Earnings in a Roth individual retirement account are generally perceived as being tax-free, but they are taxable in some circumstances. A Roth IRA must be open for a specified number of years before earnings may be withdrawn tax-free. Individuals planning their financial future can gain the greatest potential benefit from a Roth IRA by opening it several years before reaching age 59.

A pivotal point occurs in many types of retirement accounts when the account owner reaches age 59 1/2. At that age, earnings may often be withdrawn with no early withdrawal penalty. A Roth IRA shares the same age restriction, but it has an additional requirement that the account must have been in existence for five years in order for earnings to be tax-free.

5-year period

Unlike a pre-tax traditional IRA, contributions to a Roth IRA are post-tax. The long-term advantage of a Roth IRA is that both the earnings and the original contributions are received tax-free. By opening a Roth IRA before age 55, there is adequate time to meet the 5-year requirement and gain nontaxable access to your earnings at age 59 1/2.

The 5-year period begins with the the first tax year in which a Roth IRA is opened for your benefit. After the end of the fifth year, you may withdraw the earnings tax-free if you are at least age 59 1/2. Although most Roth IRA account owners prefer to delay withdrawals for as long as possible, some choose to withdraw funds at an earlier age for various reasons.

Age differences

A Roth IRA owner may withdraw their original contributions at any age, without penalty. If earnings are also withdrawn, there is a 10 percent additional tax on the withdrawn earnings if the account holder is under age 59 1/2. If the account holder is age 59 1/2 or older, the 10 percent additional tax does not apply.

Even if the account holder is age 59 1/2 or older, the account must have been open for the 5-year period for the earnings to be tax-free. The IRS has an ordering rule for Roth IRA distributions. Your original contributions are considered to be distributed first, followed by any possible rollover contributions. Earnings are considered to be distributed last.

The size of your first Roth IRA is not as important as the need to get the account established. Contact a financial planner for assistance in opening a Roth IRA.  

A service like Krosnar & Griffith PC CPA can give you more information.