When you make a withdrawal from a Roth IRA that satisfies Internal Revenue Service rules as a qualified distribution, the money you take out is exempt from taxes. If a withdrawal does not meet IRS requirements as a qualified distribution, it is considered an early distribution. Depending on the circumstances and the amounts you withdraw, you may have to pay some income taxes and penalties on these withdrawals.
A Roth IRA withdrawal must meet two IRS requirements to be qualified. First, the Roth IRA must be at least five years old, counting from January 1 of the year the IRA was opened. In addition, you must be 59½ years old, disabled or using the money for the purchase or repair of a first home, up to $10,000. If you inherit a Roth IRA, distributions are qualified provided the five-year requirement is met.
Withdrawal of Contributions
Any unqualified withdrawal is considered an early distribution, but unlike early distributions from a traditional IRA, early distributions from a Roth often have no tax consequences. You can remove any amount, up to the total amount you contributed, tax free at any time. If your Roth is worth $120,000 and your contributions amounted to $80,000, you can remove up to $80,000 whenever you like, tax- and penalty-free: the reasoning is that the $80,000 is money on which you've already paid taxes. You are not required to pay tax twice.
Withdrawal of Earnings
When you withdraw earnings from a Roth IRA as an unqualified early distribution, the money you take out is taxable as ordinary income. You must report the withdrawal of earnings on your tax return for the year in which you make the withdrawal and pay any income tax due. The IRS also levies a 10 percent penalty tax on earnings you withdraw early, unless an exception rule applies.
If you have rolled over money from another retirement account into your Roth IRA, the money is supposed to stay in the Roth IRA for five years or until you turn 59 1/2, whichever comes first. When you withdraw rollover funds early, you have to pay the 10 percent penalty tax unless an exception rule applies. However, the rollover funds you withdraw are not subject to income taxes.
Penalty Tax Exceptions
The IRS waives the 10 percent penalty tax in certain circumstances. For example, if you use the money to pay unreimbursed medical bills in excess of 7.5 percent of your adjusted gross income or to pay for health insurance when you are out of work, your withdrawals are not subject to the penalty. Likewise, you may also make an early withdrawal without penalty to pay qualified education expenses or to buy a first home, up to certain limits. When you withdraw money before the Roth IRA has been open for five years for a purpose that would otherwise be a qualified distribution, you do not incur the 10 percent penalty tax. Finally, you do not pay the penalty tax on funds you withdraw from an inherited Roth IRA.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.