www.lesswrong.com/posts/CcqaJFf7TvAjuZFCx/retirement-accounts-and-short-timeline...
1 correction found
Five years from when you open your account there are options for taking gains out tax-free even if you're not 59.5 yet. You can take "substantially equal periodic payments", but there are also ones for various kinds of hardship.
SEPPs and hardship exceptions can avoid the 10% early-withdrawal penalty, but they do not make Roth earnings tax-free before age 59½ unless the distribution is otherwise qualified.
Full reasoning
This mixes up penalty-free withdrawals with tax-free withdrawals.
For a Roth IRA, the IRS says a distribution is tax-free only if it is a qualified distribution: it must be made after the 5-year period and also be made on or after age 59½, or because of disability, death, or for a first-time home purchase (up to the statutory limit). If a Roth IRA distribution is not qualified, the portion allocable to earnings may be taxable.
The IRS separately explains that substantially equal periodic payments (SEPPs) are an exception to the 10% additional tax on early distributions. That is, SEPPs can remove the penalty, but they do not by themselves make Roth earnings exempt from ordinary income tax.
For designated Roth accounts such as a Roth 401(k), the IRS likewise says hardship distributions include a pro-rata share of earnings and basis, and the earnings portion is included in gross income unless the distribution is otherwise qualified (for example, after 5 years and after age 59½, death, or disability).
So the cited examples—SEPPs and hardship withdrawals—are not generally ways to take Roth gains out tax-free before age 59½. They are, at most, ways to avoid the early-withdrawal penalty in some circumstances.
4 sources
- Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs) | Internal Revenue Service
The IRS states that a qualified Roth IRA distribution must be made after the 5-year period and also be made on or after age 59½, because of disability, after death, or for a first-time home purchase. If a distribution is not qualified, the portion allocable to earnings may be taxable.
- Topic no. 557, Additional tax on early distributions from traditional and Roth IRAs | Internal Revenue Service
The IRS explains that the 10% additional tax applies to the part of an early IRA distribution included in gross income and is in addition to any regular income tax; listed exceptions are exceptions to that additional tax.
- Substantially equal periodic payments | Internal Revenue Service
The IRS describes substantially equal periodic payments as an exception under section 72(t)(2)(A)(iv) where the 10% additional tax does not apply.
- Retirement plans FAQs on designated Roth accounts | Internal Revenue Service
For hardship distributions from a designated Roth account, the IRS says the distribution consists of a pro-rata share of earnings and basis, and the earnings portion is included in gross income unless the account has been held for 5 years and the participant is disabled or over age 59½.