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’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.