Do Roth IRA withdrawal rules include a penalty for early withdrawal?


There are many different penalty regulations governing Roth IRA contributions, conversions and earnings. Early withdrawal penalty rules that apply to conversions are different from the penalty rules for contributions. So if your Roth IRA contains contributions, conversions and earnings, the withdrawal penalty matters can become very complicated.

Roth IRA Early Withdrawal Penalty Rules

  • Under IRS regulations, Roth IRA distributions must follow a very strict order:
    • From non-taxable annual contributions to a Roth IRA (other than conversion amounts)
    • From conversion contributions, on a first-in, first-out basis
    • From earnings.
  • There is a 10 percent penalty for withdrawal from Roth IRA contributions if distributions are made before the owner has reached age 59.5. The 10 percent early withdrawal penalty is not to be confused with the non-qualified distribution taxes which can be imposed on top of the penalty.
  • There are numerous exceptions to the 10 percent early withdrawal rules, specified as follows:
    • Distributions which occur as a result of the IRA holder's disability;
    • If distributions are made due to the owner's death;
    • The earnings are used to pay for  medical expenses exceeding 7.5% of one's modified adjusted gross income (MAGI);
    • The funds go into medical insurance premiums after the IRA owner has received unemployment benefits for more than 12 weeks;
    • If the distributions are used to purchase a first-time home (whereupon the distribution amount is limited to $10,000);
    • If the money is used to pay back taxes imposed on the IRA;
    • If the distributions are used to pay for higher education for the IRA holder or their family members.
  • If you decide to convert to a Roth IRA, penalties will be different than those applying to annual contributions. An early withdrawal penalty on conversion distributions is imposed in two cases:
    • When the distribution takes place within five years from the conversion;
    • If you have made non-deductible contributions to your original IRA.

    However, if you wait for five years from conversion until you withdraw the money from the Roth IRA, you won't be subject to the 10 percent penalty, regardless of your age and other exception requirements. So if you intend to make early withdrawals, converting to a Roth IRA is a good idea, especially since traditional IRA does not provide the five-year exception rule.

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