What makes the Roth IRA unique?
Imagine for a moment that an individual has just received a check. She looks at her summary and notices that federal income taxes were not withheld. Her initial reaction is that something is wrong—it's not—if this check is from her Roth IRA.
Two factors make this possible.
- First, the money an individual contributes to a Roth IRA has already been taxed (individuals cannot take a tax deduction for their Roth IRA contributions). So the principal amount is never subject to future taxes or penalties as long as individuals stay within the contribution guidelines.
- Second, the Roth IRA allows contributions to grow tax-deferred. If an individual does not distribute any of the earnings until he has had the Roth IRA for at least five years and has a qualifying event (generally turning age 59½), those tax-deferred earnings are tax-free.