Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

November 9, 2012
Is there a penalty if I cash in my Roth IRA?

Q: I just completed 5 years with the school district and have become eligible to purchase air time. This option will end January 1, so it's really making me think it's something I should seriously consider. It's pretty expensive, about $6,000 per year purchased. I was wondering what the penalty would be if I cashed in my Roth IRA - about $10,000 - to use as a down payment on the air time ($3,000 for 5 yrs). I haven't looked at my statements lately, but I think much of it is not earned, but is original principal. Do you have to pay a penalty if all the funds are your own? CalPERS will not allow a rollover from a Roth IRA.
I sure appreciate your help.


A. If you take an early withdrawal from a Roth IRA, the 10% section 72(t) excise tax applies to the portion that is includable in income. Remember, the $50 will also be subject to the regular income tax, as well.

Assuming that the contributions to your Roth IRA were made directly and not from a rollover from a regular IRA, only the portion of the withdrawal representing earnings on the contributions would be includible in income and, therefore, subject to the 10% penalty tax. For example, you contribute $1,000 in 2009. It earns an additional $50,so your withdrawal is $1,050. Only $50 would be includible in income and subject to the 10% excise tax.

An early withdrawal is one that is made within the five year period beginning with the first taxable year for which a contribution was made to the Roth IRA and before you reach age 59 and 1/2, with certain limited exceptions.

There is a wrinkle about which you should be aware. A distribution from a Roth IRA is subject to the 10% penalty tax as if it were includible in income if that distribution (or any part of it) is allocable to a "qualified rollover contribution", and is made within the five-tax year period beginning with the tax year for which the contribution was made. However, the 10% tax applies only to the extent that the amount of the qualified rollover contribution was includible in income.

"Qualified rollover contributions" include conversions of regular IRAs to Roth IRAs, whether by rollover or trustee-to-trustee transfer. So if you converted a regular IRA to a Roth IRA within the previous five years, more than just the earnings on the Roth IRA account may be subject to the 10% excise tax.

Referring the the example above, assume that the $1,000 initial contribution was a conversion from a regular IRA, and the entire initial contribution was subject to tax in 2009, the year of the conversion. All of the $1,050 withdrawal in 2012 would be subject to the 10% excise tax (although only $50 would be subject to the regular income tax) because the $1,000 initial contribution was a "qualified rollover contribution" which was withdrawn within 5 years of when it was contributed.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.

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