A Roth can help with college and buying a home, too

When it comes to yoga, marriage, and retirement investing, one thing is key: flexibility. And a Roth IRA is, without a doubt, the most limber of your retirement savings options.

Generally speaking, it’s best to leave your retirement account untouched so that you can maximize your returns. But for unforeseen expenses, it can be a lifesaver. And, if you’re planning to buy your first house, a Roth can be a great part of a disciplined plan to save for the down-payment. That’s because a Roth allows for early withdrawals– income tax- and penalty-free — for things like supporting yourself after a disability or buying a first home. And because your contributions are always made after you pay income taxes, you can withdraw -free and penalty free before retirement without having to fork over cash for taxes or penalties. (But once your withdrawals exceed the amount of your original contributions, that money is considered “earnings” and are subject to possible penalties and taxes).

Some other types of withdrawals require you to pay income tax on the earnings but not a penalty (currently 10 percent of withdrawn earnings).

Income-tax and penalty free

To withdraw earnings without paying taxes or penalties, you must follow the rules.The first requirement is that the withdrawal must be taken five years or more after the account is open. The IRS counts the five years from the first day of the tax year in which you make your first Roth contribution. In other words, if you open the account on Nov. 1, 2012, the IRS actually starts the clock at the beginning of the tax year, that is, Jan. 1, 2012 (and when the IRS gives you a gift like that, you take it). If you satisfy the time requirement, the IRS says distributions qualify if:

  • the money is used to buy, build or rebuild a first home, up to a $10,000 maximum, and is spent within the 120 of the withdrawal
  • the money is withdrawn because you suffered a disability
  • the money is distributed to your beneficiaries or to your estate after you die

Penalty free

Other withdrawals still require you to pay income tax, but the IRS won’t punish you with an additional 10% early withdrawal penalty. The most common is for higher education expenses. You don’t have to pay the penalty if the withdrawal is for less than or equal to the amount you pay that year for tuition, books, room and board, etc.

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