Contributions to Roth individual retirement accounts are made with post-tax dollars, so withdrawals within a certain time frame are tax-free. Unlike traditional IRAs, contributions to Roth IRAs are not tax-deductible. As is the case with traditional IRAs, the Internal Revenue Service imposes a penalty on early withdrawals. For Roth IRAs, early withdrawals are those made before the account owner turns 59 1/2 or is over that age but the account is open less than five years.
Roth IRA Contributions
As of publication, individuals under the age of 50 may contribute up to $5,000 annually to a Roth IRA, and those over age 50 may contribute up to $6,000, assuming at least that amount is received in earned income. For 2011, a single filer with an AGI of less than $107,000 may contribute the full amount to a Roth IRA, with partial contributions allowed if the AGI is between $107,000 and $122,000. For married couples filing jointly, the AGI limit for a full contribution is $169,000 with partial contributions permitted between $169,000 and $179,000.
Early Withdrawal Penalties
A Roth IRA holder can always withdraw the money he has contributed tax-free. The IRS imposes a 10 percent tax penalty on early withdrawals of any earnings, although it permits some exceptions. Withdrawals made by the due date of the federal tax return for that contribution do not count, with the IRS treating these withdrawals as if the contributions were not made. This holds true if the account files for an extension of time, and withdraws the contribution by the extension due date. While these early withdrawals are tax-free, any earnings on the contributions must be included on the tax return as income. The IRS does not allow the 10 percent penalty to be deducted in the federal income tax return's AGI section. The additional 10 percent tax must be paid in the same year as the early withdrawal.
First-Time Home Purchase
A first-time home buyer may withdraw up to $10,000 without paying the penalty for expenses related to home financing and settlement and closing costs. If the account owner is married, the IRS requires that this is a first-time home purchase for both spouses to qualify for the exemption.
The IRS does not charge the 10 percent additional tax on early withdrawals if the funds are used to pay the higher education expenses of the account holder, spouse or children. Withdrawals made to pay for medical expenses exceeding 7.5 percent of the account owner's AGI are also exempt from the penalty. If the account owner is legally declared totally and completely disabled, penalties on early Roth IRA withdrawals are waived. Beneficiaries of decedent IRA owners are exempt.