While the rules on maximum contributions to a Roth IRA are subject to change, the rules governing how you can take withdrawals remains steady. One of the main differences between a traditional IRA and a Roth IRA is that your contributions to the Roth come from income that's already been taxed. You always pay taxes on withdrawals from traditional IRAs, but qualified withdrawals from Roth IRAs are tax free. Also, you do not need to begin taking minimum withdrawals from a Roth at 70 1/2 or at anytime during your lifetime.
Another beauty of Roths compared to traditional IRAs is that you can withdraw the amount you contributed to the account at any time without penalties or taxes. Earnings on your IRA investments are not taxed so if your early withdrawal includes investment earnings, that amount will be subject to tax plus a 10 percent penalty on the amount withdrawn.
Once you reach age 59 1/2, you can withdraw any amount from your Roth IRA tax free, provided the account has been open for at least five years starting from the first day of the year in which you opened it. If you have not met the age and time requirements you can still withdraw up to $10,000 for the purchase of a first home for you, your spouse, a child, grandchild or parent. For the purposes of the IRS "first home" means you haven't owned a principal residence at any time during the prior two years.
Other circumstances under which you are entitled to penalty- and tax-free early withdrawals are if you incur unreimbursed medical expenses exceeding 7.5 percent of your adjusted gross income; if you are paying for medical insurance due to unemployment or if you become totally and permanently disabled. Distributions to Roth IRA beneficiaries on the owner's death are also not subject to tax or penalty.
Each year the total amount you can contribute to a Roth IRA is limited by your income. In 2011, you can contribute to a Roth IRA if your gross income is $177,000 or less if you file taxes jointly with your spouse. Single filers can open and contribute to an IRA if you make $120,000 or less. The amount that you can invest changes from year to year. If you meet the income requirements, you can invest $5,000 in your IRA each year if you're under 50 years old. If you're 50 or older, you can contribute up to $6,000.
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