Withdrawing Your Roth IRA Contributions
I've written on several occasions about the fact that you can withdraw 'regular' (i.e., annual) contributions to your Roth IRA at any time, and for any reason, without incurring taxes or penalties (e.g., here, here and here). A recent commenter, however, challenged the veracity of this claim, so I started digging for additional information. As it turns out, the answer is right there in black and white in IRS Publication 590 (although they don't go out of their way to highlight this factoid)...
You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).
Need more info? Check out Fairmark.com (an excellent tax website), where you'll find the following on one of their Roth IRA pages:
The rules for Roth IRAs permit you to do something that isnt allowed for regular IRAs: withdraw the nontaxable part of your money first. Distributions from regular IRAs come partly from earnings and partly from contributions. But when you take money out of a Roth IRA, the first dollars you take out are considered to be a return of your non-rollover contributions. You dont have to meet any special tests to receive those dollars free of tax. You can take them out any time, for any reason, without paying tax or penalties.
You can also check out the Yahoo! finance page on Roth IRA distributions, where you'll find much the same information (mainly because it's written by Kaye Thomas, who runs Fairmark). Search a bit more widely and you'll find that Investopedia.com tells us that:
Distributions of Roth IRA assets from regular participant contributions and from nontaxable conversions of Traditional IRA can be taken at anytime, tax and penalty free...
And over at the Motley Fool, you'll find that:
Be aware that you may take your regular Roth IRA contributions (but not earnings) at any time for any purpose free of income taxes and penalty.
So there you have it... Regular Roth IRA contributions can be yanked out whenever you want without having to pay the piper.
So why am I telling you this? Simple. It's not that I want you to drain your retirement account -- quite the opposite... The flexibility to withdraw your contributions means that you can stretch your budget and stuff your Roth with money even if you're not sure that you can really afford it. Worried that your car might break down? Or that a medical emergency might arise? Don't let that get in the way of maxing out your Roth IRA, as you can always unring the bell (so to speak) if necessary. But you can't go back and make those contributions in future years, so do it now (and every year) while you still can.
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"Withdrawing Your Roth IRA Contributions" was first published at fivecentnickel.com
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A big however--withdrawals from your Roth IRA may make you ineligible to take the extra "saver's credit" on future contributions. The way it's figured, you need to subtract withdrawals made in the past few years from the current year's contributions. In other words, if you took $2000 out two years ago, and put $3000 back in this year, the saver's credit calculation says you only deserve a credit based on $1000. And you are punished for the withdrawals in this way for several years. So it's true that you don't pay taxes or penalties for taking out Roth contributions, but it can still cost you.
There's still a good reason to have a separate, regular, taxable account for emergency funds.
Article on Saver's Credit:
http://www.investopedia.com/articles/retirement/04/031704.asp
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