Roth IRAs (Individual Retirement Arrangement) is a popular savings tool as it allows flexibility when withdrawing funds. Additionally, a Roth IRA allows your money to grow tax deferred, or tax free while it is in the IRA. When you withdraw, you may be able to make tax free and penalty free withdrawals, as long as you time it correctly. And unlike many forms of retirement accounts, you do not have to take minimum distributions. You can leave the money in the IRA until you die, when a beneficiary will withdraw the Roth.

Normally, if you reach age 59 ½, you may withdraw from a Roth and avoid paying a 10% penalty, as long as you have been in the Roth for five years.   The five year rule means that you opened your Roth five years prior to your first withdrawal. This is even if you are older than 59 ½. So, if you opened your Roth at age 59, then you must still wait five years, or until age 64 to avoid the 10% penalty. A 'normal' distribution occurs, one that avoids the 10% penalty when:

  • You invested in your Roth at least five years ago, and you are at least 59 ½ years old.
  • You withdrew from your Roth because you are permanently and totally disabled.
  • A beneficiary withdrew from your Roth after your death.
  • You used the withdrawal to purchase your first home, and the withdrawal is less than $10,000.
  • You withdrew for qualified education expenses for yourself, your spouse, your children or their descendents.
  • The withdrawal pays for medical expenses in excess of 7.5% of your Adjusted Gross Income (lines 37 & 38 of the form 1040)
  • The withdrawal pays for an IRS levy

For additional information, see IRS Publication 575 or contact your local income tax preparation office for assistance.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.