Roth Ira

Roth IRA is the alternative to a traditional IRA, where your contributions are not deductible from tax but where the earnings from your investments are not taxable. That means that when you start cashing Roth IRA and taking distributions once you reach age 59 ½, all the distribution amounts will be tax-free.

All distributions from Roth IRA are tax-free until you've withdrawn all your regular contributions. These are not subject to tax because you paid taxes on all of your direct contributions during the year. This is the reason you can withdraw direct contributions anytime without fear of paying taxes or any penalties. You are merely reducing the principal in this investment account.

Once you have withdrawn all your regular contributions, subsequent withdrawals are deemed taken from your rollover (conversion) contributions, if any. Special rules apply when you are cashing Roth IRA conversion contributions.

When you have withdrawn all your contributions (regular and rollover), any subsequent cashing Roth IRA will come from earnings on the investment. The withdrawals of earnings are tax-free if you're over age 59 ½ and at least five years have transpired since you established your Roth IRA. Otherwise (with limited exceptions) they are taxable and potentially subject to a 10% early distribution penalty.

The fact that you can do a quick withdrawal of your Roth IRA direct contributions makes it possible to use it as an emergency fund. After all, cashing Roth IRA at any time without having to pay penalties makes it a good fallback during times when you have unforeseen cash needs. And if you do not need the money, then it can continue in the Roth IRA to earn tax-free income for your retirement.

In cashing Roth IRA, some withdrawals are called qualified distributions. A qualified distribution is a payment (or distribution) from your Roth IRA that is characterized by the following:

 It is made after a 5-year period has elapsed from the time the Roth IRA was set up, and  The payment or distribution is made on or after the date that you reach age 59 ½; made because you are disabled; made to a beneficiary or to your estate after your death; or, made to acquire a first home.

If you do resort to cashing Roth IRA to cover an emergency, it would be good to remember that the principal intent of the Roth IRA is for your retirement. What you take from it will reduce the amount available for your use after you stop working - a time when you may have no other income but will still face substantial expenses.

If you can afford it, it may be better to create a separate emergency fund instead of using the Roth IRA. But at least, you should know that you will not have to pay back any amount you withdraw from the Roth IRA.

When cashing Roth IRA for the purpose of acquiring a first home, you may withdraw up to $10,000 - which can include earnings - and all of these will be without tax and penalties. This is a big help.

However, there is still the qualification that your Roth IRA must have existed for at least five years in order to enjoy this benefit. If it is less than five years, you can still take the money, without penalty, but you pay taxes.