A Roth IRA is an additional retirement option. Since the contributions made to a Roth IRA come from after-tax income, withdrawals made at retirement are tax-free. However, unlike a traditional IRA, contributions to a Roth IRA are not tax-deductible. Withdrawals can be made tax and penalty free, as long as one of the following conditions is met. The account holder:
- Is older than 59½
- Becomes disabled
- Uses the withdrawal to fund the down payment on a qualified first-time home ($10,000 maximum withdrawal allowed)
- Dies and his/her heirs withdraw funds
As of 2011, a 10% penalty and taxes could be charged if none of these requirements are met.
Unlike most retirement plans, withdrawals do not have to be taken once a certain retirement age is met. In fact, Roth IRAs can be willed to heirs tax-free.