The magic age for both the Roth IRA and the traditional IRA is 59 ½. If you are older than that you can withdraw your funds tax and penalty free. Otherwise, the early withdrawal penalty is 10% as with the traditional IRA. That is on top of the taxes you will have to pay. However, there are exceptions.  You were expecting that, weren’t you?

Since you contribute to a Roth IRA with money you have already paid taxes on, you can withdraw your contributions anytime without penalty. The rules state that the money that comes out of a Roth IRA is considered to come from the contributions portion of your funds first. However, if you converted a traditional IRA into a Roth IRA, you have to wait at least 5 years before making any withdrawals or you will have to pay the penalty.

Roth IRAs are funded with earned income. That means you actually have to work for your money, not just receive it through investments. All earnings within your Roth IRA are tax exempt not just tax deferred as with a traditional IRA. The great thing about the Roth IRA is that you can get at your money more easily than with a traditional IRA so if you are in the lucky position to retire before the magic age of 59 ½ you can. So when can you cash out a Roth IRA account? You can cash out at 59 ½. You can withdraw any of your earnings after 5 years and they will still be tax free if they meet certain conditions.

For example you are allowed to withdraw funds from your Roth IRA for qualifying college expenses at any age and you will not have to pay the early withdrawal penalty of 10%. You will have to pay taxes on any Roth IRA earnings you withdraw for this purpose though unless you meet the 5 year test. Another condition with allows you to withdraw up to $10,000 is a first time home purchase.

Should you find yourself disabled you can also dip into your Roth IRA earnings penalty free. To be tax exempt, the earnings will have to pass the 5 year test. So while there are penalties to keep you from spending your retirement savings before you actually retire, there are some reasonable exceptions to the penalties so you don’t get punished when you are already in a bind. Disability is one of those situations all of us hope we never have to deal with but if it happens you at least know you can get at the money you have been saving.

So a Roth IRA makes a reasonable ultimate disaster fund in case of emergencies. As long as your emergencies fall into the categories that congress thought of for reasonable life events that could require more funds than anticipated, you can cash out your Roth Ira. Do keep in mind that this is supposed to be your retirement savings though. If you find yourself dipping into your Roth IRA earlier, you will impact your retirement. Especially, if you do it early on such as for college costs. As with any investment, the cumulative power of time is crucial and if you plunder your funds, you will want to replenish them as soon as possible so you minimize the loss of investment time for your retirement savings.

What I think is great about the Roth IRA is that you can get at your contributions without penalties so there is no risk in starting your retirement savings early. You may as well start saving now. If you find you were overly ambitious, you have not made your funds inaccessible.