“What happens if after contributing $5,000 to a ROTH IRA an emergency arises and you have to take out the $5,000 a year later? I know the earnings would be subject to a 10% penalty but what about the $5,000 contribution?”

Great question and one that people are often confused about. The general rule is that if you make a contribution to a Roth IRA and later need to take it out, you can do so and the distribution of the original contribution will not be taxable and will not be subject to any kind of penalty. you can generally do this at any time and for any reason. this is one of the big advantages that Roths have over Traditional IRAs.

As the reader hinted, though, the same is not true for the earnings portion of a Roth withdrawal. Unless you meet time and type of distribution tests, the earnings portion will be taxable and likely subject to a 10 percent penalty.

The “time” test is satisfied if the account has been open for 5 years. The 5 year holding period begins on January 1 of the calendar year that you make your first contribution. So, if you opened your account in 2005, the five year period is satisfied on January 1 of 2010 and it doesn’t matter that you might have made your first contribution late in the year of 2005.

In addition to the time test, the distributions must be qualified. Qualified distributions include distributions that are made on or after you turn 59 1/2, distributions made due to your disability or death and distributions used for qualified first time home purchases. a distribution that fails to meet these tests may be subject to a penalty (but there are also several other exceptions to the penalty.)

You should also be aware that different rules apply if the Roth IRA you want to withdraw from was created in the last 5 years as a result of a Roth conversion. in that case, you may be subject to a penalty.

Remember, the goal with all retirement accounts is to leave them untouched for as long as possible. try to avoid the temptation to take money from a Roth or any other IRA if you can.

How to access a Roth IRA for emergency cash