While there is no deduction for Roth IRA contributions, qualified distributions from a Roth account are tax-free. Savers can also withdraw their original contributions without taxes. A Roth IRA is often an attractive savings vehicle for people who expect their tax rate to be higher in retirement than it currently is. Roth IRAs allow you to pay taxes on the money you enter your account, and then all future withdrawals are tax-free.
Contributions to the Roth IRA are not taxable because the contributions you make to them are usually made with money after taxes and you can't deduct them. If an IRA holder performs multiple Roth conversions, the five-year period is determined separately for each conversion. Individual taxpayers should seek competent professional assistance to ensure that this is a good idea and that Roth IRA transactions are handled correctly. Like income from a traditional retirement account or a life insurance policy, money you leave your heirs in a Roth IRA does not have to go through the probate process.
First, distributions of Roth IRA assets from regular participants' contributions and non-taxable conversions can be made at any time, free of taxes and penalties. Investing money in a Roth IRA provides you with many benefits, namely that your money grows tax-free over time. If an excess contribution is made to a Roth IRA and then eliminated, this contribution cannot be used to determine the five-year period for qualifying distributions. If you've met the five-year withholding requirement, you can withdraw money from a Roth IRA without taxes or penalties.
As a general rule, if you meet both the age and time requirements for which the account was open, your withdrawal from the Roth IRA will not be taxed. If you converted a traditional IRA into a Roth IRA, the rules are a little different and will be discussed later. Because you contribute after-tax money to a Roth IRA, no deduction can be applied in the year you contribute to the account. If you make a distribution of Roth IRA earnings before you turn 59 and a half and before the account turns five, earnings may be subject to taxes and penalties.
Because your Roth IRA funds come from your contributions and not from tax-subsidized earnings, you can take advantage of your contributions (but not your earnings) free of taxes and penalties at any time you want to. When you make a Roth IRA distribution, the withdrawal is considered to come first from contributions and then from profits.