Unlike with Traditional IRAs, you must pay full taxes on your Roth IRA contributions as if the money was still in your pocket. However, Traditional IRA investors must eventually pay taxes on their distributions; this shouldn't be the case for Roth IRA investors.
Qualified Roth distributions can be 100% tax-free if you follow IRS guidelines. You may have to pay taxes on a $5,000 contribution, but if savvy investments balloon your balance to $25,000, you may owe zero taxes on the $20,000 profit if:
In the meantime, you may distribute your $5,000 contribution at any time, regardless of your age, having already paid taxes on those funds in the year you made the deposit. Once you reach age 70½, you will not have to take required minimum distributions as you would with a Traditional IRA or another such pre-tax account.
You open a new self-directed Roth IRA and make a $5,000 contribution. You put the funds to work in the alternative IRA investments of your choosing and manage to earn $1,000 in your first year.
You elect to withdraw your $5,000 contribution. Because you already paid taxes in the year you made the deposit, you will not incur duplicate taxes or penalties even though you're not 59½.
You are now older than 59½ and it's been five years since your first contribution. You may therefore distribute the $1,000 your IRA earned without paying a penny in taxes!
If you intend to distribute Roth IRA funds prior to the five-year anniversary of your first contribution, you may be exempt from the 10% early distribution penalty if you’re 59 ½ and one of the following conditions apply (any such distributions would be taxed as income):
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