Unlike a traditional IRA, a Roth IRA does not provide immediate gratification. You cannot deduct Roth contributions from your taxable income. You can, however, withdraw Roth IRA money, including earnings, tax-free if you wait until you are 59½ years of age and have held your account for at least five tax years. You can also access Roth IRA money prior to retirement, although doing so may trigger taxes and penalties. Regardless of the reasons and timing, you follow the same general process when withdrawing Roth IRA funds.
Tell your IRA custodian you would like to take a Roth IRA distribution. The custodian is the financial institution where you opened your Roth IRA account or the last firm to which you transferred your account. You can find the contact information on your quarterly or monthly statement.
Explain the circumstances of your withdrawal to your custodian. If you are 59½ years of age or older and you have held your Roth IRA for a minimum of five tax years, you receive your withdrawal tax- and penalty-free. If you are taking an early distribution that is not "qualified," according to IRS Publication 590, Uncle Sam might tax any accumulated earnings that you access. You might also face a 10 percent tax penalty. You can remove Roth IRA money prior to retirement and before having held your account for five tax years without facing the 10-percent IRS tax penalty if the IRS considers your distribution "qualified." As Publication 590 notes, qualified distributions include using the money to cover higher-education expenses or costs associated with buying, building or rebuilding a first home. Providing these details is important so that your custodian can properly report your withdrawal to the IRS.
Tell your custodian how you would like to receive your withdrawal. Most firms will send you a check or electronically transfer your money to a checking or savings account. When you take your withdrawal, you can request that your custodian withholds federal taxes. Remember, the IRS never taxes original Roth contributions, however, it does tax earnings if you access them prior to turning 59½, even if you are using the money to pay for college or a first home.
- Look out for IRS Form 1099-R. Your custodian sends one to you and the IRS each tax year you take an IRA distribution. You must report this information when you file your taxes so that the IRS charges you the proper amount of taxes and penalties.
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