You call it a "non-deductible" IRA; the Internal Revenue Service calls it a Roth IRA. Either way, it's a retirement plan that doesn't give you a deduction when you put the money in, but the money comes out tax-free, if you can wait long enough. Unfortunately, some young couples can't wait. You may want to pay off some debt or make a big purchase, like a new home. You can get money out of you IRA early, though you may have to pay taxes and, in some cases, an additional penalty.
If you have income from an employer or self-employment, you can contribute to a Roth IRA up to the annual limits set by the IRS or the amount of your income, whichever is less. Contributions may be further limited or phased out completely if your income is too high. While all your contributions will be after-tax, income on any investments you make within the plan won't be taxed, and if you can wait until you're age 59 1/2, you can begin making withdrawals tax-free, assuming you've had the plan for at least five years. If you can't wait, you'll generally pay tax on any distributions that weren't previously taxed: the investment income part, along with an additional 10 percent early withdrawal penalty.
Tax and Penalty-Free Distributions
Since you already paid taxes on the amounts you contributed, you can take that out at any time without paying taxes or a penalty, and since the IRS assumes your own contributions come out first, you can keep taking money out, tax and penalty-free, until you exceed your own contributions. Then it becomes investment income subject to taxes and penalties. Once your plan has been in effect for at least five years, you can also withdraw money tax and penalty-free if you qualify as being permanently disabled or, on a happier note, to purchase a first home. For the first home, you're limited to $10,000, but it can come from your own contributions and investment income. When you inherit a Roth IRA as a named beneficiary, you can always make withdrawals tax- and penalty-free.
Allowable Early Distributions
In some other situations, the IRS will allow you to take money out early to pay certain expenses without paying a penalty. However, in these cases you'll pay tax on any previously untaxed portions. These include your individual medical costs that exceed a certain annual percentage of your adjusted gross income; to pay medical insurance if you're unemployed and meet certain IRS requirements; to pay higher education expenses for you or a qualified dependent, or to pay off a tax levy by the IRS. In all of these cases, the plan must have been in effect for five years, and the tax applies only to investment income.
Things to Consider
Right now, while you're building a life together, you may not appreciate all the benefits a nondeductible Roth IRA can provide over the years. You could build a hefty tax-free income for your retirement. Or you may some day appreciate that you never have to take distributions from your Roth IRA, but can leave a tax-free inheritance to your kids or other named beneficiary. Consider other options first and think carefully before you tap your IRA for short-term benefit.
- MM Productions/Lifesize/Getty Images