The rules for withdrawal from a Roth IRA account are different for contributions and earnings. Contributions are the monies deposited directly into the account, while earnings are the profits that have accumulated in an account through investments. Both contributions and earnings grow tax-free within an account over time.
Withdrawal rules for contributions:
1. Penalty-free and tax-free withdrawals may be made if the account is 5 years old and the account holder is 591⁄2 years old.
2. Contributions may be withdrawn from a Roth IRA account at any time. Contributions are made with after-tax dollars, so there are no taxes or penalties for withdrawing them.
Withdrawal rules for earnings:
3. Earnings or profits from a Roth IRA, may be withdrawn with a 10% penalty and normal federal income taxes, depending on the age of the account and account holder.
4. Penalty and tax-free withdrawals may be made from a Roth IRA, after 5 years of opening a Roth IRA account and if the owner of the account is younger than 591⁄2, through Qualified Distributions. Some examples of Qualified Distributions defined by the IRS are:
- First time home purchases up to $10,000
- Rolled over IRA’s (if the IRA is rolled over correctly)
- During a divorce: Under a domestic relations order, distributions may be considered qualified
- Qualified higher education expenses
- Health insurance premiums, if unemployed for more than 12 consecutive weeks
- Substantially equal payments made in a series
- The account holder becomes disabled
- Unreimbursed medical expenses that are over 7.5% of (AGI) adjusted gross income
- The account owner dies
- Birth of a child expenses/adoption expenses