1.Can I withdraw money from my Roth before retirement without penalties?
Yes and no. Depending upon the context of the word ‘money’. See, money in a roth is not like money sitting in a bank account. There are two parts to it:
- What you contributed
- What’s the interest earned on your contribution also called distribution
The primary criterion for contributing to a Roth is that the contribution must be out of your income. And you already pay taxes on your income. So contributions to your Roth are NOT taxed again. That would be double taxation!
Remember, if you don’t have any income, you can’t contribute to Roth. Since this is after tax dollars, you can take it out anytime you please without penalties. Only what you put in, not the interest though!
Now dipping into your distribution or any interest earned on your contribution, has some restrictions. In general you cannot take that money out till you are atleast 59 1/2 years old. If you do, you’ll have to pay penalties. (There are exceptions though)
2.Can I use the money in my Roth to purchase a house without penalty?
- You haven’t owned one for the past two years (IRS defines this as a ‘first home’)
- This is for primary residence and not a vacaton home
- The house is for your familiy and not relatives
- You spend it within 120 days
- You take out a maximum of $10,000 in your lifetime
- Your roth was opened at least five years prior
If you satisfy the above conditions, you can take out the principal AND distribution without penalties and you don’t have to be 59 1/2 years or older!
3.Is there any advantage to opening a Roth IRA if I can’t afford to save and I have a long way to go before retirement?
Yes. Even you don’t contribute to the maximum, if you keep one open, you can use the money in it tax-free for your first home purchase. And you don’t have to be at least. 59 1/2 years to take the money out. Purchasing a home is one of the few exceptions to the 59 1/2 year rule. My advice: Open a roth as soon as you get a job and start saving for your retirement.
4.I know little about stocks or mutual funds. Can I use a savings account as my Roth?
Yes. Some banks provide what’s called a Savings IRA. Basically like savings account but for IRAs. Will have a slightly higher interest rates than regular savings accounts. Check with your bank.
5.I’m out of college and got my first job. Retirement is the last thing on my mind!
Even if you don’t contribute much, it is always better to open one. See FAQ 3. Do make sure there are no annual maintenance fees where you decide to open one.
6.Where can I open a Roth IRA?
A no-annual fee brokerage is better than a traditional bank due to the options available. See my earlier post on this.
7.I’m already contributing to 401K. Can I open a Roth IRA in addition?
8.Can I and my wife open a joint Roth IRA?
No. There is no concept of a joint Roth IRA.
If both have jobs, both can open individual accounts. Remember I in IRA stands for ‘Individual’. Nothing called a JRA yet!
9.Can I have multiple Roth IRA accounts?
Yes. Make sure the combined contribution in your accounts don’t go over the IRA contribution limits.
10. When can I take all the money in my Roth, i.e. my contributions and the interest earned without penalties?
There are exceptions to this though and you may be eligible to take out the money from your Roth before you are 59 1/2 years old. The exceptions are:
- First home purchase
- Qualified higher education expenses
- Medical expenses that exceeds 7.5% or your adjusted gross income
- And even to buy health insurance if you have received unemployment compensation for twelve weeks or more