Must-Ask Questions: Roth IRA Withdrawals

Roth IRAs can be more than just a savings tool. When used as part of a larger retirement withdrawal strategy, they can provide flexibility and efficiency from a tax perspective that you won't get with a 401(k), traditional IRA, or brokerage account. Of course, putting money away for retirement is critical. But it's just as important to understand the rules for making a Roth IRA withdrawal—because missteps can cost you.

One of the main features of a Roth IRA is that you can withdraw your retirement savings without owing additional taxes as long as you meet the basic requirements. Understanding early withdrawal rules and exceptions can help you avoid a penalty and unnecessary tax on your withdrawals.

Here are six must-ask questions to help you consider how Roth IRA withdrawals might work for you.

When it comes to withdrawals, money you contribute to your Roth IRA is treated differently than earnings (or growth) on investments in your account. You can withdraw contributions at any time without tax or penalty. But in most cases, you'll need to wait until age 59½ or older and have had the Roth account open for at least five years to withdraw earnings federally tax-free. If you withdraw earnings before this time, you may owe a 10% early withdrawal penalty as well as ordinary income tax on the amount.

Yes, you may be able to withdraw earnings from your Roth IRA before age 59½ if you qualify for an IRS-approved exception. But your exact options will depend on whether you've held the account for at least five years.

If you've held your Roth IRA for five years or more, you may qualify for an early withdrawal without taxes or penalty for these reasons:

• You use it for a first-time home purchase (up to a $10,000 lifetime maximum).
• You become disabled.
• You die, and the withdrawal is for your beneficiary.

If you've held your Roth IRA for less than five years, you may qualify for an early withdrawal without penalty, but you'll still owe ordinary income tax on any earnings you take out before age 59½. Some examples include:

• You use it for qualified expenses related to a birth or adoption.
• You use it to pay for certain unreimbursed medical expenses or health insurance.
• You use it for qualified education expenses.
• The distribution is made in substantially equal periodic payments. (Find more information on substantially equal periodic payment calculations in IRS Notice 2022-6.)

Yes, in fact there are two five-year rules that impact Roth conversions—though some exemptions may apply:

• Under the contribution 5-year rule, at least one of your Roth IRAs must be initially funded for a minimum of five tax years before you can withdraw earnings federally tax-free, regardless of your age.
• Under the conversion rule, if you're under age 59½, you may owe a 10% penalty on any withdrawals of principal. If you withdraw any earnings, you could owe taxes and the 10% penalty. Each Roth conversion will have a separate five-year window that begins on January 1 the year of conversion. There are exceptions, but once you attain age 59½, the 10% penalty no longer applies to the converted amount. The earnings that grow from the conversion will still be subject to the contribution rule above.

Aside from age requirements and the five-year rule, experts often recommend delaying withdrawals from your Roth IRA as long as possible to give your contributions and earnings more time for potential growth.

Any tax-free gains you make on investments in your Roth IRA can help offset the taxes you paid up front, and the longer you can leave your Roth IRA assets alone, the greater the potential for compound growth.

Required minimum distributions (RMDs) are withdrawals the IRS requires you to take from retirement accounts once you reach age 73. Unlike traditional IRAs or other tax-deferred accounts, such as a 401(k), you're not required to take RMDs from a Roth IRA, meaning you can leave your Roth savings invested as long as you choose.

Having a portion of your savings in a tax-advantaged retirement account that isn't subject to RMDs can provide critical flexibility that may help you withdraw your retirement savings in a more tax-efficient way over time. And if you don't use your Roth IRA funds for retirement, you can pass them along to your heirs so they can benefit from tax-free withdrawals.

A Roth IRA must have been open for at least five years for heirs to make federally tax-free withdrawals. Most heirs have a few options for taking the money out of an inherited IRA depending on the type of beneficiary they are and when the original owner of the account died.