When Can You Cash Out a Roth IRA? Withdraw Contributions / Earnings

When Can You Cash Out a Roth IRA?

David was smart when he was younger. He began to contribute to a Roth IRA at the young age of 20. As the years have passed, David has noticed how the account has grown. He knew that a Roth IRA account is one of the greatest wealth building tools he could use to save for retirement. However, many people, even those like David who have had an account for many years, still pose the question, "when can you cash out a Roth IRA?" Usually, when you open the account, you will be provided with a lot of information, and often times, this can be overwhelming. Within this information are the rules regarding withdrawing from the Roth IRA account. It is recommended that everyone who has a Roth IRA make themselves familiar with these rules, so David went back to look up the information he needed to answer this question.

Unlike a traditional IRA account, a Roth IRA does not require mandatory distributions when you reach a certain age. This is one of the great benefits of the account and one of the main reasons David chose to open a Roth IRA over a traditional account. Since there are no required distributions, David will be able to make contributions to the account for as long as he has a source of earned income. Even after David reaches the age of retirement, when a traditional IRA would mandate distribution, he will be able to make contributions and continue to save. Having that said, David still has the question of when he can cash out the Roth IRA.

Cash out a Roth IRA by Withdrawing Contributions

When David decided to withdraw from his Roth IRA, there will be two types of withdrawals to be informed about. First is the money that was contributed. This is the amount that David has placed into the account. It does not include the earnings on the account. The IRA rules state that the contribution money can be withdrawn at any time without penalties. So, let's just say that David has contributed $4,000 to the account for 5 years. This means that he has contributed a total of $20,000. Should David decide to cash out the Roth IRA, he would be allowed to withdraw that amount. By doing so, he will not incur any taxes or penalties. As David is learning, this is another great benefit of a Roth IRA that he was unaware of. It is a way of providing the owner of the account access to the money without any age restraints or penalties. So, when can you cash out a Roth IRA? It depends on what exactly you plan to withdraw! If David only cashes out the amount he has contributed, he is allowed to take it at any time, for any reason. Basically, he has $20,000 at his fingertips.

Cash out a Roth IRA Withdrawing Earnings

Now that David is aware of this type of withdrawal, he needs to become familiar with the other type, which will include the earnings in the account. Again, assuming that David has contributed that $20,000 over 5 years, and the account has earned an additional $5,000, the balance in the account is $25,000. This is where the Roth IRA withdrawal rules come into play. In order for David to be able to withdraw the full amount of $25,000, he must be over the age of 59 1/2 and have had the account for at least 5 years. If he does not meet these requirements, there will be a 10% early withdrawal penalty. Let's say that David opened and started contributing to his Roth IRA account at 60 and he is now 63 years old; thus, he has only owned the account for 3 years. Even though the age requirements are met, David will still be penalized because the account has not been active for at least 5 years. It is important to know that both of these requirements must be met in order to avoid penalties.

In the case of David, as stated earlier, he is much younger than 59 1/2, but he has had the account for more than 5 years. In this event, he is only allowed to withdraw the amount of contributions he has made to his Roth IRA retirement account if he wishes to avoid the penalty. He cannot cash out the earnings in the account without the penalty.

David's question of when can you cash out a Roth IRA has two answers. It all depends the age of the owner and how long the account has been open. He must remember that even though he has access to the contributions made to the account, it is recommended he leave the money in the account so it can grow. That was the whole idea behind opening a Roth IRA in the first place. However, as an added benefit to the Roth IRA, it will be reassuring for David to know that the money is available should he ever need it. By the same token, if he has other financial sources available, he should leave the Roth IRA alone, allowing it to grow tax-free. He will benefit from the growth of his retirement investments in his formative years as he will then have tax-free retirement income.

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Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.

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