When deciding whether you should make a Roth IRA withdrawal, it is important to consider how much money you plan to pull out, what you will use it for, and how it will affect your retirement plans. While you can withdrawal from your contributions without fear of taxes or penalties, pulling from your earnings often comes at a cost if you plan to make your Roth IRA withdrawal before the age of 591/2. Also, if you make a habit of withdrawing your contributions, the principal on which interest compounds will be smaller and will generate less interest. This may significantly alter your financial situation at retirement, especially if you intend to rely heavily on the money from your Roth IRA.
Typically, a tax free, penalty free, or qualified, Roth IRA withdrawal can be made after the age of 591/2 as long as it has been five years since you first opened and contributed to your account. Otherwise, it can be a problem. If you made your first contribution on your 57th birthday, for example, you would need to wait until your 62nd birthday to make a withdrawal.
There are also times when you can make a Roth IRA withdrawal before the age of 591/2 without taxes or penalties. Situations that would warrant such a withdrawal include becoming disabled or using the money toward a first home for you, your children, or your grandchildren, although there is a $10,000 lifetime limit on the latter scenario. The money can also be paid out to your beneficiary without taxes or penalties in the event of your death. All of these circumstances, however, require that the money be in the account for five years prior to disbursement.
Should you need to withdraw money prior to meeting the five-year requirement, there are some situations in which it is possible to do so without paying the early withdrawal penalty; the drawback is that you are still responsible for income taxes on the money you receive. Examples of this exception to the early withdrawal penalty include making a Roth IRA withdrawal to pay higher education expenses or to cover insurance premiums after a job loss. These are not the only circumstances in which the withdrawal penalty can be waived, and it is best to check with your financial adviser prior to making a Roth IRA withdrawal to see if your situation meets the criteria.
Regardless of whether you can withdraw money from your Roth IRA without paying taxes or penalties, it is important to consider the fact that the money in a Roth IRA is intended for use in retirement. Making withdrawals from your contributions or your earnings depletes the money you have at work for you and your future. For this reason, it is imperative to consider whether you will have time to reimburse yourself for the money you pull out of your account and whether the planned withdrawal is the best way to satisfy a financial or personal necessity.