Roth IRAs - Tax-deferred growth and tax-free retirement income make a Roth IRA appealing to many

With a Roth IRA (Individual Retirement Account), you save and grow your retirement investments tax-deferred, and pay no tax on the withdrawals after you retire, as long as the account has been open for at least five years. There are no age requirements for withdrawals and contributions. But unlike a Traditional IRA, there is no tax deduction on your annual contributions.

Key features

• No age limitation. You can make contributions throughout your life as long as you have earned income below certain IRS-defined limits.
• After-tax contributions. There is no tax deduction on your annual contributions.
• Tax-free withdrawals. You pay no federal income tax when you take qualified withdrawals and have had the account for five years. If you are under 59½, you will have to pay a 10% early withdrawal penalty on the earnings unless you qualify for an IRS exception (see below).
• Penalty-free withdrawals. You can withdraw contributions (not earnings) tax- and penalty-free before age 59½.
• Maximum contributions. In tax year 2021, the most you can contribute yearly is $6,000, or $7,000 if you are age 50 or older.
• Leave it as an inheritance. You never have to withdraw your money. You can even leave it to your heirs for an income tax-free inheritance (there may be estate taxes).
• First-time homebuyer’s exemption. After five years, first time homebuyers can withdraw up to $10,000 tax-free and penalty-free for qualified expenses.

Early withdrawal penalty exemptions

Just like with a traditional IRA, there are some exemptions to the early withdrawal penalty. Keep in mind there are distribution limits and/or other requirements for certain distributions. Please consult with a tax professional to see if you would qualify for an exemption.

• Payouts upon the account owner's death
• Permanent disability
• Substantially equal periodic payments
• Qualified first-time homebuyer distributions
• Higher education expenses
• Medical insurance premiums paid while unemployed
• Unreimbursed medical expenses over a certain percentage of your adjusted gross income
• Due to an IRS levy
• A qualified reservist distribution
• For certain emergencies and disasters
• For birth or adoption