Recovering Roth IRA Money

Your Roth IRA can act as an emergency fund.
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If you’re in a tight spot financially and have invested in a Roth IRA, you may be sitting on the equivalent of an emergency fund. Ideally, you’d let your retirement funds sit and grow untouched until it’s time to retire, but if you’re facing tough times, the Internal Revenue Service allows you to reclaim funds placed in your Roth IRA without paying a penalty.

Inside Your Roth Account

While your brokerage provides you with a statement that provides the full value of your Roth, to the tax man’s eyes there are two distinct piles of money in that account. The first portion of your account is made up from the money you directly contributed to the account: If you contributed $5,000 for three years, it’s worth $15,000. When your investment increases in value, the gains go into the second section: If your Roth’s value is $18,000 after your $15,000 investment, the gains portion of the account is $3,000. Most of the time, this is moot, unless you need to raid your Roth before retirement.

Reclaiming Contributions

The IRS allows you to reclaim your contributions to your Roth at any time without incurring an early withdrawal penalty. Even better, any early withdrawal up to the amount contributed is automatically considered to come from your contributions rather than from the earnings. While you’ll need to report the withdrawal to the IRS when you file your income tax return, it will have no impact on the amount of taxes owed.

Early Distribution Penalties

While you’ll be able to pull money from your Roth in a pinch, don’t get too eager to touch your retirement early. Contributions can be reclaimed without tax or penalty because you have already paid taxes on that money, but earnings don't receive such favorable treatment from the IRS. You must pay income tax on the amount of earnings withdrawn well as a 10 percent penalty. If you wait until you reach retirement age of 59 1/2 before you tap into your Roth’s earnings, assuming the account has been open for at least five years you will pay no income tax and no penalty tax.

The Good and Bad News

There’s an advantage to turning to a Roth in an emergency: Unlike borrowing from a 401(k) plan, you won’t need to repay it. That’s also the downside, though: Once you make a withdrawal from your Roth, the IRS usually doesn’t allow you to put it back in, except as future years’ regular contributions. Because of this, taking $15,000 from your Roth in an emergency can be devastating to the growth of your nest egg, as it severely curtails your ability for additional earnings.

Special Situations

In special cases, the IRS allows you to replace the entire amount you recovered from your Roth. "You can repay qualified reservist and qualified disaster recovery assistance distributions even if the repayments would cause your total contributions to the Roth IRA to be more than the general limit on contributions," IRS Publication 590 explains. "However, the total repayments cannot be more than the amount of your distribution."

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