Early Withdrawal from Roth IRA Contributions, a Closer Look

My post about Using a Roth IRA as an Emergency Fund generated some interesting discussion here and in social media. The idea that one can take an early withdraw from Roth IRA contributions was met with understandable skepticism. I’ll admit that this is a relatively new idea for me as well. I think the best way to clarify the issue to actually dive into the IRS documents governing Roth IRAs.

First let me clarify what it means to be able to “withdraw the contributions” from an IRA. Consider this:

  • I put $100 into a Roth IRA.
  • 2 years pass and my $100 has grown to $125.
  • I take $100 out of the Roth IRA.

This is withdrawing my contributions ($100) and leaving my gains ($25). I put $100 in and then I took $100 out later; the amount of time between contribution and withdrawal does not matter.

So let’s see how exactly the IRS classifies a withdrawal of contribution like this.

IRS Publication 590, Individual Retirement Arrangements

IRS Pub. 590 defines and outlines the rules related to individual retirement arrangements. You can take a look at it here. I always assumed IRA stood for “Individual Retirement Account,” guess not. We’re all learning today.

Section 2 is devoted entirely to Roth IRAs. Section 2 has a subsection titles, “Are Distributions Taxable.” That section says (emphasis mine),

“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).”

Fairly clear. Distributions (withdrawals) that are a return of your regular contributions are not subject to income tax. OK, cool, we knew that, it was fairly obvious already since contributions to a Roth account are made on a post-tax basis. What about that scary 10% penalty tax levied on some early withdrawals?

As we continue through the document we find the section defining qualified distributions, which are kind of convoluted and included certain medical hardships, unemployment hardships, and a provision to help you buy your first house. But we’re none of those things. In fact, take a look at Figure 2-1, from IRS Pub. 590, below, that gives a visual flowchart describing what can be considered a qualified distribution. Notice we don’t even pass the first box, definitely defining our early withdrawal from Roth IRA contributions as “unqualified distributions.”

IRS Pub. 590, Figure 2-1</a>
IRS Pub. 590, Figure 2-1.

Still with me? At this point we have taken an early withdrawal from Roth IRA contributions. We’re reading IRS Pub. 590 to find out if we’re going to be penalized for that and we’ve determined that our withdrawal is considered an “unqualified distribution.” But do you see those magic words in the box we were led to in the flow chart (again, emphasis mine),

“The portion of the distribution allocable to earnings may be subject to tax and it may be subject to the 10% additional [penalty] tax.

There it is again, a mention of earnings! We’ve only withdrawn our contributions, but it says right there that only the “portion of the distribution allocable to earnings” can be taxed. Great. This is the second indication that we are not subject to any taxes for withdrawing our contributions, but let’s continue this exercise to the very end. I’m an engineer, I want to see the numbers.

The last section of IRS Pub. 590 that is of interest to us is the section titled, “How Do You Figure the Taxable Part?” which refers us to IRS Form 8606. Part III of this form is dedicated to determining the tax you owe on Roth IRA distributions.

IRS Form 8606, Part III</a>
IRS Form 8606, Part III.

So check it out. Using our $100 example from the beginning of the post:

  • Line 19 is the amount of the distribution (withdrawal), $100.
  • Line 20 is the portion of that distribution we are saying we used to buy our first house, $0.
  • Line 21 is (Line 19) – (Line 20), $100-$0=$100.
  • Line 22 is the basis of the Roth IRA contributions (the amount we initially contributed), $100.
  • Line 23 is (Line 21) – (Line 22), $100-$100=$0.
  • Line 24 is $0.
  • Line 25, which indicates the taxable amount of our distribution (withdrawal), is (Line 23) – (Line 24), $0-$0 = $0.


As long as you withdraw less than the total amount of contributions to the Roth IRA, the withdrawal, even though it is considered an unqualified contribution, is not taxable. Note that Line 22, the basis of Roth IRA contributions, is calculated as (Contributions since 1996) – (Distributions since 1996). This makes sense and just means that the sum of all early withdrawals must not exceed the sum of all contributions in order to remain untaxable.

So there it is, an early withdrawal from Roth IRA contribution is not taxable. Ever. No matter what. So take advantage and start funding a Roth IRA right now. Optimize your finances and put those dollars to work.

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