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05 / 20 / 2015 by Greg Freyman, CPA in Personal Tax

Are Roth IRA Early Withdrawals Always Taxable?

Question:
I’m withdrawing from my Roth IRA before reaching the age of 59 1/2. Is this withdrawal subject to taxes and the 10% early withdrawal penalty?

Answer:
The answer to this question depends on whether this distribution was a withdrawal of contributions or earnings, among other factors. If this was a withdrawal of your initial contributions into the Roth IRA, then it is non-taxable and not subject to the 10% early withdrawal penalty.

For a little more context per the tax code (i.e. IRC Section 408A(d)(4)(B)), a withdrawal is considered according to the following order:

1) regular Roth IRA contributions
2) taxable rollover conversions (on first-in, first-out basis)
3) nontaxable rollover conversions, and then
4) earnings

This effectively means that you can usually withdraw regular Roth IRA contributions free of any tax liability or penalty. Let’s suppose you initially funded a Roth IRA with $20,000 and the account is now worth $29,000. If you withdrew $21,000 before you reach the age of 59 1/2, $20,000 would be excluded from the 10% early withdrawal penalty. Even more, only $1,000 would be subject to the 10% early withdrawal penalty and tax liability on the earnings. This concept is often misunderstood since Roth IRA early withdrawals are not always taxable.

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