Roth IRA Interest and Profits Withdrawal
When taking a qualified withdrawal from your Roth IRA, you don't need to know whether you're withdrawing interest or contributions because it all comes out tax-free. To take a qualified withdrawal, you must be either 59 1/2, permanently disabled or withdrawing up to $10,000 for a first home. In addition, the Roth IRA must be at least five years old. If it's not a qualified distribution, you owe income taxes and potentially penalties on the earnings portion of the withdrawal.
Subtract the amount of contributions in your Roth IRA from your withdrawal to figure the amount of earnings you are taking out. If the amount of contributions in your Roth IRA exceed the amount of your withdrawal, you are removing contributions only, which come out tax-free and penalty-free. If the withdrawal exceeds the amount of contributions, you are removing earnings which, if not qualified for withdrawal, might garner tax and penalty payments. For example, say you have $10,000 worth of contributions in your account and you take out $14,000. You are not qualified to remove the earnings yet, so $4,000 of your distribution constitutes taxable earnings; the $10,000 worth of contributions aren't taxed or penalized.Step 2
Multiply the amount of taxable earnings withdrawn by your marginal tax rate to figure the taxes you owe. In this example, if you fall within the 25 percent tax bracket, multiply $4,000 by 0.25 to find that you owe $1,000 in taxes.Step 3
Subtract the value of any penalty exemption that you qualify for to figure the portion of your earnings that are hit with the early withdrawal penalty. These include suffering a permanent disability, higher education expenses, medical expenses exceeding 7.5 percent of adjusted gross income and medical insurance premiums while unemployed. Continuing the example, if you spent $2,500 on medical expenses exceeding 7.5 percent of your adjusted gross income, subtract $2,500 from $4,000 to find that you owe the early withdrawal penalty on $1,500 of your distribution.Step 4
Multiply the portion of your earnings hit with the early withdrawal penalty by 10 percent to calculate your early withdrawal penalty. In this example, multiply $1,500 by 0.1 to find you owe $150 in early withdrawal penalties on top of your income taxes.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."