Penalties for Roth IRA Early Withdrawal

Roth IRAs give a tax advantage that’s different than what traditional IRAs provide. If you wait until you reach age 59 1/2 and the Roth IRA is five years old, everything you withdraw is tax-free. If you withdraw money early, you might pay a 10 percent penalty tax. But it’s not quite that simple. The penalty, if any, depends on the nature of the funds you withdraw and the reason for the withdrawal.

Ordering Rules

The money you put into a Roth account is not tax deductible. Because there is no tax break for making contributions, you can take contributed funds out of the account at any time with no penalty and no tax liability. However, all interest and other earnings must remain in the Roth IRA. If earnings are withdrawn early they might be subject to income taxes and a 10 percent penalty tax. The Internal Revenue Service uses a set of ordering rules to decide whether dollars you take out of a Roth are contributed money. All withdrawals from the time you open the Roth IRA are contributed funds unless the total exceeds the total contributions since you opened the Roth IRA. Under the IRS ordering rules, rollover funds are withdrawn next. Only when you have taken out all contributions and rollover money are withdrawals classified as investment earnings.


A rollover, also called a conversion, occurs when you take money out of a tax-deferred plan such as a 401(k) or traditional IRA and put it into your Roth IRA. In the process, you pay any income taxes that apply to the rollover funds so they are converted to after-tax dollars. Rollover money is supposed to remain in your Roth IRA for at least five years or until you reach age 59 1/2, whichever comes first. If you withdraw rollover money early, you have to pay a 10 percent penalty tax unless an IRS exception rule applies.


For a withdrawal of earnings from a Roth IRA to qualify as tax-free, the account must be five years old, dating from Jan. 1 of the year you opened the account. You also must be 59 1/2 years old. Early withdrawals may also be qualified if the five-year rule is satisfied and you are disabled, you inherited the IRA or use the money, up to $10,000, for the purchase or repair of a first home. All other early withdrawals of earnings from a Roth IRA are non-qualified, meaning you must pay ordinary income taxes. In addition, you pay the 10 percent tax penalty unless an IRS-approved exception applies.


When you withdraw investment earnings early for any of the reasons discussed in the previous section before the five-year rule is satisfied, the IRS still waives the 10 percent penalty tax, although you pay ordinary income taxes. The IRS also waives the 10 percent penalty for taking out money to pay unreimbursed medical bills in excess of 7.5 percent of your adjusted gross income or to pay health insurance premiums if you are unemployed. You can also make penalty-free early withdrawals of some annuity payments, to pay an IRS levy or to pay qualified higher education expenses. Reservists called to active duty in the military may be able to make an early withdrawal from a Roth IRA with no penalty.

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