- The chief benefit of a Roth IRA compared to a traditional plan is the availability of tax-free withdrawals in retirement. When you put money into a Roth IRA, you do not get an immediate tax break like you do with a traditional IRA. What you get instead is the promise that your Roth IRA withdrawals can come out tax-free, unlike traditional IRA withdrawals, which are taxed at your ordinary income tax rate in the year you draw the money out.
- In order to qualify for tax-free withdrawals, you must have held your Roth IRA for a minimum of five years. This five-year holding period applies to both money you put straight into a Roth IRA and money you converted from a traditional IRA. If you plan to convert part or all of your traditional IRA to a Roth, you need to be aware of this holding period requirement and plan accordingly.
- The standard rules governing both traditional and Roth IRA accounts require that you be at least 59 1/2 years of age before you can start taking money out of the account. Once you pass the age of 59 1/2, you can start taking tax-free withdrawals from your Roth IRA. If you hold a traditional IRA, you are required to start taking minimum withdrawals from the plan when you reach age 70 1/2, but this requirement does not apply to Roth IRA accounts.
- If you have not yet reached the age of 59 1/2, you can still take money out of your Roth IRA without paying taxes if you use the 72t provision. This provision allows holders of IRA accounts and other qualified retirement plans to access their money without penalty by taking substantially equal distributions each year. The amount you can take out under the 72t provision is determined by a number of factors, including your age, your life expectancy and the balance in the account. That typically means that the younger you are, the less you can take out of the IRA. If you do choose to use the 72t provision, you must continue it for five years, or until you reach age 59 1/2, whichever is longer.
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