Roth vs. Traditional IRA Penalties

by W D Adkins

Roth and traditional IRAs offer tax advantages to encourage you to save for your retirement. Contributions to traditional IRAs are tax-deductible. Roth contributions are not deductible, but the investment earnings in a Roth IRA are tax-exempt when withdrawn after you retire. The IRS is strict about following the rules and will hit you with penalties for not following them. The rules and penalties are somewhat different for the two types of IRAs.

Early Distributions

You must be 59 1/2 years old before withdrawing funds from either a traditional or Roth IRA. For Roth IRAs only, the account must also be at least five calendar years old. The IRS imposes a 10-percent penalty tax for premature distributions (withdrawals). Roth contributions (but not those made to a traditional IRA) are exempt from any tax liability or penalty and can be withdrawn anytime. You must pay ordinary income taxes on early distributions. Traditional IRA withdrawals are taxable when withdrawn after retirement, but Roth IRA withdrawals are not (with a few exceptions. This means you may pay both the penalty tax and ordinary taxes on early withdrawals from a Roth IRA even though the money would have been tax free if withdrawn after retirement.


The IRS makes several exceptions to the 10-percent penalty tax. These exceptions are pretty much the same for both kinds of IRA. You can take money out penalty free for certain medical expenses, to pay for health insurance when you are unemployed or if you become disabled. Withdrawals are allowed for the purchase of a first home, qualified higher education costs or to pay an IRS tax levy. If you inherit an IRA, you can take the funds out without penalty. If you need income before you each age 59 1/2, you may be able to set up substantially equal annual payments.

Required Minimum Distribution

With a traditional IRA, you must start taking required minimum distributions when you reach age 70 1/2. The amount you must withdraw each year depends on the size of the account and your life expectancy. If you fail to take the required minimum distribution, you must pay a 50-percent excise tax on the money not withdrawn on top of ordinary income taxes. Required minimum distributions do not apply to Roth IRAs.

Excess Contributions

You may contribute up to $5,000 to either a traditional or a Roth IRA each year. Once you are 50 years old, the limit is $6,000. If you contribute too much, you have until your tax filing deadline (including extensions) to remove the excess amount along with any earnings on the excess. If you do not remove excess contributions before the deadline, you pay a 6 percent per year penalty until the funds are taken out of the IRA. The excess contribution penalty is the same for Roth and traditional IRAs.

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