Can I Withdraw a Contribution & Leave the Gains in a Roth IRA?

by Mark Kennan

Early withdrawals from qualified retirement programs often result in taxes and penalties. However, a major advantage of a Roth IRA is that you can take early distributions attributable to your contributions. You still need to follow certain reporting rules, however.

Contributions and Gains

When you take a nonqualified distribution from a Roth IRA, the IRS has rules to determine in what order money comes out of your account. First, your contributions come out. Next, comes amounts you converted into your Roth IRA from another account. Finally, your earnings come out. Therefore, so long as your distribution does not exceed the amount of contributions or conversions in your account -- that is, all monies on which you have previously paid taxes -- you can leave all the gains in the Roth IRA untouched.

Calculating Contributions

You can only withdraw the contributions remaining in your Roth IRA, not the total amount contributed, if the two amounts are different. For example, if you have contributed $50,000 to your Roth IRA, but last year you took out $5,000, you only have $45,000 in contributions remaining in your Roth IRA. When you file your income taxes after taking an early withdrawal from your Roth IRA, you have to document these calculations by completing Form 8606 and attaching it to your tax return.

Taxes and Penalties

When you withdraw only contributions from your Roth IRA, without taking out any of the gains, the money comes out tax-free even though you took an early distribution. This is because you've already paid taxes on that amount. In addition, you avoid the 10 percent early withdrawal penalty because it only applies to the taxable portions of your withdrawal. The downside to withdrawing contributions is that once you have removed them, you cannot add them back at a later date to make up for your early withdrawal.

Qualified Distributions

When you take qualified distributions from your Roth IRA, the distinction between contributions and earnings becomes irrelevant because all Roth IRA qualified distributions come out tax-free. However, the requirements for a Roth IRA qualified distribution are more stringent than a traditional IRA because the Roth IRA must be at least five tax years old, counted from the first day of the tax year you made the first contribution, in addition to you being 59 1/2 years old.

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