Tax season is slowly creeping up and you have until April 18th, 2016 to contribute to your Roth IRA for the year 2015.  This type of retirement account allows investors to put away $5500.  Those who are over 50 years of age can contribute $6500.  So what is a Roth IRA?

Roth IRAs are after taxed money that grows tax free.  Once you reach the age of 59 ½ years old, you can withdraw your money tax free, including the earnings that you may have made over the years.  Uncle Sam can’t touch that money since it’s already been taxed.

Roth IRAs also have the capability to offer great flexibility.  It can serve as your emergency fund if you are ever in a situation.  Meaning that all YOUR contributions can be withdrawn anytime, penalty free, as long as you have had the account for 5 years. For example say you contribute $5000 every  year to your Roth IRA.  At 5 years you will have contributed $25000.  With the Roth IRA you are allowed to take all of the $25000 that you contributed, penalty free.  If your account turned into $30000, you are still allowed to withdraw $25000, however if you withdraw your earnings with your contributions from your account then your money will be taxed at your regular income tax rate including a 10% penalty.  There are some circumstances that the IRS allows if you don’t meet the age or holding period requirement.  For example first time home buyers can withdraw a maximum of $10000 of their earnings for a down payment.  Other circumstances that may allow this type of transactions are death, disability and medical bills that exceed 10% of your adjusted gross income.  This is the beauty of the Roth IRA.

*The information provided on this blog is intended to help you understand the general issue and does not constitute any tax, investment or legal advice.  Please contact your financial advisor for further information.