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 IRA. See 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:
- 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.
- 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.