Can I withdraw my contributions from a Roth IRA without a penalty?

A Roth IRA provides retirement savers greater flexibility with their retirement money than other retirement plans such as 401(k) and traditional IRA. It allows retirement savers to access their money at any time before or after retirement tax and penalty-free. However, some Roth IRA withdrawals may trigger a tax or penalty.

You can withdraw the contributions made to a Roth IRA tax and penalty-free at any time. There are no age restrictions or limits on how much of the Roth IRA contributions you can withdraw from the account. However, you may owe taxes and penalties when you withdraw Roth IRA conversions and investment earnings if you don’t meet the requirements of a qualified distribution. 

Withdrawing Roth IRA Contributions

A Roth IRA is funded with after-tax contributions, meaning that you pay taxes upfront when making contributions. Unlike a traditional IRA and 401(k), retirement savers do not get a tax deduction when they contribute to the Roth IRA. Hence, since you have already paid taxes on the contributions, you won’t owe taxes and penalties when you withdraw the original contributions from a Roth IRA.

Also, the IRS does not place age restrictions on when you can withdraw Roth IRA contributions. You can withdraw the contributions at any age penalty-free. However, even with the flexible withdrawal rules, you should watch out not to exhaust your retirement savings before your retirement.

When you take a withdrawal from your Roth IRA, the contributions come first in the ordering list. Once you have exhausted the original contributions, you will get access to Roth IRA conversions, and the investment earnings will come out last.

Withdrawing Roth IRA Conversions

When you convert a pre-tax funded account such as an IRA or 401(k) to a Roth IRA, you must pay income taxes to reclassify these funds as Roth IRA savings. The Roth IRA conversions are treated differently from Roth IRA contributions. Roth conversions are subject to a 5-year rule, meaning you can only withdraw the converted funds tax and penalty-free once it has been in the account for at least five years.

The five-year rule for Roth IRA conversions is calculated in terms of tax years, and the conversion must occur before December 31. The 5-year rule starts counting from January 1 of the year you do the Roth IRA conversion.

For example, if you convert $10,000 from a 401(k) to a Roth IRA on July 1, 2022, the 5-year period starts counting from January 1, 2022, and lasts until January 1, 2027. If you withdraw the Roth IRA conversions before January 1, 2027, you will owe a 10% penalty for early withdrawals, unless you qualify for a penalty exemption.

If you have several Roth IRA conversions in a year, each conversion has its five-year rule. For example, if you converted a traditional IRA to Roth IRA in September 2020, and then converted a 401(k) to a Roth IRA in July 2022, each of these conversions has its own five-year rule. When withdrawing funds from a Roth IRA, you should consider if the funds include converted assets and the year in which the Roth IRA conversions were made.

To take a qualified distribution of the Roth IRA conversions, five years must have elapsed since you made the first contribution and you must be at least 59 ½ or older. If you are below age 59 ½ at the time of distribution, you will pay a 10% penalty on the withdrawal.

Withdrawing Roth IRA Earnings

The five-year rule also applies to Roth IRA earnings. To make a tax and penalty-free withdrawal of the Roth IRA earnings, you must be at least age 59 ½ or older and held the Roth IRA for at least five years since the first contribution.

If you have multiple Roth IRAs, the five-year rule applies to the first contribution you made to any of the Roth IRAs. Once you meet the five-year rule for one Roth IRA, all other Roth IRAs are considered to have satisfied the five-year rule.

How to Withdraw Roth IRA Funds

When withdrawing funds from a Roth IRA, you must request your IRA provider to transfer a distribution via check or wire transfer. You can request the payout on the IRA provider’s portal, or by calling the IRA provider.

Generally, once you request to withdraw from IRA, the funds can take up to three business days to reach your bank account. If the funds are held in a money market or mutual fund, you can receive the funds by the next business day if you send a request by 4 p.m. However, if the funds are invested in stocks, it can take up to three business days for the funds to be sold in the public market and the funds disbursed to your account.

Before you request a payout, you should consider if you will owe taxes or penalties on the distribution. While Roth IRA contributions will not attract taxes or penalties, Roth IRA conversions and investment earnings may attract taxes and penalties if the withdrawal is a non-qualified distribution.