Early Roth IRA Withdrawal after 5 years Transfer?

In 1998 I transferred a Traditional IRA (approx. $15,000) into a Roth IRA and paid the appropriate taxes. Through bad investments the value of the Roth in 2007 was $12,000. I withdrew $11,000 to pay some debt. I know I don't owe tax on Capital Gain but do I still need to pay the 10% penalty? Does the "5 year Rule" have any effect on the 10% penalty?

There are two conditions that must be met to avoid a penalty when withdrawing money from a Roth. One, you need to have had the account for at least 5 years, and you must be at least 59 1/2 when you made the distribution. If one of these two conditions are not met, you will pay a 10% penalty on the amount of the distribution as an "early withdrawl penalty". You will also pay taxes on the earnings that are imposed in the event of a non-qualified distribution, which is basically an ordinary income tax (since your account didn't earn anything you don't have to worry about that).

If you are over 59 1/2 you don't have to worry about it and shouldn't have to pay any taxes or penalties.

You will not have to pay the 10% penalty. For Roth IRAs, the 10% penalty would only apply if:
1) You withdrew money prior to the five year period, or
2) You withdrew earnings above and beyond your conribution base prior to age 59 1/2 (there are other exceptions).