Withdrawing Your Roth IRA Contributions
I’ve written on several occasions about the fact that you can withdraw ‘regular’ (i.e., annual) contributions to your Roth IRA at any time, and for any reason, without incurring taxes or penalties (e.g., here, here and here). A recent commenter, however, challenged the veracity of this claim, so I started digging for additional information. As it turns out, the answer is right there in black and white in IRS Publication 590 (although they don’t go out of their way to highlight this factoid)…
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).
Need more info? Check out Fairmark.com (an excellent tax website), where you’ll find the following on one of their Roth IRA pages:
The rules for Roth IRAs permit you to do something that isn’t allowed for regular IRAs: withdraw the nontaxable part of your money first. Distributions from regular IRAs come partly from earnings and partly from contributions. But when you take money out of a Roth IRA, the first dollars you take out are considered to be a return of your non-rollover contributions. You don’t have to meet any special tests to receive those dollars free of tax. You can take them out any time, for any reason, without paying tax or penalties.
You can also check out the Yahoo! finance page on Roth IRA distributions, where you’ll find much the same information (mainly because it’s written by Kaye Thomas, who runs Fairmark). Search a bit more widely and you’ll find that Investopedia.com tells us that:
Distributions of Roth IRA assets from regular participant contributions and from nontaxable conversions of Traditional IRA can be taken at anytime, tax and penalty free…
And over at the Motley Fool, you’ll find that:
Be aware that you may take your regular Roth IRA contributions (but not earnings) at any time for any purpose free of income taxes and penalty.
So there you have it… Regular Roth IRA contributions can be yanked out whenever you want without having to pay the piper.
So why am I telling you this? Simple. It’s not that I want you to drain your retirement account — quite the opposite… The flexibility to withdraw your contributions means that you can stretch your budget and stuff your Roth with money even if you’re not sure that you can really afford it. Worried that your car might break down? Or that a medical emergency might arise? Don’t let that get in the way of maxing out your Roth IRA, as you can always unring the bell (so to speak) if necessary. But you can’t go back and make those contributions in future years, so do it now (and every year) while you still can.
Published on May 2nd, 2006 - 19 Comments
Filed under: Retirement, Saving & Investing, Taxes
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Excellent post, I’ve been looking for something black and white like this….great job!
Comment by MyFinancialJourney — May 2nd 2006 @ 10:41 amOne of the major drawbacks of taking a Roth withdrawal is that you can’t really put the money back in. If you put in $4000 one year and take out $2000, then you’re going to be $2000 behind forever, assuming you’re maxing out your contributions each year. So it’s kind of a last resort.
Comment by Jerry Kindall — May 2nd 2006 @ 10:48 amJerry: I agree completely. I’m only recommending this as a safety net for those that otherwise wouldn’t be contributing to their Roth out of fear of a cash flow crunch. In this case, those individuals would be best served by stuffing their Roth and then hoping for the best. If they can stave off the cash flow crunch, then they’ll come out ahead. If not, they can always get the money back out.
Is the contribution limit to a Roth IRA net? For example, if I contributed 4000 in the beginning in the tax year, but a few months later withdrew 2000. Would I still be able to recontribute 2000 before the end of the tax year? Is this viewed as a 6000 dollar contribution for the year or a net 4000 contribution?
Comment by PrimeRate — May 2nd 2006 @ 12:58 pmI can’t seem to find a clear and explicit explanation of how this affects conversions from a non-taxable traditional IRA that was put into a Roth IRA. That being money that was put into a traditional IRA that was put in on a pre-tax basis and then converted to a Roth IRA and then the full taxes paid on the entire conversion amount at the time of conversion. This money is taxed in the same way as a normal contribution is but it allows one to pile a lot more money into the Roth if you have money in a traditional (especially if rolled from a former 401-k) and meet the income limits to qualify for the conversion.
There is one quote above that mentions “and from nontaxable conversions of Traditional IRA” but I am not sure exactly what that means. What exactly is a nontaxable conversion? My conversions were from non taxable IRAs but the conversion itself was most definatley a taxable event. I would think I could withdraw that entire sum in addition to contributions since I have already paid the full tax on it but perhaps that is not the case.
Is it clear what I am talking about? Can you shed any light on that nickel?
Comment by Apex — May 3rd 2006 @ 3:32 pmok, I followed the Investopedia link above and found this. Assets are taken out in the following order:
1. regular Roth IRA participant contributions.
2. taxable Traditional IRA conversions.
3. nontaxable Traditional IRA conversions.
4. earnings on all Roth IRA assets.
#2 is the one I was talking about.
only 1 and 3 are fully tax and penalty free. 2 is tax free since taxes are paid at conversion but will have a 10% penalty if it has been less than 5 years since the conversion. If its been more than 5 years then it is also tax and penalty free. I think I recall reading something like that now that I see it again.
It doesn’t seem to make much sense to me that 2 comes out before 3 but I guess its amazing it makes as much sense as it does.
So in case anyone was wondering, I answered my own question for you.
I try to keep pretty good records of my conversions and contributions but my Roth has been moved around a little bit and I lost a little paperwork. I had recently worked to rebuild my paper trail by contacting the plan administrators and asking for back paper work and I think I have the trail fully rebuilt. I don’t plan to tap it, but I just wanted to know if I did that I could prove my contributions and conversions.
Comment by Apex — May 3rd 2006 @ 3:44 pmOk last post, promise.
Is anyone concerned that the government will one day change the rules on Roth’s especially with the impending social programs financial problems? Thats the other reason I wanted to rebuild my paper trail. If they did change the rules I don’t know in what manner they would do it but if they did it would make the Roth a far inferior vehicle to anything tax deductible.
Anyone concerned about this? I have heard some financial advisors comment on its possibility. If it happens I would hope they would just halt future contributions and not tax anything currently in Roth accounts. However my fear is that the desire to do it would stem from the need for more tax revenues. The large untaxed stream of dollars sitting in Roth’s could be pretty tempting to some who think that certain people are not paying their fair share by having this money on which they will never owe any tax. It wouldn’t be too hard for people to start a fairness argument about it and get some serious headway.
Comment by Apex — May 3rd 2006 @ 3:51 pmGood Job Nickel-That doubting Thomas would really fret when you tell em that some people even put real estate in their Roth’s! Pretty sweet for folks who have the cash in the Roth’s and don’t want to worry about tax gains when flipping properties!
Comment by Steve Mertz — May 4th 2006 @ 5:11 pmGreat job nickel, very informative post.
Comment by LSD — May 8th 2006 @ 2:15 pmAwesome thanks! This was my understanding, but I hadn’t really found an authoritative document that explicitly said it.
Comment by 2 million — May 11th 2006 @ 1:35 pmWithdrawing from your IRA (or the ability to) provides much needed flexability but should still be one of the last resorts since you are truly defeating the tax purposes and taking a hit to your retirement.
Comment by Wes — May 23rd 2006 @ 7:19 pmI don’t think it is that clear. I’ve been reading through IRS p590 and it says you can pull out contributions by due date of the tax return for the year the contribution was made. Then it says you must include the earnings as income for the year of the contribution. Previous years contributions aren’t considered qualified and are subject to the additional (10%) tax on early distributions. I think ‘regular contribution’ only refers to that tax years contribution and must be pulled out before the tax return due date to avoid the penalty.
Comment by jeff — May 24th 2006 @ 10:00 amWas just going back through some old posts and, seeing as I was the ” recent commenter, however, challenged the veracity of this claim, ” referred to above, I must say it makes me feel a little better to realize that there are plenty of other people somewhat confused about this topic. It was a great post nickel…thanks!
Comment by Norm — Nov 3rd 2006 @ 8:48 amNorm, thanks for your comments… They keep me honest!
What if you contribute at the beginning of 2007, but then you get a big bonus, big raise which puts you over the contribution limit? You have to take it out right? But what about the increase in value of the $4k?
Comment by J — Nov 3rd 2006 @ 11:04 pmI thought you could pull out your contributions and the IRS gave you 60 days to put them back in. Is this true?
Comment by Jimmy — Apr 4th 2008 @ 9:41 pmI’m interested in the rules regarding withdrawing your contributions and putting them back in. Does anyone know the rules on that?
Comment by Chad — Aug 12th 2008 @ 7:08 pmLooking for clarification: converted IRA to Roth IRA over 5 years ago (paid appropriate taxes at the time);
I am under age 59 - can I make a withdrawal of ‘contributions’ [not earnings] both tax and penalty free?? is there a minimum or maximum withdrawal??
thank you.
Comment by Carol — Aug 14th 2008 @ 12:31 pmCarol - you can take out any amount of your contributions tax-free at any time. I also found out that you can put your contribution (only for the current year) back in within 60 days.
Comment by Chad — Aug 14th 2008 @ 2:09 pm