Avoiding the Penalty for Early Roth IRA Withdrawals

Aug 15

The advantage of the Roth IRA is that you pay the taxes before you contribute, so your money grows tax-free, and no taxes are due on withdrawals. The problem is that the account is considered a retirement account, so there is generally a 10% penalty for early withdrawals before 59 ½.

Roth IRAs are also subject to something called the “five-year rule” that determines if taxes are due.

However, there are some situations where you can withdraw funds before the minimum age without paying the penalty. This can come in handy if you need cash to buy a first home, pay for college, or if your family grows.

The Five-Year Rule of Roth Ownership

Roth IRAs have another layer of complexity when it comes to taxes. The account has a five-year holding requirement that applies to earnings on your contributions. Your original contributions are made with after-tax dollars, so no taxes are due on... ...