In this video, we’re covering what you need to know before you cash out your Roth IRA or take out a good sized chunk of cash from it – and what you need to know to avoid paying the 10% penalty for early withdrawal.

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The rules allowing a Roth IRA to be 100% tax-free and penalty-free are firm: Hold the account for more than 5 years and be age 59 ½ or older.

Now, if you’re under 59 ½ and you want to withdraw ALL or SOME of the money from your Roth – how much you have to fork over to the government for early withdrawal is determined by how long you’ve held the account.

And that amount is 5 years.

If you have had your Roth IRA for under 5 years and you are under 59 ½, you will be penalized 10% by the IRS. Remember, your contributions are always free from taxes since you deposited after-tax money into your Roth IRA. However, you will pay taxes on the gains you made plus pay the 10% early withdrawal penalty.

There are a few exceptions to this rule and if you meet these exception requirements, you may be able to avoid penalties (but not taxes).
If you have held your Roth IRA account for more than 5 years and you are under 59 ½, your earnings will not be subject to taxes. And you WILL NOT have to pay the 10% IRS penalty if you meet one of the following conditions:

You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
You use the withdrawal to pay for qualified education expenses.
You use the withdrawal for qualified expenses related to a birth or adoption.
You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.

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Cashing Out Roth IRA? [Avoid the 10% Penalty]

A Roth IRA is a retirement account that allows you to save for your retirement while enjoying tax-free growth on your investments. However, if you need to withdraw money from a Roth IRA before the age of 59 ½, you may be subject to a 10% penalty on the amount withdrawn. In this article, we will explore some situations in which you may be able to avoid the penalty.

1. Qualified Distributions

The IRS allows for qualified distributions from a Roth IRA without penalty. A qualified distribution is one that meets two criteria: the distribution must be made after the five-year period beginning with the first tax year in which a contribution was made to the Roth IRA, and the distribution must be made for one of the following reasons:

– The account holder is 59 ½ years old or older.
– The account holder becomes disabled.
– The distribution is made to pay for qualified educational expenses.
– The distribution is made to pay for qualified first-time homebuyer expenses.

2. Substantially Equal Periodic Payments

If you need to take money out of a Roth IRA before the age of 59 ½, you may be able to avoid the penalty by taking substantially equal periodic payments (SEPPs) from the account. To qualify, the payments must be made for a minimum of five years, or until the account holder reaches age 59 ½ (whichever is longer). The amount of the payments must be calculated using one of three IRS-approved methods.

3. Medical Expenses

If you have significant medical expenses, you may be able to withdraw money from a Roth IRA without penalty. To qualify for this exception, your medical expenses must exceed 7.5% of your adjusted gross income (AGI). The amount withdrawn must not exceed the amount of the medical expenses.

4. Levy by IRS

If the IRS levies your Roth IRA account, you may be able to withdraw the money without penalty. However, this exception only applies if the IRS levies the account due to a tax debt, and the amount withdrawn is equal to the amount of the levy.

5. Qualified Reservist Distributions

If you are a member of the National Guard or military reserve and are called to active duty for at least 180 days or for an indefinite period, you may be able to withdraw money from your Roth IRA without penalty. This exception only applies to individuals who were called to active duty after September 11, 2001.

In conclusion, taking money out of a Roth IRA before the age of 59 ½ can be a costly mistake due to the 10% penalty. However, by understanding the exceptions to the penalty, you may be able to avoid this costly fee. Before making any decisions regarding your Roth IRA account, it is important to consult with a financial advisor or tax professional to determine the best course of action for your specific situation.