Roth IRAs differ from their traditional IRA brethren on a number of different points. Those differences play a role at a number of different points in the life cycle of your account, not the least of which is during the withdrawal period.
During the growth and investment period, your Roth Individual Retirement Account is funded with after tax dollars. While it does not provide you the real-time income tax benefits that a Traditional Individual Retirement Account offers, the rules relating to these accounts result in your growth being tax exempt, provided you abide by the guidelines for Roth IRA distributions.
Those rules are simple, and very similar to those for the original IRAs. For a distribution to be qualified, and hence completely tax-free, it must meet the following standards:
-start after age 59 and ½
-occur due to death or documented permanent disability
-be specifically for use in a first-time home purchase
-funds must have been on deposit in the account for a period of at least 5 years
With those minimum standards met, there is no 10% withdrawal penalty for the gains in your distribution. In the event that you must do an unqualified distribution due to some other near term financial hardship, one of the advantages of a Roth versus a Traditional IRA is that because the initial investment is with after-tax dollars, any principal you withdraw is non-taxable as it has already been paid. Only the growth is subject to taxation.
Another fundamental difference between the original IRAs and Roth is that withdrawal is not mandated by age 70.5. Roth IRA distributions are not taxable. Because the government has no vested interest in when those funds disburse, as all the foreseeable tax has already been paid on those dollars, there is no mandate for withdrawal. This makes it an excellent investment vehicle for people expecting other forms of income early in their retirement, but have concerns that their needs or costs may grow significantly as they age.
This is not to say that an early distribution is without cost. In terms of your long-term investment and retirement goals, a premature withdrawal of capital can have a resounding negative impact on the growth of your retirement account. Because of the compounding effect of interest and stock value growth over time, relatively small withdrawals can mean tens of thousands of lost nest egg dollars. However, at least the investor who needs a premature distribution from a Roth IRA is not facing the double jeopardy of a penalty and payment of income tax due.