The IRS insists that individual retirement accounts be funded with earned income. The accounts offer tax advantages to spur workers to sock away dollars for retirement. Anyone with earned income, then, can fund an IRA. Unlike traditional IRA owners, Roth IRA owners of any age can withdraw their contributions at any time without triggering a penalty or income tax. Earnings distributions are subject to more restrictions.
Roth IRA principal withdrawals can be made by anyone who owns an account, regardless of age.
To remove earnings from a Roth without tax or penalty, you must have owned a Roth for at least five years and you must have turned 59 1/2. If you do not meet either of these conditions, you will have to pay income tax at your usual rate plus a penalty of 10 percent. If you are 59 1/2 or older and have owned your Roth for less than five years, you pay only income tax on the earnings withdrawal.
Rollover Withdrawals -- Five-Year Rule
If you roll funds from a traditional IRA, SEP-IRA or SIMPLE IRA into a Roth, you have to wait five years before you can withdraw any of the money. Each rollover starts its own five-year clock. Therefore, it is important to keep track of the date(s) and amount(s) of any rollovers you effect. Some individuals elect to open a new Roth IRA for each rollover, the better to track rollover principal, earnings, and contribution and withdrawal eligibility dates. It is also true that once you effect a rollover into a Roth, you cannot do another rollover to that same account until 12 months have passed.
Roth Ordering Rules
When it comes to the order of Roth withdrawals, the IRS considers all IRAs as one IRA. The order of distributions is regular contribution principal first, then rollover principal, then earnings. Say you have two Roth accounts. You contributed $5,000 per year to each from 2008 to 2013. Total principal in each account is $25,000. Earnings on those funds are $1,500 for one account and $1,200 for the other. You also made a rollover contribution of $50,000 from a traditional IRA to one of the Roths in 2008. Earnings on the rollover money amount to $5,000. In 2013, after reaching age 59 1/2, you withdraw $60,000 from one of the Roths. The IRS considers the first $50,000 as principal and the remaining $10,000 as rollover principal. This is the case no matter which account you withdraw the $60,000 from.