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I'm 24 years old and have $10k in my retirement accounts (Roth IRA) after about a year with a real job. I'm considering withdrawing the entire balance to support myself for a few months while I launch a tech startup.
I will remain on good terms with my current employer and will probably structure this period as a leave of absence to cover my butt.
Yes, it is possible to withdraw money from your Roth IRA before retirement (but I wouldn't necessarily advise you to do so.) Here's the good news, and the bad news:
The good news: Unlike a traditional IRA, money contributed to a Roth IRA is done so on an after-tax basis, meaning you don't benefit from a tax deduction on contributions. So, the money you withdraw from your Roth IRA will not be taxed entirely as ordinary income.
In fact, you are allowed to withdraw the amount of your original contributions (also known as basis) without any taxes or penalties. Let's imagine you originally deposited $9000 of that current $10K total value – then in such a case, $9000 could be withdrawn tax and penalty free.
The bad news: When it comes to the investment earnings – the other $1000 in my example – it's a different story: Since you wouldn't be age 59 1/2 at the time of withdrawal, any money taken out beyond your original contributions would be considered a non-qualified withdrawal and subject to both ordinary income taxes plus a 10% early withdrawal penalty. Ouch!
Perhaps you might want to restrict your withdrawal to your original contributions. I would imagine if you've had the account for such a short period of time that much or all of your account value is original contributions anyway.
A good article about the rules for early IRA withdrawals is About.com's Tax Penalty for Early Distribution of Retirement Funds.
Note: If your Roth IRA funds were the result of a rollover from another account type, other rules may apply. See Roth IRA (Wikipedia) for more detail; search for "rollover".
Regarding the withdrawal process itself and the timing, you should check with your account custodian on how to proceed.
There are two methods of doing this
Pulling out the money and paying the penalty if any, and going on your way.
Having the Roth IRA own the business, and being an employee.
If you go with the second choice, you should read more about it on this question.
Chris's answer is a great start.
Keep in mind that when you withdraw from a Roth IRA, you "shrink" the size of the IRA (i.e. if the start up flourishes, you can't put the $10k you withdrew back, as you're limited to ~$5k in contributions per year).
You may want to consider funding your startup with a credit card (ideally a balance transfer of $10k at 0% interest). If you need to, you can always pay your card off with your Roth balance, but if the startup takes off, your IRA is unharmed.
(On a side note, I wouldn't feel comfortable quitting my job to do a startup with only $10k in savings, but to each his own!)
