservist, you can take distributions without owing the 10% penalty. This goes for a military reservist or National Guard member called to active duty for at least 180 days.
8. Buying a House
While you can’t take out IRA loans, you can use up to $10,000 from your traditional IRA toward the purchase of your first home — and if you’re purchasing with a spouse, that’s up to $10,000 for each of you. The IRS defines first-time homebuyers as someone who hasn’t owned a principal residence in the last two years. You can also withdraw money to help with a first home purchase for a child or your spouse’s child, grandchild, or parent.
In order to qualify for the penalty-free withdrawals, you’ll need to use the money within 120 days of the distribution.
9. Substantially Equal Periodic Payments
Another way to avoid penalties under IRA withdrawal rules is by starting a series of distributions from your IRA spread equally over your life expectancy. To make this work, you must take at least one distribution each year and you can’t alter the distribution schedule until five years have passed or you’ve reached age 59 ½, whichever is later.
The amount of the distributions must use an IRS-approved calculation that involves your life expectancy, your account balance, and interest rates.
Understanding How Exceptions Are Applied
If you believe that any of the exceptions to early IRA withdrawal penalties apply to your situation, you may need to file IRS form 5329 to claim them. However, it’s wise to consult a tax professional about your specific circumstances.
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Is Early IRA Withdrawal Worth It?
While there may be cases where it makes sense to take an early withdrawal, many financial professionals agree that it should be a last resort. These are disadvantages and advantages to consider.
Pros of IRA Early Withdrawal
• If you have a major expense and there are no other options, taking an early withdrawal from an IRA could help you cover the cost.
• An early withdrawal may help you avoid taking out a loan you would then have to repay with interest.
Cons of IRA Early Withdrawal
• By taking money out of an IRA account early, you’re robbing your own nest egg not only of the current value of the money but also the chance for future years of compound growth.
• Money taken out of a retirement account now can have a big impact on your financial security in the future when you retire.
• You may owe taxes and penalties, depending on the specific situation.
Alternatives to Early IRA Withdrawal
Rather than taking an early IRA withdrawal and incurring taxes and possible penalties, as well as impacting your long-term financial goals, you may want to explore other options first, such as:
• Using emergency savings: Building an emergency fund that you can draw from is one way to cover unplanned expenses, whether it’s car repairs or a medical bill, or to tide you over if you lose your job. Financial professionals often recommend having at least three to six months’ worth of expenses in your emergency fund.
To create your fund, start contributing to it weekly or bi-weekly, or set up automatic transfers for a certain amount to go from your checking account into the fund every time your paycheck is direct-deposited.
• Taking out a loan: You could consider asking a family member or friend for a loan, or even taking out a personal loan, if you can get a good interest rate and/or favorable loan terms. While you’ll need to repay a loan, you won’t be taking funds from your retirement savings. Instead, they can remain in your IRA where they can potentially continue to earn compound returns.
Opening an IRA With SoFi
IRAs are tax-advantaged accounts you can use to save for retirement. However, it is possible to take money out of an IRA if you need it before retirement age. Just remember, even if you’re able to do so without paying a penalty, the withdrawals could leave you with less money for retirement later.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
Can you withdraw money from a Roth IRA without penalty?
You can withdraw your contributions to a Roth IRA without penalty no matter what your age. However, you generally cannot withdraw the earnings on your contributions before age 59 ½, or before the account has been open for at least five years, without incurring a penalty.
What are the rules for withdrawing from a Roth IRA?
You can withdraw your own contributions to a Roth IRA at any time penalty-free. But to avoid taxes and penalties on your earnings, withdrawals from a Roth IRA must be taken after age 59 ½ and once the account has been open for at least five years.
However, there are a number of exceptions in which you typically don’t have to pay a penalty for an early withdrawal, including some medical expenses that aren’t covered by health insurance, being permanently disabled and unable to work, or if you’re on qualified active military duty.
What are the 5 year rules for Roth IRA withdrawal?
Under the 5-year rule, if you make a withdrawal from a Roth IRA that’s been open for less than five years, you’ll owe a 10% penalty on the account’s earnings. If your Roth IRA was inherited, the 5-year rule applies to the age of the account. So if you inherited the Roth IRA from a parent, for instance, and they opened the account more than five years ago, you can withdraw the funds penalty-free. If the account has been opened for less than five years, however, you’ll owe taxes on the gains.
How do inherited IRA withdrawal rules differ?
According to inherited IRA withdrawal rules, you don’t have to pay the 10% penalty on withdrawals from an IRA unless you’re the sole beneficiary of a spouse’s account and roll it into your own, non-inherited IRA. In that case, the IRS treats the IRA as if it were yours from the start, meaning that early withdrawal penalties apply.
In addition, for inherited IRAs, the five-year rule applies to the age of the account. If the person you inherited the IRA from opened the account more than five years ago, you can withdraw earnings penalty-free.
Are there penalties for missing RMDs?
Yes, there are penalties for missing RMDs. You are required to start taking RMDs when you turn 73, and then each year after that. If you miss or don’t take RMDs, you’ll typically owe a 25% penalty on the amount that you failed to withdraw. The penalty could be lowered to 10% if you correct the mistake and take the RMD within two years.
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