Roth IRAs are one of the many ways you can save for retirement. Their key benefit – that you can withdraw funds in retirement without paying taxes on the distributions – has made them very popular among tax-savvy investors. Still, there are rules surrounding Roth IRA withdrawals that you should know in order to avoid costly penalties. How your distributions are treated by the IRS depends on your age, how long you’ve held the account and a number of other factors. Here’s what you need to know.

A financial advisor could help you create a financial plan for your retirement needs and goals. 

Roth IRA Withdrawal Rules: Qualified vs. Non-Qualified Distributions

Before withdrawing funds from your Roth IRA, it’s important to understand the difference between qualified and non-qualified distributions.

Qualified distributions are entirely tax- and penalty-free. To qualify, you must meet two conditions:

1. You must be at least 59 ½ years old.
2. Your Roth IRA must have been open for at least five years, starting from January 1 of the year of your first contribution.

Once you meet these criteria, your funds become fully accessible without penalties or taxes.

If you need access to your funds before meeting these requirements, there is some flexibility. You can withdraw your contributions at any time, for any reason, without incurring taxes or penalties. However, withdrawing earnings before qualifying will result in penalties.

For example, if you’ve contributed $5,000 to your Roth IRA, and it has grown to $6,000, you can withdraw the $5,000 without penalties. However, the additional $1,000 in earnings will remain off-limits unless you meet the age and time requirements. If you withdraw earnings prematurely, they will be taxed and you may face a 10% penalty.

When Early Roth Distributions Can Be Made

There are exceptions to the above rule. Certain circumstances allow you to withdraw earnings penalty-free. According to the IRS, here are the scenarios that qualify for these exceptions.

Unreimbursed Medical Expenses

Medical care costs can add up. And many taxpayers may face financial hardship when trying to afford the costs of a medical emergency. When you have medical expenses that are more than 7.5% of your adjusted gross income (AGI), you may be able to avoid distribution penalties.

You cannot take more than your deduction for medical expenses on your Schedule A. To verify the appropriate distribution amount, you can review your recent tax filings.

You are not required to itemize your deductions to take advantage of this exception.

Health Insurance Premiums

If you recently lost your job, affording your health insurance premiums can be a challenge. Since you need health care coverage, these payments are a necessity. The IRS allows account holders to take tax and penalty-free distributions to cover medical insurance premiums.

As long as you’re eligible, you can use your Roth IRA withdrawals to cover medical insurance premiums for you, your spouse or your dependents. You won’t be subject to the 10% penalty and earnings taxation as long as your withdrawals don’t exceed your payment amounts.

Inherited Roth IRAs

Provided the previous account holder has met the five-year rule, all beneficiary distributions won’t be subject to penalties or earning taxation. As a Roth IRA beneficiary, you have to take required minimum distributions (RMDs). You must take your first RMD no later than December 31 of the fifth year after the account holder passed away.

A word of caution: If you do not withdraw the funds before the date mentioned above or establish a required minimum distribution, you could face a 25% excise tax on the remaining account balance. If the RMD is corrected within two years, the penalty drops to 10%.

Purchase of Your First Home

If you need help paying for a down payment for your first home, it’s possible you can use money from your Roth. Even if you’re under 59 ½, you may be able to use your withdrawals to pay for the cost of building, buying or reconstructing your first home.

To qualify for the first homebuyer distribution, you must use your funds to pay the qualified acquisition costs. Keep in mind, the total distribution amount may not exceed $10,000. If you and your spouse are first-time home buyers, you may be able to withdraw $10,000 from each of your accounts.

Permanent Disability

Disability can put a wrench into your retirement savings. If you discover you’re unable to work due to a disability, you may need to tap into your savings.

You are considered disabled if you can prove that you cannot partake in work activity. Your lack of participation can be caused by your physical or mental health. A physician must determine that your condition will continue for an indefinite duration of time or may result in death.

Higher Education Expenses

College can be expensive. And some pre-retirees may need additional dollars to fund education expenses, often for children or grandchildren. Luckily, if you’ve contributed to a Roth IRA, you can use your account to pay for college costs.

The IRS lets account holders take tax and penalty-free distributions to pay for higher education expenses. You can use these funds to pay for higher education expenses for you, your spouse, your children or your grandchildren. These distributions can be used to pay for books, tuition, fees, supplies and more.

However, all higher education expenses must meet certain qualifications. Also, higher education expenses won’t qualify unless they’re from an eligible educational institution. Keep in mind, your Roth withdrawals can’t exceed the cost of your qualified higher education expenses. If they do, you are subject to earnings taxation and a 10% penalty.

Qualified Reservist Withdrawals

Any request for active duty can potentially derail your finances. If you run into financial distress, taking Roth distributions is a potential solution. Members of reserve components (Army Reserve, Marine Corps Reserve, Naval Reserve, etc.) who are called to active duty can take tax- and penalty-free withdrawals. To qualify, your active duty should exceed 179 days or be for an indefinite amount of time.

How to Establish a Roth IRA Account

Now that you understand Roth IRA withdrawal rules and penalties, you may have a better understanding of the benefits of a Roth IRA. If you are currently only contributing to a traditional account such as a 401(k), IRA or 403(b), you may want to consider opening a Roth account. Utilizing both retirement savings options can set you up for a more prosperous retirement.

Bottom Line

Contributing to a Roth IRA can be a smart way to reduce your tax burden in retirement. By opening a Roth IRA, you can take advantage of its tax-free growth to help offset future taxes. As you approach retirement, it’s crucial to understand the withdrawal rules and potential penalties associated with Roth IRAs. To make the most of your savings, developing a thoughtful withdrawal strategy is essential. Since this process can be complex, working with a financial advisor can provide valuable guidance. They can help you create a personalized distribution plan while avoiding unnecessary penalties.

Tips for Planning for Retirement

• A financial advisor can help you make strategic decisions around your retirement savings, including how and when to execute a Roth conversion. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• SmartAsset’s retirement calculator helps you see if you’re on track to meet your savings goals.

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