When Can You Cash Out a Roth IRA?

In essence, the principle money contributed to a Roth IRA can be withdrawn whenever the money is needed. No taxes are paid on withdrawal because the money has already been taxed prior to putting it into the account. However, any interest paid on the principle will be new money earned and therefore subject to tax penalties once the money is withdrawn. The earlier the money is withdrawn, the higher the tax penalty can be.

Most people hear IRA, or individual retirement account, and think of the traditional type. This is where money is contributed to a retirement account by an individual or their employer. The money contributed has not had taxes taken out, and the person contributing the money is eligible to take that same amount of money off his or her yearly income tax. This money can not be withdrawn without a tax penalty before retirement age. When the money is eventually withdrawn, the owner will then have to pay taxes on it.

A Roth IRA is different because the money that feeds the account comes from a person’s income that has already had taxes taken out. Since this money has already been taxed, it can’t be taxed again. Therefore, you can cash out a Roth IRA at any time, even before actual retirement. The interest earned on the money has not had taxes taken out and will, therefore, be taxed appropriately when withdrawn. The only drawback to Roth IRAs is that there is a cap for how much money can be put in yearly.

Additionally, a Roth IRA is another way to save for retirement on top of any 401Ks, traditional retirement accounts and other investment choices. Roth IRAs are also a convenient place to put rollover money from 401K benefit plans. However, tax laws change from year-to-year; therefore, current tax laws must always be consulted prior to cashing out Roth IRAs or other retirement savings.