The Roth IRA was created by Congress in 1997. While the traditional IRA features deductible contributions and tax-deferred earnings, the Roth offers tax-free withdrawals at retirement. Roth IRA contributions are not tax-deductible, but the account type boasts far more lenient withdrawal rules than those of the traditional IRA.
The Internal Revenue Service lets you withdraw your Roth contributions at any time for any reason. So if you put $4,000 in a Roth, you are free to take out the entire $4,000 at any time, In addition, for purposes of withdrawal, the IRS sees all IRAs as one IRA. For example, suppose you have five different Roth accounts and contribute a total of $50,000 over the course of a decade. You then decide to withdraw $20,000. You can take the $20,000 from one or two of the accounts. You do not have to remove $4,000 from each of the five accounts. The age of the accounts is irrelevant in this instance.
As of 2012, you can contribute up to $5,000 per year to your Roth accounts. For example, if you have two Roth accounts, you can contribute $3,000 to one and $2,000 to the other, or $4,000 to one and $1,000 to the other, in a single year. IRA contributions must come from earned income. The IRS defines earned income as salaries, wages, commissions and tips, in addition to taxable military pay and alimony. Social Security, disability and unemployment benefits do not qualify. Neither does investment income.
Roth IRA earnings are subject to a different set of rules. To withdraw earnings free of tax and penalty, you must meet certain criteria. You must have owned a Roth for for five years and you must have reached the age of 59 1/2. If you do not meet these conditions, the earnings distribution will be subject to both ordinary income tax and a 10 percent early withdrawal penalty. If you have reached 59 1/2 but your Roth is not yet five years old, you owe only income tax on an earnings withdrawal.
If, before you reach age 59 1/2, you roll money from another retirement account into a Roth, you cannot withdraw those funds until five years from the date of the rollover. Each rollover starts its own five-year clock. For example, suppose you convert $20,000 from your traditional IRA to a Roth in January 2010. You cannot withdraw those monies until January 2015. If you do, you will incur a 10 percent penalty.