Withdrawal of Initial Deposits From a Roth IRA

by Craig Woodman

A Roth IRA allows a taxpayer to set up a retirement plan independent of an employer. A person earning less then $167,000 per year in adjusted gross income as of 2011 is eligible to contribute a maximum of $5,000 per year ($6,000 if over age 59.5), with contributions phased out and eliminated with adjusted gross incomes of $177,000. Roth IRAs have different withdrawal rules than traditional IRAs.

Roth Background

The Roth IRA allows a person to save money for retirement in a tax-advantaged account. It has significant benefits over a traditional IRA. All of the money that a person withdraws from a Roth IRA in their retirement is tax free. Unlike a traditional IRA, the account owner cannot take a tax deduction for the contributions that he makes to a Roth.

Withdrawals

With a Roth IRA, the owner of the account can withdraw his contributions at any time, without incurring income taxes or penalties for a withdrawal taken before retirement age. This includes the initial deposit he made when opening the account. The earnings on the account, however, will be subject to income taxes and penalties in most cases if the account holder is under age 59.5. Exceptions to this rule are for first-time home purchases or the death or disability of the account owner.

5-Year Rule

A Roth IRA must be open for at least five years before the account owner can withdraw the earnings tax free. This is the case even if the account owner is at retirement age. The five-year rule applies to the beginning of the calendar year that the deposit was made. Specifically, four full calendar years must pass since the year that the deposit was made before earnings can be withdrawn tax and penalty free.

Prior-Year Contributions

Withdrawing the initial contributions from a Roth IRA will have a significant impact on the value of the account over the long term. If you withdraw the initial deposit, you have up to 60 days to replace the money. After that, any contributions count towards the yearly contribution limits for the current calendar year. An account owner cannot make up that withdrawal.