Using Money in Your Roth IRA

The rules for using money in your Roth IRA share a lot of similarities to the rules and exceptions for using money in your Traditional IRASee here for the full list of when you can use your Roth IRA without paying a 10% penalty.  One difference, however, is that your Roth IRA has to be opened for at least 5 years before you start taking money out.  Even if you meet one of the other requirements (like reaching age 59.5), if your Roth IRA hasn’t been opened for at least 5 years, you will still be subject to the 10% penalty.

However, there are 2 advantages to taking money out of a Roth IRA vs. a Traditional IRA:

  1. When you take money out and it’s a qualified distribution, you don’t have to pay any tax because you already paid tax when you put money into the account.
  2. Even when it’s a non-qualified distribution, you don’t have to pay the 10% penalty on your contributions.  You just have to pay the penalty on the interest earned in the account.  Here is an example I gave my friend:
    • Let’s say you put in $5,000 into your Roth IRA 7 years ago and your account grew to $8,000 because of your investment returns.  You can take out $5,000 anytime without paying tax or penalty because that is your contribution amount.  But if you take out $8,000, you have to pay a penalty (and tax!) on the $3,000 worth of earnings.
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