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Q: Are there ways to take money out of a Roth IRA without paying tax or penalties?
A: One of the great things about Roth IRAs is that you put cash in, invest and then take the money out after retiring without paying taxes on the withdrawal. Pretty nice. But, what if you need the money before you turn 59-1/2 years old? The rules are strict. Here's the good part. With a Roth, you're able to withdraw the money you put in — that is, the contributions — any time without paying tax, says the Ernst & Young Tax Guide 2008. That makes sense, because you've already paid tax on the contributions. What about the money you earned on your contributions? Generally, taking those out early will cost you, because they may be added to your gross income and then slapped with a 10% additional tax. There are exceptions. If you take earnings out to pay for certain education costs, you may need to add the amount to your taxable income but you won't owe the 10% additional tax, says 2007 Guide to Tax and Financial Planning from PricewaterhouseCoopers. You can avoid taxes and fees in certain other cases, including after you become disabled, to pay to a beneficiary after your death or to pay for up to $10,000 in some first-time home buyer expenses. The Roth really is designed for people who plan to keep money invested for many years and use it for retirement. But as you can see, there are a few escape hatches that make Roth IRAs interesting ways to save for some education and housing expenses.
WHAT THE IRS SAYS: IRA rules (pdf).
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.
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