The Roth IRA is best known for providing tax-free income in retirement, as none of the withdrawals from a Roth account are taxable provided you are over age 59 1/2 and have had a Roth account for at least five years. If you need to withdraw money from your Roth IRA before you reach age 59 1/2, a different set of rules comes into play. Depending on the source of the funds in the account, you could owe taxes and penalties on at least some of your withdrawal.
According to the IRS, contributions that you make to your Roth IRA are withdrawn first from the account. Since withdrawals of your contributions are tax and penalty free, any amount that you withdraw up to the total of all of your Roth IRA contributions will be tax free when you withdraw the funds to transfer money.
Rolled Over Amounts
Amounts converted from a traditional IRA are the second in the order of funds withdrawn from a Roth IRA. Any converted funds are tax free no matter when the conversion was done, as you have already paid the taxes, but are only penalty free if they were converted at least five years earlier. For example, as of November 2012, any funds converted in 2007 or earlier would be penalty free.
Earnings are the last funds to be withdrawn from a Roth IRA account. If you are under age 59 1/2, you will pay taxes at your normal income tax rate, and a 10 percent penalty on the amount of earnings that you withdraw. If you are older than 59 1/2, the earnings are tax-free and penalty-free as long as the account has been open for at least five years.
Say you transfer $50,000 out of your Roth IRA to your checking account in November, 2012, at the age of 40. You have made a total of $10,000 in Roth IRA contributions. In addition, you rolled over $10,000 from a traditional IRA in 2007, and $20,000 from a traditional IRA in 2010. The account has earnings of $20,000. With this transfer, you can take the $10,000 in contributions out without taxes or penalties. The $10,000 from the 2007 rollover is tax and penalty free. The $20,000 from the 2010 rollover is tax free, but you must pay a $2,000 penalty on the early withdrawal. The final $10,000 from Roth earnings is subject to taxes, as well as the 10 percent penalty.