Roth IRA vs. Roth Contributory IRA

Roth IRAs are subject to many of the same rules as traditional IRAs. Unlike traditional IRAs, however, contributions you make to a Roth IRA aren't tax deductible. On the other hand, unlike the traditional IRA, distributions you receive from a Roth IRA are generally tax free.

A Roth Contributory IRA is an IRA funded by your fresh contributions. The contributions you make to your Roth are subject to income tax in the year you earn them, but you can take tax-free withdrawals of the contributions and their earnings in the future. Your contributions can be withdrawn at any time without tax or penalty, since you've already paid taxes on them. But you will generally face a 10 percent penalty plus tax on any withdrawals of investment gains from your account until you turn 59 1/2 years old or become permanently disabled. All withdrawals are considered tax-free and penalty-free at that point.

A Roth Conversion IRA is an account funded with funds rolled over from a traditional IRA. Because you originally contributed those funds tax-free, the amount in the account will be subject to income tax when you convert it. However, you can withdraw the funds tax-free in the future. Like Roth Contributory IRAs, you can make penalty-free withdrawals from Roth Conversion IRAs if you become disabled or after age 59 1/2.

While investors open Roth Contributory IRAs for the purpose of making nondeductible contributions, investors open Roth Conversion IRAs to hold rollover funds from an account they originally created as a non-Roth IRA. Though conversion and contributory IRAs begin in different ways, investors can make contributions to either account under the same rules. The rules governing withdrawals are significantly different, though. You must leave your money in a Roth Conversion IRA for at least five years after the conversion or until you turn 59 1/2 in order to avoid paying penalties on it, while you can withdraw contributions to your Contributory Roth IRA at any time without fear of financial punishment.