A: This rule is often misunderstood! It applies only to the interest earned.
You can't withdraw the Roth IRA's earnings tax-free until you're over 59 and a half AND have owned the account for five years.
But you can withdraw your principal anytime without triggering a tax or a penalty.
There is one exception: If you do a Roth conversion and you're under 59 and a half, you'll owe a 10% early withdrawal penalty -- but no income tax -- on converted principal that you withdraw within five years of doing the conversion, says Barry C. Picker, a New York City tax accountant and IRA expert.
If you do a Roth conversion and you're over 59 and a half, you can withdraw the converted amount tax-free and penalty-free at any time; but you can't withdraw earnings tax-free until the account is over five years old.
The reason you can withdraw Roth IRA contributions tax-free anytime is that you've already paid taxes on them. If I contribute $2,000 to a Roth IRA, for example, I get no tax deduction for the contribution. The $2,000 is included in my taxable income for the year.
But of course, there's a major downside to tapping the account: If you withdraw your principal, the Roth IRA can't earn anything.
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