What is a Roth IRA?
An individual retirement account to which you contribute after-tax dollars. As long as you stay within the contribution guidelines, the principal amount is never subject to future taxes or penalties.
Roth IRA contributions grow tax-deferred.2 If you do not withdraw any of the earnings until you have had the Roth IRA for at least five years and have a qualifying event, those tax-deferred earnings become tax-free. That means any penny you withdraw in retirement, stays in your pocket.
You may make tax-free and penalty-free withdrawals from your Roth IRA if you satisfy two conditions. First, your Roth IRA must have been open for a minimum of five years. Second, the withdrawal must be made because of the occurrence of one of the following events:
- Age 59½
- First home purchase
Distributions that meet the above requirements are referred to as “qualified distributions.” While you may take distributions from your Roth IRA at any time, distributions which are not qualified distributions may be subject to taxes (and in some cases early distribution penalties) to the extent they exceed your aggregate contributions to Roth IRAs.