Can I Withdraw All of My Roth IRA at Once?
Cashing out a Roth IRA is possible, but the financial outcome depends on how your withdrawal is structured and timed relative to your age and account history.
It is possible to withdraw your entire Roth IRA balance at once. The primary consideration is not whether you can, but what the financial consequences will be. Taking a full distribution from a Roth IRA is a significant financial decision with specific tax and penalty implications. These consequences are determined by your age, how long the account has been open, and the composition of the funds.
Understanding Roth IRA Withdrawal Rules
The Internal Revenue Service (IRS) has a system for how money leaves a Roth IRA. Withdrawals are made in a specific order: first from your direct contributions, and only after those are exhausted, from investment earnings. Your contributions can be withdrawn at any time, for any reason, tax-free and penalty-free.
Once you withdraw all contributions, any further amount is considered a distribution of earnings. The tax treatment of these earnings depends on whether the withdrawal is a “qualified distribution.” A distribution is qualified if you are at least 59½ years old and your Roth IRA has been open for at least five years. This five-year clock starts on January 1 of the tax year of your first contribution.
If a withdrawal of earnings meets both conditions, it is tax-free and penalty-free. If either condition is not met, the withdrawal is non-qualified. The earnings portion is then subject to ordinary income tax and a 10% early withdrawal penalty.
Consider an individual who is 50 years old and opened their Roth IRA twelve years ago. They contributed $60,000, and the account is now worth $95,000. If they withdraw the entire balance, the first $60,000 comes out tax-free and penalty-free. The remaining $35,000 is a distribution of earnings, and because they are under age 59½, this amount is subject to both ordinary income tax and a $3,500 penalty.
Exceptions for Early Withdrawal of Earnings
The tax code provides several exceptions to the 10% additional tax on early withdrawals of earnings. These provisions allow you to access investment earnings before age 59½ without the penalty. However, ordinary income tax on the earnings will still apply unless the distribution is otherwise qualified.
Common exceptions to the 10% penalty include withdrawals for:
- A first-time home purchase, allowing you to withdraw up to a lifetime maximum of $10,000 from earnings.
- Qualified higher education expenses for yourself, your spouse, children, or grandchildren at an eligible institution.
- Cases where you become totally and permanently disabled.
- Payments for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI).
- Distributions taken by a beneficiary after your death.
The Withdrawal and Reporting Process
To begin the withdrawal, contact the bank or brokerage firm that acts as the custodian for your Roth IRA and request a full distribution. The institution will process your request and send you the funds, typically via check, wire transfer, or an electronic funds transfer to a linked bank account.
By January 31 of the next year, the financial institution will send you and the IRS a Form 1099-R. This form reports the details of your withdrawal, including the gross distribution amount and distribution codes. For example, code ‘J’ indicates an early distribution from a Roth IRA, while code ‘Q’ indicates a qualified one.
You must report the withdrawal on your federal income tax return using IRS Form 8606. Part III of this form is used to calculate the taxable portion of the distribution. You will report your total contributions to determine how much of the withdrawal is a tax-free return of your basis versus taxable earnings.
If your withdrawal is subject to the 10% additional tax or you qualify for an exception, you must file Form 5329. This form is used to either calculate the penalty you owe on the early distribution or to claim an exemption from that penalty.