How To Make An Early Roth IRA Withdrawal Without Paying A Penalty

Retirement accounts are meant for retirement.  In order to protect people from themselves, the IRS levies a 10% penalty on most IRA withdrawals before age 59 1/2.  For the vast majority of Americans, that’s a great thing insofar as it keeps them from raiding their retirement savings for frivolous purchases.  It poses a problem for early retirees, however.  Those retiring extremely early generally have to find some other way to finance their lifestyle.  That said, there are two tricks you can use to make an early Roth IRA  withdrawal without paying a penalty.  While I would prefer to leave my retirement accounts untouched for a while, just in case, it’s nice to know I have options in a pinch.

Penalty-Free Early Roth IRA Withdrawal Techniques

There are a number of IRA early withdrawal exemptions applying only to very specific conditions, such as in the event of permanent disability or first-time home purchase, but what we’re after is a more generalized method of getting at our money without any strings attached.  There are two such cases I know of…

Roth IRA Contributions Are Always Penalty-Free

Since Roth IRA’s are after-tax accounts, you can always withdraw your contributions without penalty.  For example, say you’ve contributed $30,000 to a Roth IRA over the years and, thanks to generous market returns, it is now worth $50,000.  You are allowed to withdraw $30,000 (the amount you contributed) at any time for any reason, no questions asked.  You won’t owe an early withdrawal penalty or even income taxes.  Every dollar you withdraw beyond the $30,000 you’ve contributed, however, will be subject to both the penalty and regular income taxes.

Substantially Equal Periodic Payments

Substantially Equal Periodic Payments (SEPP) are an inflexible way to tap into your IRA before regular retirement age.  The rules are simple:  you must agree to take substantially-equal payments every year for 5 years or until you reach age 59 1/2, whichever comes last.  Once you decide to start taking SEPPs you are not allowed to skip a payment or change your mind, or you will owe a penalty on previous withdrawals.  The annual distribution you are required to take is not decided by you;  rather, it is based on your life expectancy.  There are actually three specific methods used, each resulting in slightly different amounts:  the amortization method, annuitization method, and Required Minimum Distribution (RMD) method.  See Investopedia’s article on the subject for more details.