This isn’t to say that I should, of course. But it’s nice to know it’s a possibility in an emergency.
There are multiple ways to take money out of a Roth IRA without penalty — a few easy ways, and one less easy way (which is still pretty easy).
Relevant IRS publications
Today, I’ll refer to the following:
- Publication 590, Individual Retirement Arrangements (IRAs), 2012
- Form 8606, Nondeductible IRAs, 2012
- Instructions for Form 8606, 2012
Easy way #1: Current year contributions
Any amount taken out of a Roth IRA that is less than the amount you have contributed in that tax year (e.g. until April 15 of the following year) can be removed and treated as though the original contribution never happened. From a professional perspective though, it would be wise to set up a consultation with an internet tax prep system to accurately determine this. Explicitly, Publication 590 says:
If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. (p. 70)
In other words, current-tax year contributions can be pulled out with no penalties, no worksheet, no forms (other than including any earnings those contributions made as part of your normal AGI) — nothing. It’s hard to think of reasons why this is less liquid than a bank account.
(Late edit: Here’s the link to the relevant IRS PUB 590-B for 2014)
Easy way #2: Qualified distributions
The other easy way to take money out of a Roth IRA — in this case, both contributions and earnings — is to make what the IRS defines as a “qualified distribution.” For most of us, this will mean waiting until we’re 59 1/2 years old, but here is the list in its entirety from Publication 590:
- Made on or after the date you reach age 59 1/2
- Made because you are disabled,
- Made to a beneficiary or to your estate after your
- One that meets the requirements listed under First
home (up to a $10,000 lifetime limit).
Provided that a distribution meets any of these conditions (N.B. If you are taking a distribution for a first home, you still need to fill out the form I discuss in the next section) and that it was taken at least five years after the first contribution, a distribution can be made without penalty.
Not as easy — but still pretty easy way: Non-qualified distributions smaller than cumulative contributions
Distributions not among those in the list of qualified distributions are those that could be subject to the 10% penalty — officially, an “additional tax.” To figure out how much of your distribution is taxable, you would fill out Part III of Form 8606, which I’ve snipped and included here if you’d like to follow along:
In typical IRS fashion, there are more words than necessary, but basically it’s saying to do the following until you get to the end (with the amount remaining subject to the 10% additional tax) or you reach $0:
- Start with nonqualified distributions from your Roth (including first-time homebuyer distributions)
- Subtract first-time homebuyer expenses up to $10,000 (don’t forget that this has to happen at least five years after a contribution)
- Subtract “basis” in Roth IRA contributions
- Subtract “basis” in tradional, SEP, and SIMPLE IRA conversions to Roth
Wait. What is this “basis” mentioned in item 3? As defined in the following monstrosity of a chart on page 7 of the Instructions for Form 8606, basis is the sum of all of your past contributions to your Roth IRA less all of your past distributions from your Roth IRA:
In other words, as long as the amount you take it in nonqualified distributions this year is less than the total amount of contributions you’ve made in the past (minus distributions you’ve made in the past), you’ll zero out this calculation and not be left with a taxable amount.
I’m impressed if you made it through all that dry IRS talk to get to this point. Say the secret word, “shibboleet” in the comments if you make it this far and we’ll be best friends. Besides friendship — the greatest gift of all — you also get to know that I’m of the opinion that what might be the most interesting thing regarding emergency funds is actually on Line 24 (what I called item 4) of Form 8606, but that’s a topic for another day.
And that’s why I can take as much as I want from my Roth IRA contributions in distributions without penalty. Pretty neat, huh?