Roth IRA - you can withdraw principal?

[Tyson]

Is it true that when you invest in a Roth IRA, that if you need to take money out of it, you can and without penalty, but only the amount of the principal?  Does it have to be repaid at some point? 

The reason I'm asking - I have about $17k in a taxable Vanguard VTSMX account.  I'm thinking of moving $5500 of it to a Roth IRA, but one thing I like about the taxable account is that if I need to, I can withdraw my money from it without penalty.  I never put money into a Roth because I figured it was locked up for years (at least 5 even backdooring it).  But if I can withdraw principal from a Roth without penalty, then I'd rather do a Roth and get the tax free growth. 

Am I missing something here?  Or is this a good idea?

[FIRE_Buckeye]

You're correct.
Roth contributions can be withdrawn penalty free at any time, and doesn't need to be paid back if you so choose. Earnings on the principal cannot be withdrawn penalty free until age 59.5.

[Tyson]

Wow!  That changes a LOT for me - thanks!  So, since I'm married, I can actually move $11k of the $17k I saved last year and have it all as tax free growth, is that right? 

And I can do that again this year - dump up to $11k into 2 Roths, one for me, one for my wife?

I have a 401k through work, which I max out every year already, but I still have $2k every month that I'm saving on top of that.  So this is great, it gives me a way to get more of my money working for me.

Again, am I missing anything here?

[LeRainDrop]

Yup, that's pretty much right.  I don't know what your income is, but keep in mind that there are income limits for tax-deductible contributions.  After that, you could still open a non-deductible Traditional IRA and then convert it to a Roth IRA (aka backdoor Roth).  http://www.forbes.com/sites/ashleaebeling/2014/10/23/irs-announces-2015-retirement-plan-contribution-limits-for-401ks-and-more/#59d0fba178aa

Here's a good resource on Roth IRA withdrawals:  http://www.rothira.com/roth-ira-withdrawal-rules

[MDM]

I never put money into a Roth because I figured it was locked up for years (at least 5 even backdooring it).

While there is no restriction on withdrawals of direct Roth contributions, there is a restriction on Roth money that comes via conversion (e.g., a backdoor Roth). 

See https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ for more on this.

[Tyson]

Sorry, I misspoke earlier - I'm not going to do the conversion, I'll be doing the pipeline at some point.  Although I'm old enough (got started late, grrrr) that I might not have to touch it till retirement age anyway.  Mostly it depends on job stability.  If I can avoid periods of long unemployment, I have a pretty good plan to get retire in the next 12 years or so.  Which is 1000% better than my previous retirement date of "never".  :)

[dandarc]

Sorry, I misspoke earlier - I'm not going to do the conversion, I'll be doing the pipeline at some point.  Although I'm old enough (got started late, grrrr) that I might not have to touch it till retirement age anyway.  Mostly it depends on job stability.  If I can avoid periods of long unemployment, I have a pretty good plan to get retire in the next 12 years or so.  Which is 1000% better than my previous retirement date of "never".  :)

The pipeline is a series of conversions.  A backdoor Roth is a conversion as well - just one you pay little to no tax on if you do it right.  The no-penalty withdrawal of contributions at any time only applies to regular contributions.  Whether you can make regular contributions or not depends on your MAGI and filing status for any given tax year.

[Tyson]

I make $120k per year and I max out my 401k, so that's $18k reduced for my MAGI.  What are some other things I can do to get it lower?  I'm married with one child.  My wife works a part time job but earns very little and no 401k for her at that part time job. 

[dandarc]

If you file jointly, you should be fine for Roth IRA contributions - you can make the full contribution up to $184K (2016). 

With your 401K and other above-the-line deductions, you could probably also make deductible traditional IRA contributions, if you were so inclined.

[Paul der Krake]

Since it looks like your income is to high to deduct two traditional IRAs, your next best bet would be to convince your wife's employer to offer a 401(k) or a SIMPLE IRA.

Another move would be to convince your work to offer an HSA option for health insurance, allowing you to deduct another $6,650, plus FICA taxes if done via payroll deduction.

[dandarc]

Since it looks like your income is to high to deduct two traditional IRAs, your next best bet would be to convince your wife's employer to offer a 401(k) or a SIMPLE IRA.

Another move would be to convince your work to offer an HSA option for health insurance, allowing you to deduct another $6,650, plus FICA taxes if done via payroll deduction.

It might not be quite 2X tIRA, but I think it is pretty close.  Unless the wife is covered by an unmentioned retirement plan at work, they can almost certainly deduct a tIRA fully for her - start of the phase-out range for her is $184K joint MAGI.  Then OP is pretty darn close to the bottom of the phase-out range as well, just based on salary less 401K.  Suppose it depends on how little "very little" is on her income.

Also unmentioned are health insurance premiums, any FSAs, and similar that the OP might be paying for / taking advantage of - could well be under the start of the phase-out for both OP and wife.