Is there a Penalty for Early Withdrawal on a Roth IRA?

When you're looking at ways to fund your retirement, you'll almost certainly end up looking at tax friendly retirement accounts. These types of accounts, which include Roth IRAs, traditional IRAs, and 401 (k) accounts, are tax friendly because of rules and regulations that the federal government has created. These regulations allow you to either take a deduction on your income taxes at the time you make the contribution to the retirement account or at the time you collect the gains.

The reason the federal government has created these types of tax beneficial retirement accounts is to encourage Americans to save money toward retirement, such as by using a Roth IRA account. The opportunity to save some money on income taxes, either now or in the future, is a significant benefit to people considering the pros and cons of Roth IRAs, so they're willing to place their money in these types of accounts. However, the downside to these regulations is that if you later end up needing that money to meet your household expenses, you'll have to pay a penalty for undergoing an early withdrawal.

So, why is there a penalty for early withdrawal on a Roth IRA? Basically, the penalty goes back to the idea that the federal government wants to make sure citizens are saving for retirement. Because of the penalty, most people will very carefully consider whether they should try to withdraw that money in the Roth IRA retirement account, or whether they should try to find another way to meet those household expenses, thereby leaving the money in the retirement account untouched. The federal government wants people to use the latter option.

Penalty Amounts on Roth IRAs

The rules for determining the penalties for withdrawing money early from a Roth IRA account are pretty easy to understand. You are allowed to withdraw money from your Roth IRA account once you reach age 59 1/2. If you withdraw funds from the account before you reach that age, you will be assessed the penalty. This penalty consists of a 10% assessment against whatever amount you've withdrawn from the Roth IRA account. If you withdraw $10,000 early, for example, you'll pay a $1,000 penalty.

In addition, if you make an early withdrawal, you must pay income taxes on the amount you've withdrawn at whatever income tax rate you're being assessed during the year when you've made the early withdrawal. When you make this early withdrawal, most financial institutions or brokerages will offer to withhold some of the money from your withdrawal, sending this money to the federal government. This is a good way to make sure that you don't spend the money that you need to pay to the government for the penalty and the income tax assessment.

You potentially can have the 10% penalty waived, if you meet a few different criteria. For example, if you're making a first-time home purchase, you can withdraw up to $10,000 to put toward the down payment without paying the 10% penalty. Those people who've suffered a disability during the year or who have accumulated a large amount of medical bills also can apply to have the penalty waived. Those who are unemployed can use the money to pay health insurance premiums, too.

Even if any of the above mentioned criteria apply to your situation, you'll still have to pay the income tax on the funds you've withdrawn. That's why it's very important that you carefully consider whether grabbing funds from your Roth IRA is a smart idea. You'll really want to make sure you've exhausted every other option before tapping the Roth IRA for money with an early withdrawal.

Roth IRA

Roth IRA