What Can Roth IRA Money Be Used For?
Original post by Justin Johnson of Demand Media
The money in a Roth IRA can be used for more than just to fund your retirement. Thanks to the fact that contributions to the account can be withdrawn at anytime free of penalty and taxes, you can benefit in a number of ways from investing money in a Roth IRA. From paying for a first home to funding college tuition, Roth IRA's are a flexible investment vehicle.
Roth IRA's are primarily a retirement savings vehicle. You can invest up to $5,000 per year in a Roth IRA as long as you have earned income. This money, left untouched, can grow and be used to fund your retirement. Contributions to the account can be withdrawn at any time, free of penalties and taxes. However, the earnings made on these contributions cannot be withdrawn before age 59 1/2. An advantage of using a Roth IRA to fund retirement is that contributions to the account are taxed, leaving the funds to be withdrawn at retirement time free from taxes.
First Home Purchase
Funds from a Roth IRA can be withdrawn to help purchase a first home. Rules require that the account be at least five years old. After this five year period, you can withdraw up to $10,000 to put towards the purchase of a home. For the purpose of purchasing a home, you are permitted to withdraw contributions and earnings from the Roth IRA, free of taxes and penalties. If the $10,000 is withdrawn prior to the end of the five year period, you are not required to pay the 10 percent penalty on the early withdrawal, but you will be liable for taxes on the amount withdrawn.
You can help pay for your child's college education with the funds in a Roth IRA. While it may be advantageous to open a college savings specific account for this purpose, your budget may not always allow that to happen. "Kiplinger's" advises people to fund a Roth IRA before an educational savings vehicle, such as a Coverdell account. If the money is not available to fund such an account, college tuition and other related expenses can be paid from the funds in the Roth IRA. Taxes will be incurred on the early withdrawal, but the 10 percent penalty will be waived.
Roth IRA's can also double as an emergency fund if all other emergency funds have been exhausted. Due to the rule that allows you to withdraw contributions at anytime free of penalties and taxes, you can rest assured that you have another safety net to fall on if the need arises. Be sure that earnings are not withdrawn, as early withdrawal of earnings will incur taxes and a 10 percent penalty on the amount withdrawn.
- "Kiplinger"; Why You Need a Roth IRA; Erin Burt; March 2009
- Bankrate.com; Use Roth IRA as Your Backup Emergency Fund; Teri Cettina
About the Author
Based in Somerset, Ohio, Justin Johnson has been writing since 1998. He was a finalist for the 1998 Muskingum County (Ohio) Bar Association Law Day Essay Contest and has also written academic papers on business, finance and political topics. He has a Bachelor of Science in business management from Pensacola Christian College.