If you have a Roth IRA, you probably can’t wait to enjoy tax-free withdrawals in retirement. But in order to enjoy those distributions without penalty, you’ll need to follow the Roth IRA withdrawal rules. Since the money comes out tax-free, there are stricter Roth IRA rules for withdrawals than for other types of retirement savings accounts. Here’s what you need to know to keep your Roth IRA distributions free of taxes and penalties.

Contributions and Earnings

The answer to, “When can you withdraw from Roth IRA?” depends on whether you’re okay with paying penalties and taxes on the money. For tax- and penalty-free withdrawals on the earnings of the account, you’ll need to wait until you’re 59½. The funds will also need to be in the Roth IRA account for at least five years.

There’s a reason for the 5-year rule on Roth IRA withdrawals. The money you put into a Roth IRA grows tax-free until the day you withdraw it. It remains tax-free as long as the withdrawal is a “qualified distribution,” which means you meet all the requirements for tax-free Roth IRA withdrawals.

Roth IRA Income Limits

In addition to Roth IRA distribution rules, the IRS limits IRA contributions to those earning below a certain income each year. For 2021, if your adjusted gross income is $140,000 or more and you’re a single tax filer, you can’t contribute at all. That income limit increases to $208,000 or more if you’re married and filing jointly.

But if you earn more than $125,000, or $198,000 as a joint filer, you can still enjoy the benefits of tax-free Roth IRA withdrawals at retirement, you’re just permitted to contribute a reduced amount during your working years. The amount you can contribute begins phasing out once you hit those earnings. If you make less than $125,000, or $198,000 as a joint filer, you can contribute up to the 2021 limit of $6,000, or $7,000 if you’re age 50 or older.

Roth IRA 5-Year Rule

If you’re nearing or past retirement age, the first rule you’ll have to follow for tax-free distributions is the 5-year rule. This stipulates that you have to leave the funds in a Roth IRA for at least five years before you can start taking earnings on the account out. If you begin withdrawals before the five years are up, it won’t be a qualified distribution, and taxes and penalties may apply.

The 5-year rule applies even if you aren’t taking a Roth IRA early withdrawal. That means if you’ve reached retirement age and you’re over 59½, you’ll still face taxes and penalties for withdrawing funds from your Roth IRA before five years have passed.

Qualified Distributions

The question “when can I withdraw from Roth IRA?” relates specifically to qualified withdrawals. A qualified withdrawal is one that meets the IRS’s “qualifications” to be both tax- and penalty-free.

To avoid the Roth IRA withdrawal penalty, a Roth IRA withdrawal must meet the following qualifications: the Roth IRA account holder must be at least 59½ years of age and the funds must have been in the account for at least five years or until the account holder dies.

The first two are required. But if you die before you reach the minimum age or the 5-year mark, distributions to your beneficiary will be considered a qualified withdrawal.

Non-Qualified Distributions

The answer to “can you take money out of a Roth IRA?” is technically “yes.” You can take money out at any time, whether you’re 59½ or not. Even if five years haven’t passed, you can technically take the funds that you have contributed out.

If you take money out of your Roth IRA, it’s what is known as a non-qualified distribution. This means it doesn’t meet the qualifications for tax-free, penalty-free withdrawals. Withdrawals aren’t limited to what your employer allows, either, unlike a 401(k) hardship withdrawal.

The good news with non-qualified distributions is that you’ll only pay taxes and penalties on what you earned while the money was in the account. The funds you put in, which you already paid taxes on, won’t be subject to taxes or penalties. Any earnings you take out will be taxed as regular income and you’ll pay a Roth IRA early withdrawal penalty, which is 10 percent.

Withdrawal Rules for Age 59 and under

If you’re under the age of 59½ and you want to withdraw the funds, you’ll simply request a withdrawal through the financial institution that holds your account. You’ll claim the amount you took out on Form 1040 at tax time and pay taxes, along with whatever IRA early withdrawal penalty applies to you.

There is one exception to the Roth IRA penalty and taxes on early withdrawals, though. If you have a court order to transfer part or all of your IRA to your ex-spouse during a divorce proceeding, you could get around the penalty. You’ll need to transfer the IRA, though, rather than taking the funds out. If you withdraw the funds, you’ll still be subject to taxes and penalties.

Withdrawal Rules for Over Age 59½

Waiting until you reach the age of 59½ will allow you to take Roth IRA withdrawals without taxes and penalties. As long as you satisfy the Roth IRA 5-year rule, you’ll be fine. If, however, the funds haven’t been in the IRA account for at least five years, you’ll owe taxes and a 10 percent penalty on any earnings you made on the funds you originally contributed.

The good news about Roth IRAs is that you don’t have to begin taking money out at any time. Although Traditional IRAs are subject to required minimum distributions (RMDs), Roth IRAs are not. You can leave some or all of the money in your IRA account until your death if you so choose.

Final Thoughts

Although you can take money from a Roth IRA tax-free, you’ll need to meet IRS requirements. If you’re weighing your options on how to best make withdrawals from your retirement accounts like a Roth IRA, we recommend working with a Certified Financial Planner® to reduce your tax burden as much as possible.

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