Can I Really Withdraw My Roth IRA Contributions At Any Time Without Tax Or Penalty?

Revised for 2014. This post about how to withdraw past Roth IRA contributions has been popular over the years amongst search visitors, and I have completely updated it using the most recent IRS documentation. Besides emergencies, this information may also be useful for early retirees under age 59.5 that wish to access some of their tax-deferred funds without incurring taxes or penalties.

This is a follow-up to my post Roth IRA Contribution vs. Emergency Fund Savings, where I suggested that people should just fund their Roth IRAs first over an Emergency Fund. The simple reasoning was that anyone can withdraw their Roth IRA contributions at any time, without penalty. (Not earnings, just contributions.) Put in $5,000, and you can take out $5,000 later – be it one day later, one week later, or one decade later. But some concerns were raised about the validity of that assumption, so I wanted to iron that out here using IRS Publication 590.

First, we head to the Roth IRA section, specifically the subsection called Are Distributions Taxable?. Here, the first sentence states:

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)

Sounds pretty clear, but let’s keep looking. The next section talks about qualified distributions, like those made after you turn 59½, which are definitely not taxable. We are given this decision flowchart (Figure 2-1), and… whoops, we may not even pass the first box. Taking out your contribution within the first 5 years is not a qualified withdrawal. 

But wait. Not all unqualified withdrawals are taxable. Going to How Do You Figure the Taxable Part?, we are directed as follows:

To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III.

Here is a link to Form 8606 [pdf] and the Form 8606 instructions [pdf].

Here’s how you would fill out the form for the simple situation of taking out former Roth IRA contributions. On Part III, Line 19, you would include the money you took out as a distribution – “Enter your total nonqualified distributions from Roth IRAs in 2013″. This would carry over to line 21. But then on Line 22 you would “Enter your basis in Roth IRA contributions”. Line 23 tells you to subtract the difference (21 minus 22). If you are taking out less than you formerly contributed over the years, your net taxable amount would be zero.

What about a possible 10% penalty? In the section on the penalties Additional Tax on Early Distributions, we see this:

Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Since this unqualified distribution of a former contribution is not taxable, there is no “taxable part” and thus no penalty to worry about.

In conclusion, although taking out a former Roth IRA contribution as a distribution may be (1) an unqualified distribution, it is also (2) not taxable and (3) not subject to any additional penalties. When subsequently filing your taxes, remember to fill out IRS Form 8606 as indicated above so show the IRS that you are only taking out your original basis.

How Do I Make A Withdrawal?
If you are under 59½, you usually need to make a specific request to your broker. Here is the info from my Vanguard account:

You can request a withdrawal from your IRA online, over the phone, or by mail. You can have a check sent to you, have the proceeds deposited directly to your bank account, or transferred to a nonretirement Vanguard account.

Comments

  1. Want to know a really weird rule that’s similar to this? First of all, let’s call the sum of all contributions to a Roth IRA its “basis”. So, if you contributed $4k this year and last, you have $8k in basis. So, as you stated in this post, whatever it grows to in the future, you can take out $8k tax/penalty free.

    What if you contribute to a Roth 401(k) plan (well, technically you are just making Roth contributions to a 401(k) plan, or putting money into a “designated Roth account”, but it’s easier to just talk about it as a “Roth 401(k) plan”, so I will refer to it as such)? You can’t take out a Roth 401(k) plan basis like you can with a Roth IRA. But, you CAN rollover your Roth 401(k) plan money into a Roth IRA. The question than arises, how much of your rollover is basis?

    The answer? ALL of it! Whatever amount rolls over into the Roth IRA is now basis and can be taken out of the Roth IRA tax/penalty free.

    So, let’s say you contribute $15k this year to a Roth 401(k) plan. Next year, you leave the job but keep your money in the plan. Over the next few years, it increases to $20k. If you really needed all $20k at that point, just roll it over to a Roth IRA and then empty it out. It’s all considered basis. If you left it in the IRA and it grows further to $25k, only the $20k that was rolled over is basis and can be distributed tax/penalty free.

    This is why my Roth 401(k) plan money is staying in my former employer’s plan as long as possible (for now). I’m sure there may be other reasons to roll it over somewhere in the future (perhaps to a current employer’s Roth 401(k) plan)…

    • I know this post is old, but I wanted to debunk this advice in the case that anyone stumbled upon this via Google.

      Rollovers from a traditional 401k to a Roth 401k requires that you pay tax on the ALL of the conversion amount, which breaks the loophole above. It makes sense if you think about it. You always pay tax leaving a traditional 401k/IRA, and you only fund a ROTH 401k/IRA with post-taxed money. There’s no loopholes.

      • He’s not talking about Traditional 401k to Roth 401k conversion, he’s talking about a Roth 401k that he directly contributed to from his paycheck, which you then “roll over” to a Roth IRA. No Traditional 401k involved anywhere in his comment.

        • I am dealing with this exact issue with the IRS. My husband and I withdrew contributions that we had made to a Roth IRA. The accounts had been opened more than 5 years and did not withdraw any earnings (only original contributions). Apparently we made a mistake in how our tax returns were filed and did not report this income. IRS now says that we owe money on a taxable distribution from a retirement account and is hitting us with taxes + penalties because we are under 59 1/2 years old. Hopefully this will get resolved but I am concerned what makes them think it is taxable!?

          • After about 10 hours of researching this, I think I found the problem… articles always say the withdrawals of your ROTH IRA contributions are tax-free, penalty-free, but never talks about what needs to be filed with the IRS. (Makes it sound like nothing is required). Maybe I missed this using Turbotax, but I checked twice trying to make sure I had handled it correctly.

            Anyway, make sure you pay close attention to Form 8606. You don’t have to report anything if you are withdrawing the contributions you made FOR THAT YEAR. If you withdraw contributions from prior years, you have to report it and show that you did not take out any earnings.

            Hopefully this will get everything cleared up!

  2. Very interesting point!

  3. Thanks guys, a great post and a great comment. I’m still contemplating between Roth and regular IRA tax treatment differences, but I definitely like the fact that you can take out the principal from Roth without penalties.

  4. first, only applies to contributions and not earnings. Just to make it clear if people are getting confused.

    second, it is still a bad idea to mix monies for different purposes. Can you withdraw RIRA contributions at any time? Yes, but it doesn’t mean that you should use it as a primary vehicle for your emergency fund. It can be the next thing to look at when your emergency fund is depleted, but as a primary emergency fund, you are taking away from your retirement savings and taking away from the long term benefits of holding onto a RIRA. The purpose of having different monies for different purposes is just that, so you don’t take away from one goal/purpose to fund another. It’s part of diversifying.

  5. Jonathan,
    Starting next year almost every company will offer roth 401k. Can you please provide detail that roth 401k is better or roth IRA(provided both has very good option , infect my company allows to access mutual fund window to go to vanguard funds).
    First comment on this thread is very interesting.

  6. Jonathan,

    Awesome post. I’m going to max the Roth IRA every year now. I wonder what the probability of the IRS changing this loophole is with the ever increasing popularity of Roth IRAs and 401(k)s? Sounds too good to be true, especially the rollover basis calculation outlined in the first post.

    Good to know when some of us have questions about a topic you are willing to write about it and open it up for further discussion. One of the reasons I love your blog.

    Thanks!

  7. @ Hoon Park -

    Do you have evidence to back this up because I researched pretty hard before I rolled over my Roth 401k and everwhere I turned I was told that when it is rolled over they would separate the contributions and gains and so the new Roth IRA rollover would know what you originally contributed. Based on how the rollover went I believe that is the case as it was clearly defined what I had contributed on the rollover statement.

  8. I must say I’m behind on my Roth 401(k) readings. Looks like there is lots of potential confusion there as well… Have fun at IRS.gov :D

  9. Ted Valentine says:

    What happens WHEN (note, not IF) you have your ROTH money aggressively invested for 30 years out, we hit a recession, the market tanks for a couple years, and your investments are down 40%?

    Oh and because there is a recession, you just got laid off?

    Oh snap. Now your $12,000 ROTH “emergency fund” just became $7,200 and you’ve got a $2,000 mortgage to pay and the kids need to eat. Better find a job in a recession real fast!

    BE CAREFUL.

    It sounds like you’re killing 2 birds with one stone by having your ROTH and emergency fund intertwined. But that only looks good in best case scenario.

    You need to consider the WORST CASE scenario because that is the PURPOSE of an emergency fund. The PURPOSE of a ROTH Individual Retirement Account is totally different.

  10. There’s no reason that this investment has to be in anything aggressive. I’m thinking about pulling $ from my emergency fund to put into a TIPS fund within a Roth IRA. That will give me assurance of a return on my investment and provide a hedge against inflation.

    I’m joining this school of thought that there is no reason not to have months 2-6+ of the emergency fund in a Roth IRA (assuming that one can’t fund both the $4K in the Roth and a separate emergency fund). Once I have my desired level of emergency savings in safe investments (within the Roth), I’ll start changing my Roth IRA contributions to a more aggressive investment.

    Good discussion!

  11. Ted..

    That’s a good point to keep in mind, but one can always keep a portion of his/her Roth IRA contributions in a less-risky money-market fund.

  12. Ted: why would you invest your emergency funds in an aggressive portfolio? This can be viewed as a loop hole. Why not take advantage?

    On the one hand, if we have an emergency, we’ll have readily available funds to withdraw. On the other, if don’t have to withdraw, we have a pile of money to add to our retirement.

    Seems like a win-win to me.

  13. LargeTalons says:

    Once you have taken a withdrawl from the Roth account, are you allowed to payback the amount taken out while not affecting the contribution limit? I would assume the answer to this is yes, otherwise it would not make sense to use a Roth IRA as an emergency account.

  14. Ted: first of all, i don’t think anyone here has said that you should replace an emergency fund Roth IRA (or Roth (401(k)), and second of all, if you were investing into Roth IRA for 30 years aggressively, you’d have a whole lot more than $12,000. With contributions maxed out at $4,000 a year, your contributions alone would be more than $120,000 and with compounded interest of 7% you’d have about $500,000 in your account.

  15. Yeah, there is no way that the IRS will allow an increase in basis simply due to rolling over from a Roth 401(k) to a Roth IRA. The funds in the Roth 401(k) would retain their tax attributes – contributions vs. appreciation – upon rollover. Upon making an unqualified withdrawal from a Roth account, you will be taxed pro-rata on the FMV:Contribution ratio. So, if your account is worth $20,000, your contributions were $16,000, and you withdraw $10,000, $2,000 of the $10,000 will be taxed [$10,000 - ($10,000 x $16,000/$20,000)]. The IRS does not allow you to allocate what you withdraw solely to contributions.

  16. Tight Fisted Miser says:

    It seems to me the biggest drawback of using your IRA as an emergency fund is that if you have to withdraw your money you can’t put that contribution back in. Or am I wrong about that?

  17. Ted Valentine says:

    Creative -

    I’m not talking about 30 years from now and I think you know that. Say some implements this today. They fully fund a Roth aggressively with a 30 year horizon. Say they get 30% total growth in years 1 and 2. Everything’s going great and they again fund a Roth in year 3.

    Something causes a recession. Account drops 20% in year 3. Recession continues in year 2. Down 20%. Your $12,000 emergency fund is now worth ~$9,200.

    This is precisely the time when the emergency is most likely to happen: When things go bad. That’s why its called “emergency fund”. Note that not only have you now lost principal to your EF, but you can’t go back and put the money back into the ROTH account! Once its out, its out (this is a real emergency, not a temporary holdover).

    On the other hand, say you put your $4k Roth into a safe money market or ST treasury bond fund. Are you really win-winning as TallWes says? At the end of 3 years you’ve got $12k in a Roth Account for an emergency fund. In a taxable account you’ve got $12,450 available in the emergency fund after taxes.

    Oh, but you say I got $600 more dollars invested for retirement that can be invested aggressively and that will grow to several thousand over 30 years! And I say if you can’t save $200 dollars a year in an IRA without playing this game, you’ve got bigger problems.

    I’m not saying this isn’t a neat trick to the tax code. It is and could maybe provide some benefit to some. HOWEVER it ain’t all that great — unless you get really lucky. And it could be a disaster if you get really unlucky. If you know whether the roulette wheel at Caesar’s Palace is going to hit red or black this Friday at 7:07 pm, please tell me now.

  18. Ted – Sorry if I misunderstood what you meant, I just took it literally when you said “money aggressively invested for 30 years out”. Either way, you’re probably right about keeping retirement money separately from the emergency fund unless you have absolutely no other choice and need to deplete all your accounts.

  19. Ted Valentine says:

    That should be year 4 not 2 in the second paragraph.

    And Creative, yes, Jonathan has suggested funding a Roth before an EF.

    BE CAREFUL is all I’m saying. If Jonathan can present the best case (he used 8% growth in his assumptions – which is what you use for stocks), he should do his duty and present the worst case other than the tiny caveat at the end of the first post.

    Second putting the money in a money market does not significantly increase your wealth long term. Who’s retirement asset allocation includes a significant amount in a money market fund? Please post below if yours does.

    If you include your bond allocation in your Roth, that creates two issues. First, if the emergency occurs you now need to sell stocks in your other accounts to rebalance your portfolio. It may be a bad time to do this. That’s risky. Second, professionals generally recommend you put your highest risk, least tax efficient investments in a Roth because of future tax advantages.

    The most significant benefit I can think of is that this can create a temporary holding account for people who’s income is going to surpass the Roth contribution limits in the next few years. (Like Jonathan, surprise, surprise!) The only problem with this that people in this category already make enough have a Roth and EF! So again I say, this really doesn’t make much difference to regular people unless they want to gamble.

  20. If you’ll refer back to the original post, please note that I am only advocating using Roth IRA as an Emergency Fund when it’s an either-or proposition between funding Roth or funding the Emerg Fund. Why not have some chance at tax-shelteredness, instead of no chance?

  21. @ Hoon Park –
    Your ideas about rolling the Roth 401 to a Roth IRA, thereby getting a favorable basis would be great if it were true! However, that’s not how US tax code is constructed and it certainly isn’t going to work according to situation you described above — nice try, though.

    Although i haven’t looked at the specific tax code relating to Roth 401 rollovers to Roth IRAs, i can tell you that you’ll be faced with one of two scenarios, and it’s likely that ONLY ONE OF THEM MAY BE CORRECT.

    Scenario 1: When you rollover your Roth 401 to the Roth IRA, the basis for your Roth 401 (the fair value your qualifying contributions at the time they’re made) will become the basis of your Roth IRA. So any gains from the Roth 401 do not affect the basis on conversion.
    or,
    Scenario 2: Whey you rollover your Roth 401 to your Roth IRA, you pay one-time tax on the gain of your 401, and the rolled over amount then becomes the new basis of your Roth IRA.

    I suspect that Scenario 1 is the accurate way to account for Roth 401 rollovers to Roth IRAs, but i could be wrong (consult your tax advisor before making the wrong move!) However, i’m certain that you will not receive the favorable tax benefit of the increased basis of your Roth without some consequences in the form of a tax on the gain or penalty on a non-qualified rollover, or both.

    One of the things that makes Jonathan’s blogs so great is that goes the extra step to make sure he doesn’t provide incorrect information. Thanks!

  22. RothNovice says:

    Jonathan,

    Are u still allowed to contribute to the roth because ur income’s are now above the limit?

  23. Quick question, if you take that money out, are you allowed to put all of it back in later? Or do they hold you to the $4000 a year still? If you can put it back in, how long do you have until that time runs out?

  24. I am personally going to be unable to contribute to a Roth IRA this year. I am currently investigating whether I should contribute to a non-deductible Traditional IRA.


    From Pub 590:

    Withdrawals of contributions by due date. If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

  25. well these recent posts have been very helpful as i am just making my elections for benefits @ my first job out of college. i have fully funded a roth ira @ vanguard for the past couple years and as of now dont have a roth 401(k) available to me. once i decide on my contribution percentage and investment choices (plan is through fidelity), i will contribute as i would if i was getting the 6% company match (not eligible until next year).

    while i understand how amazing roth ira’s are (and hope they dont get legislated away), i’m just not understanding where i should be putting savings for a house/etc at this point. as a 22 year old, putting down 20% on my first home/condo or real estate in (hopefully) 5-8 years is the most obvious medium term goal. while its great to have the tax free growth & withdrawals in a roth, its only $4k a year (yes i know it increases next year and i plan to fully fund it every year…). i just dont understand where to starting putting the other money beyond the future company match.

    i am still budgeting all of my finances and figuring out what my percentages are (required expenses vs discretionary spending vs savings %), so i’m still playing around with it all (and probably should be doing some more reading… esp considering i now have to track asset allocation @ different brokerages… blah). i’m not sure if i should be opening a taxable brokerage account or what…. i dont want to dump some ridiculous percentage of my income now into my 401(k) and not be able to really get at it in the future…. my expenses will also be rising a good amount next year, so i dont want to spread myself too thin.

    thoughts or advice would be appreciated :o

  26. I don’t think entwining your retirement account with your emergency fund is a good idea, for psychological reasons. It’s too easy to backslide on your savings plan if in your mind your retirement account isn’t sacrosanct, it’s best to fund it and then leave it alone. Perhaps you and a few other Americans don’t need to compartmentalize your savings and retirement separately but I think you are in the minority, and the numbers that reflect the lack of savings and amount of personal debt that most Americans have seems to bear this out.

    I know that I need to have very strong boundaries around my savings and debt reduction, otherwise I’ll slip back into the woolly financial thinking that got me into debt in the first place. If I were to plan that my emergency fund was a withdrawal from my Roth IRA then it’s quite possible I would have no money left in retirement (or at least not nearly as much as I planned for.) I just don’t have the discipline for it and I would argue that the majority of Americans probably don’t as well given the spending and debt habits that we see.

    Transformation of spending and savings habits for most people needs to be as rigorously treated as overcoming addiction. You need to quit cold turkey and transform the underlying behavior. Just as an alcoholic can never in their life have another drink or they will backslide, most people coming out of a lifestyle of spending more than they earn and living with a mountain of debt can never again live without rigid financial boundaries.

  27. If you contribute to a non-deductible IRA, you will be able to convert it to a Roth in 2010, when the income limitation on conversion is lifted. The tax you would incur on the conversion (the tax on the appreciation of the non-deductible IRA) can be spread over two years. If you choose not to convert, then when you reach 59-1/2 and start drawing on it, you will be taxed pro-rata on the proportion of the FMV to basis.

  28. If you’re debating between a tradition IRA and a Roth IRA, there is a magic number at which any additional contribution does not reduce your taxable income. For me last year, it was $1720. So $1720 went into the Traditional, and the balance of $4000 went into a Roth.

  29. I have a question about the limitation to making contributions. The IRS site you referenced notes that there is a 6% excise tax when people put excess funds into their ROTH IRA but does not suggest that these funds must be withdrawn. I’m only 24 years old, but am presently a student with loans as my only income, but stock holdings and some savings. If it is merely a 6% tax that I must pay in order to put some savings in my IRA it would make sense for me to do so in the long run. Is this legal or or am I misreading IRS Publication 590?

  30. LargeTalons and Ashley: once you withdraw from a Roth you can never, ever replenish that amount. This is why withdrawing from a retirement vehicle before retirement is just a bad idea. Presumably you are investing wisely and your Roth is part of your retirement portfolio. As such, if you withdraw, you can no longer count on it for retirement.

    Aksays: a little off. in 2010 you will be able to directly rollover a 401k into a roth. You can convert from a TIRA to RIRA at any time so long as you meet the AGI limitations. You also have to take tax into account as you will then have to pay tax on the converted amount. Currently, you can rollover a 401k into TIRA then convert TIRA into RIRA. 2010, the extra step won’t be necessary.

    Johnathan: I don’t think it has be an either or scenario. You can fund both an emergency fund and a RIRA, if you only have $4k, albeit you will not max your RIRA. However, you will have a buffer in the form of an emergency fund that will not take away from your retirement savings plan.

    Again, mixing monies for different purposes is just a bad idea, because you can no longer count on your savings plan for each goal. Of course you can adjust, but in the case of RIRA, you will never be able to make up for what you have withdrawn.

  31. Tim:
    If one does this, one must not think of these funds as Retirement funds. This is an emergency fund (EF) that just happens to have the word Retirement in the name of the account. In the end, once you turn 65, voila, you magically have added a pile of retirement income to your portfolio that can be used for living expenses.

    On the flip side, for example, let’s say you just have a plain old EF in a bank right now. Furthermore you don’t have any emergencies. Fastforward, to when you’re 65 and retired. You have a pile of cash that was your EF. That is now spending money for living expenses. That little pile could have been much bigger if it was in a ROTH account.

    -Wes

  32. Tim:

    My response was to Jonathan’s decision whether or not to contribute to a non-deductible IRA. Assuming his AGI prevents him from contributing to a Roth, the same would hold true on rolling over to a Roth – except in 2010 when the AGI limitation on conversions will be lifted.

    The Heroes Earned Retirement Opportunities Act was a gift to high income individuals who would not otherwise be able to contribute or convert to a Roth. I would advise contributing to a non-deductible and then converting in 2010 when he is able, especially since he can spread the tax on the FMV in excess of basis over two years.

  33. I’m really late to the table. But I just wanted to say I follow this. I guess the caveat here is keep up with ever-changing tax law. Even as a tax practicing CPA it is easier said than done.

    But I am quite conservative and tend to err on putting too much in my IRAs and less in cash. I know I have a really hefty emergency fund to fall back on in this case – with all the retirement tax benefits if I never need to touch it. (When you look at the odds in either case it is a start move. The odds I’ll need more than my cash emergency fund? Slim).

    But when I mention this to fellow financially responsible people they flip out. So thank you for your post. I think you have to have a certain mindset. Since hell would have to freeze over before I touched my cash emergency fund and sell my more liquid assets, I know odds are slim I would ever pull money out of my IRA. But being rather conservative it is the only way I can fork all that money to my IRA that I wish I had in cash or investments for a rainy day.

    The other key is we contribute like 25% to retirement which is really way more than we need. If we were only contributing 10% this would be dangerous ground. On the flip side, when you are young with many competing money goals, you can kill 2 birds with one stone putting your money in a ROTH and having it as an emergency fund as well. It probably beats the alternatives (like consumer debt).

    I am not sure how I would feel if I was in a higher tax bracket. But since our tax bracket is nil, it makes much sense to funnel as much as we can into our ROTHs, for now.

    I think Tallwes said much the same point very well.

  34. Money Monkey says:

    From the flowchart: Was the distribution made to your beneficiary or your estate after your death?

    Kinda hard to answer when you’re dead x-/

  35. @ Ken – The 6% pertains to contributions over the QUALIFIED amount. Only qualifying contributions receive favorable tax treatment — ie, no taxes on qualified withdrawals. You cannot make a qualified withdrawal of an non-qualifying contribution.

    Additionally, loan proceeds are NOT income, and you can only make QUALIFYING Roth contributions to the extent you (or your spouse) has income, which means – no income, no contribution. Furthermore, i hope you weren’t considering contributing your loan proceeds anyway — that’s definitely a violation of your loan terms (not that students pay much attention to limitations of their loan proceeds) and it flies in the face of sound investing.

  36. Just as a followup point to Jonathan, if forced to decide between a roth verses a taxable emergency fund we should also remember there are likely to be other alternatives available like credit cards offering 0% apr for 12/15 months that one could draw upon if in a jam without having to liquidate the roth. There are no loans/promotions for retirement.

  37. So if I overcontributed to Roth in the beginning of the finacial year (due to unexpected raise or bonus) is it possible to get the principle contribution decrease without penalties? What happens to interests?

  38. Hi, very interesting. I just talked to Vanguard, there is indeed no penalty for withdrawing one’s contributions. What is interesting, and I need some backup here, is he said that, if one were to contribute the max $5000, then withdraw say $2000, he CAN re-contribute that $2000 back, but it has to be within a 60 day window. He called this an “indirect rollover”. Thoughts? Thanks, great forum-Dan

  39. dan – Yes, that is technically true. Be sure to keep good records and don’t go past the 60-day window, however.

  40. Betsy Broadhurst says:

    Can you withdraw from an IRA and if so how frequent and is the money taxable if you are over 591/2?

  41. Hi, in regards to dan’s post, what if you didn’t make any contributions for this year (2008) yet, and you decided to withdraw $6000 from a Roth IRA with a $12,000 basis. Would you be able to re-contribute that $6000 back within a 60-day window?

  42. hmmm, that’s a good one. Jonathan? Personally I don’t see why not

  43. Thank you so much for clear explanation of Roth IRA withdrawals with supporting documentation from IRS website.

  44. The below link on Vanguard’s website has a very clear description of which contributions are subject to tax and penalty and when:

    https://personal.vanguard.com/us/accounttypes/retirement/ATSRothIRADistContent.jsp

  45. Thanks so much for the clarification. I’ve had the folks who handle my employer’s 401k tell me to the contrary re: withdrawl rules for a RIRA…..and I was just flipping through a book yesterday that also said you had to wait 5 years before you could draw on the contributions without penalty. Just shows you that so many supposed experts don’t know what the hell they’re talking about.
    My wife and I are fortunate enough to have been able to build up a hefty EF as well as contribute fully to a RIRA since 07. Although ideally I’d never want to touch it (invested aggressively, by the way), if I had to, it’s there. Good point someone made about the credit cards. Nice to know about re-funding within 60 day window, too.

  46. Thanks for the info – I cashed mine in, in 2007 after setting it up in 1999, basically it was going nowhere fast and my other regular mutual fund had similar investments and was starting to tank. I decided to cash it out – about $13K rolled it into a regualr savings account as a bit of a safety net – Well Janus decided to sent the IRS the form that states it was a 13K distibution, of course they never sent me anything, so I got the nasty gram from the IRS yesterday – now that puts me into the next tax bracket, 9K extra tax = fines etc – well after some investigation, turns out seeing as I put in over 10K for starters over the 8 yrs I believe (someone correct me) that I am only liable for the 3K I made which will lower my tax bracket.
    Am I missing something?

  47. @Ted – I agree that it’s not a great idea to rely on your Roth IRA as emergency fund. Another I didn’t see mentioned (and I may have just missed it) is that the IRS treats your original contribution and your investment value basis as two completely different numbers.

    So as Ted points out, you can invest $5,000 in a mutual fund, then have a 50% market downturn. That leaves you with $2,500.

    Let’s say in a previous year, you invested $1,000 in a stock that’s now worth $2,500…

    You Roth IRA value may be $5,000 at this point, but all you can withdraw is $3,500.

    Why?

    Because $1,500 of that $5,000 is considered investment gains by the IRS.

    So not only is a Roth IRA not a reliable emergency fund, but be careful with your “tax-free” withdrawals. You could unwittingly trigger taxes and penalties and end up worse off for it…

  48. or you could contribute to your roth, then park your emergency fund money ( i have 100 a month put into the account) in a tax free bond fund. mine is currently paying an sec 30 day yield of 4.9%

  49. My wife & I have 30 yr term life insure and I have a Roth IRA and am thinking about combo it into a Northwestern Mutual Program where its basically a 20 yr term and while the term life progressed its increasing feeds a permanent life insurance policy that pays out in the end like a Roth IRA, tax free. Northwestern doesnt call it a perm life insure policy, they call it something else, adjustable comp life

  50. Jonathan, why do you say “you’ll need to fill out IRS Form 8606″ when making a withdrawal from a Roth IRA? I looked at Form 8606 and it seems to only be for distributions from (or nondeductible contributions to) a Traditional IRA, not Roth?

  51. @Steve – Did you check out Part III of that form? (Second page)

    Distributions From Roth IRAs
    Complete this part only if you took a distribution from a Roth IRA in 2009. For this purpose, a distribution does not
    include a rollover (other than a repayment of a qualified disaster recovery assistance distribution), qualified charitable
    distribution, one-time distribution to fund an HSA, recharacterization, or return of certain contributions (see page 7 of the
    instructions).

  52. @Jonathan – Ah, I missed Part III. To add to the confusion, that part says “return of certain contributions” don’t need to be included on this form, which sounds like the case we’re talking about, except page 4 of the instructions says that in this case they’re talking about only contributions that were made in the same year that you took them out. So it looks like you’re right that this form needs to be filled out in most cases.

  53. I contacted IRS and they told me that the only way I can avoid a penalty is if this IRA has been open at least five years AND I am 59.5 years old. Exceptions are death, disability and that is basically it.
    Otherwise the penalty applies.

    What am I missing?
    Any comments?

  54. @Dimitri – From my understanding the penalty amount is the part above contribution.

    For example:
    Contribution over the years, $10,000
    Gain/(Loss) over the years, $2000
    Today’s account value, $12,000

    You can have an early withdrawal, penalty free, of $10,000 no questions asked.

    Any amount above that incurs a penalty, unless [Exceptions....]

  55. I will begin by saying, I am not an expert on this subject, but I question the information provided by “Britt” on May 20, 2009. One of the things I have always considered to be nice about investing via a Roth IRA is not having to worry about the “basis” of every single investment. Maybe I have misunderstood this all along.

    This is how I understand investing in a Roth IRA to work:

    Contribute $XXXX to a Roth to the extent allowed by law, buy and sell however frequently, as long as funds are available in the account, and at age 59 1/2, withdraw whatever portion is wanted/needed. In the event that a withdrawal is made prior to age 59 1/2, the amount of $XXXX stated in line one of this paragraph may be withdrawn without any penalty of any kind, regardless of what was gained or lost on any particular investment in the Roth IRA. If a person has contributed $40,000 over the years and the current balance is $50,000, that person could withdraw $40,000 without having to look at what was gained and what was lost on every single investment.

    Am I wrong in my understanding?

  56. I am having to quit my job and get on SS, i have a 401k plan at work, and will be needing some money to live on until the first checks arrive. What would you suggest for me to do so I wouldn’t have to draw it all out and lose more than half in taxes?

    Thanks for a speedy reply

  57. Awesome post. I’m 23 and am planning to use ROTH IRA as part of my emergency fund so that I can contribute more to my 401k. It’s not that I don’t save enough, I’m just saving for a possible condo purchase instead of retirement. I was confused about withdrawals before 5 years and your post cleared it up for me.

  58. I would not recommend this.

    The IRS treated my withdrawal as a taxable withdrawal. I am fighting with them. I have sent them everything they required twice, but they just keep sending back form letters and adding on penalties. Now I am dealing with two different offices, because although I sent correspondence to Philly, somehow the Austin, TX office is handling the issue, but Philly has the authority.

    It’s all a huge mess.

    I withdrew $11,000 in 2007, all contributions, and they want $3,000 plus $250 in penalties. I am very poor right now. If I have to pay them this or they garnish my wages, I might go bankrupt. I have three children who are not having much of a nice summer, but I notice that our politicians are living it up at the beach and other exotic places.

    Just because their own rules say something, doesn’t mean the people there have a brain or understand their own tax code. I have called them 9 times over the course of this year. When I think I’ve been helped, I send off what they tell me to, and I just get form letters back saying I owe them.

    The man in Philly acknowledged that they don’t have any records of the packages I’ve sent to them. He recommended faxing them and following up with a phone call, which I will try next.

  59. I am having problems withdrawing my funds from the Vanguard account, they are stating that I have to wait 6 months without any contributions to my account. Beings that I am in a union. Is there any information or leads out there that I can get a hold of, please let me know. My BA also states the same thing without any regard to my financial status. I let him know that I had to move from Las Vegas, NV to Oklahoma to live with some relatives, until the economy picked up, and that I would lose either both or one of my vehicles without the funds. As you can see the union dont care what we lose.

  60. To my previous post, I can be contacted at rvsolis1@hotmail.com

  61. What if the funds in my Roth are B shares? Isn’t there a back end fee when you sell them?

  62. I’m a bit confused, this loop-hole seems ripe for exploitation. Given what I’ve read above it seems that I could do the following:

    Contribute ANY amount of money (for exaggeration let’s say a million dollars) to your Roth IRA on April 16th 2010 (Just after the 2009 tax year close) and invest as you choose. 364 days later sell the same dollar amount of your positions and withdraw them from the fund, the next day (April 16th 2011) deposit the same amount into the account, rinse and repeat.

    If I’m reading the above correctly any gains realized over the year (and left inside the Roth IRA) would be tax free and the net amount contributed and subtracted within the tax year was zero, I effect you would be funding your Roth IRA with no maximum contribution limit (except for the one day buying/selling). What am I missing here? This can’t be possible.

  63. Hi,
    Here is a slightly different question or spin on it. Suppose your child had $3000 in earned income, contributed it to a Roth 3 years ago. Now is 15 and has $4000 in the Roth.

    Can you as the custodian for the child’s Roth withdraw the contributions without penalty and put in their savings account?

    I couldn’t find the code section or IRS publications dealing with this question.
    Thanks!

  64. Just called IRS. The guy named Peace said if you contributed and then took it out. It is like you have not made the contribution yet. So you can contribute again before the deadline of the tax return.

  65. James – you can only contribute $5k/year with the exception of the catch-up clause for older people. So putting in $1 million and taking it out is not an option.

    Since you can have multiple Roth IRA accounts( to the IRS they are all just one big account), just open 2 at with different custodians.

    Have #1 hold your emergency fund and be invested safely in money market/whatever. Fund this first.

    Have #2 be your long term retirement savings invested as aggressively as you feel comfortable doing.

    Now, for me, I have “mini” emergency find that I keep in checking for small emergencies. The fund in the ROTH IRA is to support me if I lose my job.

    With this setup, I get the benefits of ROTH with a buffer to lower the chances of pulling funds out for small emergencies. This defangs the problem of not being able to put the money that you took out back into the fun in a timely fashion.

  66. In 2008 I contributed $5k to a new Roth IRA, I have not since contributed anything to the account. Today, that account is worth about $4900.

    I would like to pull the full amount out and reinvest in a much better opportunity, but when I talked to my “investment adviser” at the bank he told be I’d have to pay 10% on the entire amount in tax penalty.. it seems this is incorrect from your blog post and he is as ignorant about taxes as he is investing. I can safely pull all of the money out of the Roth.. nothing has changed since you posted this blog four years ago?

  67. Thank you to Jonathan for this blog post and all who have contributed. It is a very interesting topic. I just spoke to my broker about my Roth IRA which was opened in 2007. He said I cannot withdraw my contributions before 2012 without penalty. I questioned him on this statement, but he insisted. Is this just a common misunderstanding of the IRS rules on this subject? Once the worksheet is completed, is it clear that withdrawals of contributions are never taxed/penalized? Similar to Chad’s question of 11/28/11, I am just seeking reassurance. Thank you!

  68. So have the rules changed since this blog was posted? Can we still withdraw our contributions to a Roth Ira at anytime without any type of penalties/fees? If so, then there appears to be many financial people out there that are misinformed.

  69. I just came across this today and called the IRS to settle some of the questions…

    You can withdraw up to the amount of your regular contributions without paying income tax or an additional tax penalty. Furthermore, the 5-year rule does NOT apply.

    Their reasoning was that it is a return of your already-taxed money.

    I also asked about withdrawing and replenishing – as long as it is within a 60-day window (stated earlier in the comments), it does not count towards your yearly contribution limit.

  70. My husband and I are considering buying a house within the next year. I contributed $5,000 in an IRA for the 2010 tax year and planned to contribute $5,000 for the 2011 Tax year, using the grace period before April 15th. My question is if I contribute the $5,000 next month for the 2011 Tax year and we buy a house in say May, can I withdraw the $10,000? Or should I not contribute the $5,000 and save the cash?

  71. Blanca,

    I wouldn’t put 5K in Roth IRA (let’s say in March) if you are planning on using it in May.

    You won’t have a problem taking it out later because Roth IRA contribution are after-tax money, but if you know you’ll need the money so soon, why risk putting them into an investment account (I’m assuming your Roth IRA would be an investment account).

  72. Babybird says:

    test

  73. Babybird says:

    “You can withdraw up to the amount of your regular contributions without paying income tax or an additional tax penalty. Furthermore, the 5-year rule does NOT apply.”

    “Withdrawals of contributions by due date. If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions. ”

    I have a couple of questions regarding the above two statements. Would anybody clarify this for me?

    1. When you withdraw your contributions, does that mean you must also withdraw the earnings it generates? And the earnings need to be subjected to tax? Otherwise, people can keep contributing and withdrawing every year, just leave the earnings there to grow tax free?

    2. It is clear that you can withdraw your contributions within the same tax year without penalty. It is also allowed that you can withdraw your contributions of past several years? For example, you have contributed to ROTH IRA for past 5 years and this year you want withdraw all the principals. Is that also tax and penalty free?

  74. I went to my pathetic excuse for an investment adviser @ chase on Friday and withdrew all of my Roth IRA.

    It took several explanations on my part as to why I could do this.. although she continued to insist that I must pay taxes on it. Eventually, and without admitting it, she must have realized that I was saying things she didn’t understand with authority, so I must know more than she does. I have had the ‘investment’ for 5 years and, as of withdrawing it, have LESS than the principal I ‘invested.’ She explained that it’s an IRA and subject to tax.. I asked, what am I being taxed on? Capital Gains? I LOST money here… and it’s a ROTH.

    She punched her buttons on her computer, asked why I was closing the account and twenty minutes later I was out the door. I’ll point out that I’m closing all of my accounts at Chase.. I really hate that bank. They have a revolving door of incompetent staff who are ‘investment advisers.’ Every 6 months, someone new who doesn’t know anything except how to wear a blue shirt and act like they’re superior to you because they have a fancy title. I banked there for 10 years (since it was bank one) and found it to be a downhill progression. I was once brand loyal to them but all they do is rape me with petty fees and bad advice. F Chase.

  75. If I were to rollover my current 401k (17k) into a Roth when I switch jobs, would the amount contributed(after taxes withheld) be considered contributions, and therefore able to be withdrawn?

    thanks for any help

  76. Chad, I feel exactly the same way about Chase. The sad thing is that most people know more than their advisors, but they charge you fees like crazy. So glad I found Bogleheads. ROTH IRA is great, but nothing really helps you if they charge you 2% annually plus a load fee.

  77. @Babybird – I’m also curious about having to file amended returns for the tax years that you withdrew your contributions. I don’t see why you would have to since you didn’t have to report your contributions on your return, nor did you get any kind of deductions for the contributions.

  78. As a young person considering my first contribution into a retirement account, I think this idea is especially enticing for people who are making a choice between an emergency fund OR a Roth IRA contribution. I agree that the big downfall of using a Roth IRA as an emergency fund is that you cannot redeposit the investments you took out, but the tables get turned when you wouldn’t have even taken advantage of your right to deposit for that tax year in lieu of a <1% interest account.

    I sought this article out because I wanted to be sure there wasn't a catch to the "at any time" line that is often used- I don't plan to do this of course, but I am just thinking about the worst case scenario. I enjoyed this article and the discussion. This is a much better discussion that the one that followed from me asking the T—CREF representative about using a RothIRA as an emergency fund.

  79. And this was the point of the original article.

  80. I’m not seeing how this is true. This is exactly what I did because I had always read this yet when working on my taxes now with turbo tax its telling me its taxable and its charging me the 10%. The account was open in 2001 so its well past the 5 years and I only withdrew 1170 while my total contributions were 1250. I don’t get this at all.

    • Turbo Tax should fix it if this is the case that it can’t handle this situation. I’m going to wait to do anything like this until the new year so at least I won’t have to deal with Turbo Tax problems like this, at least by this April.

      I’d also like to know more about the 8606 form, same as Chris.

  81. So, now that it’s 2012, did anyone figure out the Roth 401k conversion question? Do your contributions to Roth 401k become the basis of Roth IRA and can be taken out tax-free? Or do the ordering rules preclude that? (I believe they say taxable part of conversion has to come out first)
    Thanks!

  82. Hi, Roth IRA—can I take my monthly income dividends (normally “contributed” to purchase additional shares of the fund) without tax or penalty? I fear the answer is no. In other words, must one always sell original or other contributed shares to obtain Roth IRA funds without tax or penalty?

  83. How do I fill out the stupid 8606 form based on withdrawing my contributions (the whole point of the article)? I am absolutely baffled by this thing.
    Thanks

  84. Ditto with Chris – got a 1099-R from Vanguard that said “Taxable amount not determined” (checked), Distribution code(s) J, trying to figure out how to tell the IRS that this is a withdrawal of contributions, anyone know?

  85. Jonathanm
    Long time subscriber of your posts. Thanks for the wealth of information. Here is something that I am struggling with. I am using turbotax and this does not allow me to enter 8606 directly. When I click on line 19 in 8606 it asks me to get the data from 1099-R but what should be entered in 1099-R to trigger no tax ?
    I had contributed 5000 to my RothIRA for the tax year 2010 and another 5000 for the tax year 2011. I deposited 5000$ for the tax year 2012 on 1-Feb-2013 and withdraw the same amount ( 5000$) 12-Mar-2012. I did not get any tax statement last year and had also not mentioned the RothIRA contribution in 2012 tax return. Now my broker has sent me a 1099-R statement with 5000$ as gross distribution and distribution code as 8 and taxable amount as not determined. How do I handle this in TurboTax premier desktop version that I have . When I enter 1099-R , this amount is considered as income.

  86. I actually recently blogged about this topic. I was hit with a big tax bill (or so I thought) because I took money out of my ROTH IRA in 2011. The IRS didn’t send me the bill until late 2013. I filled out the form 8606 and there was no problem. Just remember, if you take out your contributions, you’ll have to explain it to the tax man!

  87. Hey,

    There is actually another exception to the IRA account rules.

    Rule 72(t)

    An Internal Revenue Service (IRS) rule that allows for penalty-free withdrawals from an IRA account. The rule requires that, in order for the IRA owner to take penalty-free early withdrawals, he or she must take at least five “substantially equal periodic payments” (SEPPs). The amount depends on the IRA owner’s life expectancy calculated with various IRS-approved methods.

    Rule 72(t) allows you to take advantage of your retirement savings before the age of 59.5, when there is otherwise a 10% penalty on early withdrawal. The withdrawals, however, are still taxed at your income rate. The drawback to taking advantage of Rule 72(t) is that you may deplete your retirement accounts well before the end of your life expectancy. By taking out your funds early you are putting yourself in jeopardy in the future.

  88. Jonathan, i am a long-time follower of your site, and i was surprised to see that i had already commented previously to this blog post (in 2007).

    I have appreciated (and benefited from) the vast amount of information you share in your blog. I’m also very impressed with the thorough amount of research you do prior to disseminating information. However, as a CPA who has encountered a number of situations where people got themselves in trouble based on the tax advice of someone who isn’t a tax professional, i would STRONGLY ADVISE that IF you’re going to continue to advise readers on completing tax forms or on taking positions that can potentially injure themselves financially, THEN you add a disclaimer to your post that states that you are not a tax professional and that the comments you make should not be taken as tax advice.

    Just copy the language you see in popular tax blogs so you limit your exposure to potential lawsuit.

  89. Thank you! This was exactly what I was looking for. I looked and could not figure out how the IRS would know I Was taking out my contribution. Now I know, 8606 is it!

  90. My husband has a RIRA and is 60 years old. My question: Can he draw funds from the RIRA and still continue to contribute on a monthly basis as he has for the last several years?

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