So you want to take an early withdrawal from your Roth IRA, and you’re wondering what, if any, IRA penalties you will incur because of this. Chances are, it’s a bit more than you want to pay. Let’s take a look at how and why you can avoid some of these penalties.
A Roth IRA early withdrawal is described as an early removal of funds before the age of 59 ½, or before a 5 tax year time frame. You have funded your Roth IRA with after tax funds so you will never have to pay income tax on the money you placed in the fund, only on the gains that occurred.
One of the exceptions to the 10% early withdrawal penalty is the use of funds for higher education. This can be for yourself, a child or grandchild. You will likely still have to pay income tax on the money so be sure this is the right choice.
Another exception to the early penalty charge is if you or the people you will be lending the money to are first time home buyers. This exception has a limit though as well of $10,000. Though, if you and a future spouse or a child each have a Roth IRA you both can withdraw this amount of money to be used as a down payment on the home.
The 5 year rule comes into play as well here. You cannot open a Roth IRA when you are 58 and then decide to remove funds at 59 ½ without incurring penalties as well. The fund needs to have been open for 5 tax years.
As you can see, there are ways to use your Roth IRA as an additional savings account as long as you are aware of the penalties that could potentially go along with using the funds for something other than retirement.
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