You don't get to deduct contributions to Roth IRAs, but all of the money you withdraw is tax free if you meet Internal Revenue Service requirements. Sometimes, financial necessity can force people to withdraw money from a Roth IRA early. The good news is that you can continue to make contributions. Plus, not all money withdrawn early from a Roth IRA is subject to taxes and penalties.
You can open a Roth IRA and contribute money as long as you have earned income. If you are married and file a joint return, you can contribute as long as either spouse has earned income. Earned income has to be at least as much as the amount you deposit in the Roth IRA. The annual contribution limit is $5,000, as of 2012. The limit increases to $6,000 when you reach age 50. The only time you can't contribute to a Roth IRA is if your adjusted gross income exceeds IRS limits. For single taxpayers, the allowed contribution is eliminated when AGI reaches $125,000, as of 2012. If you are married and file a joint return, the limit is $183,000.
Roth IRA contributions are made with after-tax funds, so you get no tax deduction for making them. For this reason, the IRS considers a withdrawal of contributed funds a return of invested capital and does not levy any tax or penalty. Money removed from a Roth IRA is considered contributed funds as long as the total amount withdrawn is not more than the total contributions you have made since you opened the account.
When you contribute to a Roth IRA and then withdraw the money, you might not be able to return it to the account. The IRS rule is that contributions made during the current year and then withdrawn may be returned during the current year or by your tax filing deadline. However, contributions made in previous years and then withdrawn may not be returned to the account. Suppose you have contributed $5,000 during the current year but must withdraw $12,000 to deal with a financial crisis. You can return the $5,000 contributed during the current year but not the $7,000 contributed during previous years. You may continue making contributions in future years up to the annual limit.
The money in your Roth IRA is yours and there's no law that says you can't withdraw it whenever you choose. However, if you take out more than the amount you have contributed, the distribution may be subject to income taxes and a 10 percent penalty tax unless the withdrawal is a qualified distribution. To be qualified, the withdrawal must take place after the account is at least five calendar years old, dating from Jan. 1 of the year the account was opened. In addition, you have to be 59 1/2 years old, disabled or put the money -- up to $10,000 -- toward the purchase or repair of a first home. If you inherit a Roth IRA, withdrawals may be qualified as long as the five-year rule is satisfied.
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