RETIREMENT PLANNING
Roth IRAs are often touted for their tax-advantaged retirement savings benefits, but your Roth IRA has advantages as a financial resource beyond retirement savings.
You can use a Roth IRA to help pay college expenses, to make a down payment for a home or to serve as an emergency fund. But the primary benefit of a Roth IRA is the contributions you make grow tax deferred, which results in tax-free withdrawals.
When you take a withdrawal, it’s important to consider tax restrictions for how you take money out. For example, contributions you’ve made will come out first, and they can come out any time for any reason, tax and penalty free. Conversions and rollovers you’ve made to the account will come next with the taxable portion coming out first followed by the non-taxable portion. Earnings are withdrawn last.
Earnings may be subject to tax and penalty unless the distribution meets the definition of a “qualified withdrawal.” To be a qualified withdrawal, you must have made your first contribution or conversion to the Roth IRA at least five years prior, and the distribution must meet one of these four requirements: over age 59½, disability, first time home buyer’s exception (up to $10,000), distributions to a beneficiary after your death.
For example, if you are age 50, you’ve contributed $50,000 to a Roth IRA which has been open for five or more years, and you’ve earned $20,000 in investment returns, you could withdraw up to $50,000 without tax or penalty. You would be taxed and possibly subject to an early withdrawal penalty on any withdrawals beyond that unless it was a “qualified withdrawal.”
It’s also important to understand that these withdrawals are not considered loans. However, if you find that you don’t need the withdrawal, you will have 60 days from the date of the reception to roll the dollars back into the original Roth IRA or over to another Roth account under your name. You are only allowed one such direct rollover in a 12-month period for all IRAs that you own.
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Many parents set up 529 plans or Coverdell Educational Savings Accounts to help fund college costs, but there may be advantages to using a Roth IRA for the same purpose. For instance, you could withdraw your contributions (the principal), for this purpose.
In addition, if you also withdrew the earnings, you would be subject to income tax on the earnings, but the 10% early withdrawal penalty doesn’t apply because qualified higher education expense is a penalty exception. Qualified educational expenses include such costs as tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution.
However, because of the contribution limitations of a Roth IRA, you may not be able to put away enough money to cover four years of college costs.
With a Roth IRA, if your child doesn’t need funding for higher education, you can keep the money in the account until you’re ready to withdraw it.
If you would like to buy a home, you may consider using your IRA as a source for part of the down payment. First time home buyers—defined as those who have never owned a home or have not had a financial interest in a home during the past two years—have a one-time option to withdraw up to $10,000 from an IRA to use as a down payment without penalty. Your spouse can also withdraw up to $10,000 from his or her IRA for the down payment.
Roth IRA holders can withdraw the money they’ve contributed tax and penalty-free. In addition, if it’s been at least five years since the first contribution or conversion to your Roth IRA, a distribution of earnings, up to $10,000 as a first-time home purchase, is considered a “qualified distribution” from the Roth and is not subject to tax or penalty. If it has not been five years since your first contribution to the Roth IRA, then the distribution is not a “qualified distribution” and the earnings would be subject to income tax, but not subject to the 10% early withdrawal penalty. Read Avoiding tax penalties on IRAs for details.
Since you can withdraw your contributions from your Roth IRA at any time without tax or penalty, a Roth IRA can be used as a back-up fund to cover unexpected costs, such as medical care, costly repairs and family emergencies.
Here are some of the most important rules and contribution limits to help you get the most out of your Roth IRA. Visit IRS.gov for more details.
Contribution limits
For 2025, you can contribute the lesser of $7,000 or your earned income. If you’re 50 or over, you can contribute a total of $8,000 (or up to your earned income). In 2026, contribution limits are $7,500 ($8,600 for those 50 and over). If you contribute to both a traditional and a Roth IRA, your total contributions cannot exceed your contribution limit.
Spouse contributions
Your spouse can also contribute if you have sufficient combined earned income. For instance, if you’re both under 50, you and your spouse could each contribute up to $7,000 for 2025 and $7,500 for 2026 if your combined earned income is at least $14,000 for 2025 and $15,000 for 2026. (If you’re both over 50, the higher limits would apply.)
Age restrictions
Roth IRAs have no age restrictions for contributions. You are not required to take withdrawals from your Roth IRA during your lifetime.
Spouse beneficiaries may conduct a spousal transfer into their own Roth IRA where they will have to follow the distribution rules as if the funds had been originally theirs. Another option is for your spouse beneficiary to open an inherited Roth IRA. They will need to start taking distributions based on their own life expectancy. A third option is to open an inherited Roth IRA using the 10-year method. No distributions are required during years one through nine, however; all money needs to be distributed by Dec. 31 of the 10th year following death. Finally, your spouse beneficiary can take a lump sum distribution that will not have contributions be taxed, nor will earnings assuming the Roth IRA was more than five years old when you (the original account owner) died.
Generally, a non-spouse beneficiary must distribute the full inherited Roth IRA by Dec. 31 of the 10th year following the year of the owner’s death.
Higher income restrictions
There are income restrictions to be eligible to contribute to a Roth IRA:
The Roth IRA five-year wait
The five-year period starts with the tax year of your first contribution, but you can make that contribution as late as the mid-April tax filing deadline in the following year. In other words, a tax time Roth IRA contribution made before the April 2026 deadline could be credited as a January 2025 contribution, which would slice a year off the wait. Be aware that this must be designated as a carryback contribution; otherwise, an April contribution would be credited to the current year.
A tax-year-2025 account start would mean that the earnings from your Roth IRA could be used for qualified purposes beginning in 2030.
If, over time, you open multiple Roth IRAs in addition to your original account, the five-year period start date for all of them would revert back to that of your first account. If you’ve had a Roth IRA since 2020, and then open another in 2025, you wouldn’t have to wait to start making qualified withdrawals of the earnings in your 2025 account (assuming you are age 59½ or meet one of the other requirements). Your five-year waiting period would have already elapsed. (Roth IRA conversions made prior to age 59½ have a separate five-year holding period related to the 10% penalty being applied if you withdraw the conversion amount from the Roth IRA). For more on the five-year rule, see the IRS Publication 590-B.
Keep in mind, if you open more than one Roth IRA, you can contribute a total of $7,000 in 2025 ($7,500 in 2026) cumulatively to all the accounts.
When to make contributions
Contributions can be made to your Roth IRA at any time during the calendar year, and as late as the due date for filing your tax return (which is usually on or around April 15 of the following year).
Contributions: Lump sum or throughout the year?
You can make contributions as a lump sum, or periodically. You can also set up an automatic purchase plan that withdraws a set amount of money each month from your bank account and invests it in the mutual fund or funds of your choice within your IRA account.
Conversions
Conversions are subject to penalty if withdrawn before five years since the conversion have passed and if you are under 59½.
401(k) plan
If you already have a (401k) plan or another type of retirement plan at work (such as a pension, profit-sharing SIMPLE or SEP plan), you can contribute to a Roth IRA if you are under the income ceiling.
The information provided is not intended as a source for tax, legal or accounting advice. Please consult with a legal and/or tax professional for specific information regarding your individual situation.
