Can I Cash in My Roth IRA Early Without Penalty?

by D. Laverne O'Neal

The Roth IRA is a tax-advantaged account intended to help wage earners save for retirement. You can withdraw contributions without penalty at any time. However, until you reach age 59 1/2, withdrawing interest generally triggers both ordinary income tax and a 10 percent penalty. Some exceptions to this rule exist.

Five-Year Rule

To make tax-free earnings withdrawals -- qualified or not -- at least one of your Roth IRAs must have been open for five years. You will have satisfied this rule on the first day of the fifth year after account establishment. For example, you open a Roth IRA in September 2006 and another account in October 2008. As of January 1, 2011, you will have satisfied the five-year rule for both accounts.

Qualified Distributions

After five years, qualified distributions are free of both tax and penalty. Withdrawals made after you have reached the age of 59 1/2, have become totally and permanently disabled, or have died are included in this category.

First-Time Homebuyer Exemption

Once you satisfy the five-year rule, you can withdraw up to $10,000 from your Roth free of taxes and penalties to cover acquisition, construction, settlement and closing costs for a principal residence. You must not have owned a home in two years. The exemption does not apply to vacation or other secondary homes. In addition, you can use the money to buy a home not only for yourself and your spouse, but for a child, grandchild or ancestor. But watch the calendar. You must use the funds within 120 days of withdrawing them.

10 Percent Penalty Exceptions

Once the five-year rule is satisfied, you can take out earnings free of penalty if you are using them to pay unreimbursed medical costs that amount to more than 7.5 percent of your adjusted gross income. In addition, you can escape the penalty if you use the withdrawn earnings to cover qualified higher education expenses, such as tuition, fees and supplies. Moreover, if you lose your job, you can take out earnings without penalty to pay health insurance premiums.

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.

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