Can you take money from your rollover IRA? | John Hanco*ck Retirement (2024)

Why you might have a rollover IRA from a 401(k)

When you leave an employer, you have four options to manage your retirement plan account such as a 401(k) or 403(b):

1. Leave it as is
2. Cash it out and pay taxes and potentially an early withdrawal penalty
3. Roll it over to your new employer-sponsored plan
4. Roll it over to an IRA

If you choose option four, you’d establish a rollover IRAand move your money from your employer-sponsored retirement account to your IRA—and you can choose a traditional (pretax) or a Roth (after tax) IRA.

Can you take money out of your rollover IRA?

Yes, but you may end up paying income taxes or an early withdrawal penalty if you’re not careful. There are a couple key rules to pay attention to before you take a withdrawal from your rollover IRA, or any retirement account for that matter.

Early withdrawal penalty

The U.S. Internal Revenue Service (IRS) has created a 10% penalty tax to discourage people from taking out their retirement money too soon. Once you reach age 59½, you avoid this penalty.

The IRS has provided exceptions to the 10% penalty before age 59½ for IRAs and other retirement plans:

• Death
• Disability
• Unreimbursed medical expenses above 10% of adjusted gross income
• A series of substantially equal payments—you commit to taking a payment for five years or until you reach age 59½, whichever comes second

IRA owners are eligible for additional exceptions to the penalty:

• Qualified higher education expenses
• Qualified first-time homebuyers, up to $10,000
• Health insurance premiums paid while unemployed¹

For a complete listing of exceptions, check out the IRS website.

Roth IRA withdrawals—the five-year rule

For Roth IRAs—which are funded with after-tax money—there’s an additional rule you must meet to avoid the 10% penalty tax on account earnings, called the five-year rule. Here’s how it works:

You’re able to withdraw your contributions tax and penalty free because these amounts were already taxed—the five-year rule only applies to your account earnings.²When you make a withdrawal from a Roth IRA, your money gets withdrawn in the following order:

1. Your IRA contributions
2. Taxable conversions
3. Nontaxable conversions
4. Earnings³

To avoid the penalty on your earnings, you must wait five years from January 1 of the tax year you make your first Roth IRA contribution or rollover. If you have multiple Roth IRAs, you only need to worry about the date on which you made the initial contribution to the first IRA.

You’re charged the 10% early withdrawal penalty if you’re over age 59½ but fail the five-year rule—as the five-year rule takes precedence. With rollovers, the clock starts when the rollover occurs—the amount of time you had your money in your 401(k) plan doesn’t count.

Know the rules before you withdraw money from your retirement accounts

There are several rules for withdrawing money from your rollover IRAs and other retirement accounts.⁴ If you have many retirement accounts, it may become a more complex web of decisions than you anticipated. Here are some tips to help you manage through it:

• Consider consolidating your accounts into one⁵
• Know the tax treatment of each account
• Keep track of the timing for Roth contributions
• Understand penalties on early withdrawals

Consult with a tax or financial professional before taking a withdrawal if you want to be sure you understand the impact of withdrawing your money.

1 “Retirement Topics – Exceptions to Tax on Early Distributions,” U.S. Internal Revenue Service, 9/30/21. 2 “What Is the Roth IRA 5-Year Rule?”, Investopedia, 3/30/21. 3 “Roth Ordering Rules,” Investopedia, 7/13/21. 4 “Distributions from Individual Retirement Arrangements (IRAs),” U.S. Internal Revenue Service, 5/13/21. 5 As other options are available, participants are encouraged to review whether consolidating accounts, staying in a retirement plan, rolling over into an IRA or another option is best, as there are advantages and disadvantages to each.