Question of the day: Roth IRA withdrawal rules

We get questions from blog readers and followers on Twitter (@family_finances), and we're always happy to answer. Today's question is answered by Elaine Coder, Director of Client Services for the Family Investment Center. If you have a question for us, please post it in the comments section or e-mail robynsekula@sbcglobal.net.

QUESTION: I have a Roth IRA, and I have a few questions. Does a Roth IRA have the same withdrawal restrictions as a traditional IRA? I’d like to know because I have a Roth IRA, but do not have a sizable emergency fund yet, and I’m wondering if I could take money out of a Roth IRA should some sort of emergency come up before retirement.

ANSWER FROM ELAINE CODER: An advantage of the Roth IRA over a traditional IRA is that there are fewer withdrawal restrictions and requirements.

Because Roth IRA contributions are not tax-deferrable, withdrawals are generally tax-free, but not always. Direct contributions to a Roth IRA may be withdrawn tax free at any time.

The earnings from your principle contributions can not be withdrawn until you reach the age of 59 1/2 without paying a 10% early withdrawal penalty. There is also a provision on being able to withdraw your earnings after 59 1/2 called the 5 year rule. You can only withdraw your earnings from your Roth IRA at 59 1/2 and have them count as qualified distributions if your Roth IRA has been open for for at least 5 years. Example, if you opened your account at 57, you would need to wait until you were 62 to withdraw any earnings on your principle.

Money in a Roth IRA due to conversion from a traditional IRA may be withdrawn up to the total of the converted amount without penalty, as long as the 5 year rule has been met.

The order of distributions is setup in order to help you avoid paying fees or penalties. Your contributions (tax and penalty free) come out first. Next come conversion or rollover amounts followed by earnings on your contributions, which could be assessed penalties if not a qualified distribution.

There are exceptions to the 10% penalty. If you need to take a distribution from your Roth IRA for a non-qualifying reason you can avoid the 10% early withdrawal penalty but will pay income tax. Some of the exceptions are:

* If you have un-reimbursed medical expenses that exceed 7.5% of your adjusted gross income.
* You are paying medical insurance premiums after losing your job.
* Education expenses
* Qualified disaster recovery assistance distribution

It is best to have a sufficient emergency savings (6-12 months of annual expenses) trying to avoid tapping retirement funds. The point of a retirement account is to have the money going in, growing tax free using the power of compound interest, withdrawing the money defeats the whole process.