One of the primary charms of the Roth IRA is that you are free to withdraw your contributions at any time without tax or penalty. The Internal Revenue Service places restrictions on the distribution of earnings and, more leniently, on withdrawing rollover contributions. Over time, earnings can mushroom. So It's important to keep careful track of your contribution and rollover amounts.
Withdrawing Roth contributions requires no lengthy procedure and triggers no tax liability. To take out your original Roth IRA contribution, you can write a check against the account or visit your financial institution online or in person to request a withdrawal.
Taking your earnings out of a Roth is subject to restriction. To make an earnings withdrawal tax- and penalty-free, you have to have owned a Roth account for five years and you have to have turned 59 1/2. If you meet neither requirement, you'll have to pay income tax and a 10 percent penalty on the earnings distribution, unless the distribution meets one of several excptions. If you are 59 1/2 but have not owned a Roth for five years, you pay only ordinary income tax on the earnings you take out.
Order of Withdrawals
When it comes to Roth IRA distributions, the IRS takes rather a friendly stance. No matter how many Roth accounts you own, the IRS automatically puts withdrawals in order as follows: 1) contributions; 2) rollover funds; 3) earnings.
Say, for example, you open two Roth IRAs in 2010. Over the next five years, you contribute $5,000 to one and $10,000 to the other. Accumulated earnings equal $500 for the first account and $800 for the second. In 2015, you decide to make a withdrawal. The IRS will automatically consider the first $15,000 you withdraw as principal, and you will incur no tax liability on that amount.
Rollover contributions are subject to age and holding period requirements. You have to hold rollover monies for five years or until you turn 59 1/2, whichever comes first, to be eligible for penalty-free distributions. (If you turn 59 1/2 before you do the rollover, there are no restrictions on withdrawing those funds.)
If you have not yet reached 59 1/2, each rollover is ruled by an individual five-year clock. For example, in June 2012, you roll $5,000 from a traditional IRA to a Roth. You cannot take out any of that money until June 2017. If you do, you'll pay a 10 percent penalty on the withdrawal. Let's say after leaving a job in November 2014, you roll money from your 401(k) to your Roth. You cannot withdraw the funds from that rollover without penalty until November 2019.