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The Roth IRA is a "back-ended" IRA, which means that contributions are non-deductible,
but distributions, if specific requirements are met, would be tax-free and/or penalty
free.
Allowable contributions to a Roth IRA depend on your adjusted gross income (AGI).
Contributions are phased out for singles whose AGI is between $95,000 and
$110,000, and for married couples whose AGI is between $150,000 and $160,000.
Funds in your Roth IRA grow tax-deferred until they are withdrawn. The tax and
penalty status of the funds depends on how long ago you made the first contribution
to your Roth IRA, your age, and what these funds will be used for. If you withdraw
the funds after age 59.5 and
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the first contribution was made five years ago, then
the withdrawl is tax- and penalty-free under all circumstances.
If the funds in a Roth IRA are used for the purchase of a first home, all withdrawls
up to $10,000 are tax-free, as long as they were held in the Roth IRA for at least
five years from the date of the first contribution. By contrast, funds used for
college expenses for yourself or your immediate family are penalty-free, but are
subject to ordinary income tax on the accumulated earnings.
Finally, if funds are withdrawn before five years from the date of the first
contribution, the earnings on these funds are subject to regular income taxes
and will be assessed the 10% penalty for early withdrawals.
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