Withdrawing funds from a Roth IRA (Individual Retirement Account) can be complex, with the procedure and the implications determined by a number of factors. Pay attention to the rules that govern Roth IRA withdrawals, so that you are aware of penalties and taxes beforehand. An understanding of these rules will help you proceed in the best way possible if you need to withdraw Roth IRA funds.Generally, withdrawals (or distributions) are classified as qualified or nonqualified distributions. Nonqualified distributions are usually taxed as ordinary income.   

One Big Roth IRA

First, know that for withdrawal purposes, the IRS (Internal Revenue Service) considers all your Roth IRAs as one big Roth IRA. Why is this important? Looking at your various IRA accounts as one communal account makes it easier to apply the IRS’s requirements on withdrawing funds in a particular order. 

Withdraw Roth IRA Funds in this Order

The IRS requires that funds be withdrawn from Roth IRAs in a particular order:

·         Nontaxable annual contributions to a Roth IRA should be withdrawn first.
·         Conversion contributions to a Roth IRA should be withdrawn next (on a first in, first out basis).
·         Roth IRA earnings should be withdrawn last. Each of these designations is handled differently, and will have different financial and tax implications for you.  

Withdrawing Nontaxable Annual Contributions to a Roth IRA

Annual contributions to your Roth IRA can be withdrawn at any time, without penalty or tax. Note that these are your contributions only, and not any earnings from those contributions.  

Withdrawing Conversion Contributions to a Roth IRA

Conversion contributions to a Roth IRA are amounts that you converted from a traditional IRA into your Roth. While you already paid taxes on this money during the conversion from Traditional to Roth IRA, you may pay an IRA penalty of 10% when you withdraw these funds from your Roth IRA – if you withdraw within five years of making the conversion.

Withdrawing Conversion Contributions – When a Penalty Applies

If you take a distribution of conversion contributions from your Roth IRA, you will pay a 10% early withdrawal penalty if you are younger than 59-1/2 years. This applies only to conversion contributions taken five years or less since the conversion from Traditional to Roth IRA. If you take a distribution of conversion contributions from your Roth IRA five years (or more) after the conversion, no early withdrawal penalty applies.   

Withdrawing Roth IRA Earnings – Qualified Distributions

Roth IRA earnings that are considered a “qualified distribution” may be withdrawn without tax, at any time. The following instances constitute a “qualified distribution”:

• You are 59-1/2 or older.

• You have a qualifying disability. 

• You are the beneficiary of an IRA holder who has passed away.
• You plan to use the funds for qualified expenses for first-time homebuyers.
• You have significant unreimbursed medical expenses.
• You’re unemployed and plan to use the funds to pay medical insurance premiums.
• The amount you are withdrawing does not exceed your qualified higher education expenses.
• The IRS has levied your qualified Roth IRA for the amount of the distribution.
• You plan to engage in a method of timed payouts to yourself, based on how long you are likely to live. Designated “substantially equal period payments” by the IRS, you should consult with a tax advisor for the details of this method.