Although you can't deduct Roth IRA contributions from your federal income tax return, you don't pay tax on them when you make withdrawals. Unlike traditional IRAs -- taxes on contributions to which are only deferred -- Roth IRAs are funded by income that has already been taxed. Not only do you not have to pay taxes on qualified withdrawals, but you're also not required to take minimum annual distributions as with traditional IRAs.
While you can begin making tax-free withdrawals from your Roth IRA upon reaching the age of 59 1/2, there's no age at which you must make withdrawals. For the traditional IRA, that age is 70 1/2, with failure to take the required withdrawals penalized by the Internal Revenue Service at 50 percent of the funds not taken. If you're still working at age 70 1/2 and beyond and your income falls within the eligibility limits, you can continue contributing to your Roth IRA.
For 2012, the IRS allows taxpayers to contribute up to $5,000 to any IRA as long as they earned that much in income. Those over age 50 are allowed an additional $1,000 catch-up contribution. For 2013, the standard contribution rises to $5,500, and an individual over age 50 can contribute up to $6,500.
Your income must fall within a certain range in order to contribute to a Roth IRA. For 2012, single filers with an adjusted gross income of less than $110,000 can contribute the maximum amount. The contribution is lessened for those with income of $110,000 or more but less than $125,000. If you make $125,000 or more, you're ineligible to contribute to a Roth IRA. For 2013, a full contribution is allowed with less than $112,000 and the contribution is totally phased out if you make $127,000 or more.
For 2012, married couples filing jointly can each contribute the full amount to their Roth IRAs if their combined adjusted gross income is under $173,000. The contribution is phased out at $183,000. For 2013, income of less than $178,000 enables the full contribution and the phaseout kicks in at $188,000.
While you won't be hit with taxes if you withdraw Roth IRA money before the age of 59 1/2, you could be hit with a 10 percent penalty. That's also true if you withdraw from an account open less than five years. You don't have to pay the penalty, however, if you withdraw the money because you are disabled; you use the money to purchase your first home, pay for higher education expenses or pay for medical insurance after job loss; or if you have significant unreimbursed medical expenses.
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