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Yes, there are two types of individual retirement accounts that are most commonly utilized: the traditional IRA, and the Roth individual retirement account.
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You make contributions into the account before you pay taxes on the income. This is a positive arrangement in the near term, because your taxable income is reduced by the amount of the contributions.
On the other hand, when you take distributions from the account, they are subject to regular income taxes. Penalty-free withdrawals can be made when you reach 59 ½ years of age, and thereafter. You must begin taking the required minimum distributions when you reach the age of 72. You can also continue to contribute into the account for an open-ended period.
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Early withdrawals trigger a 10 percent (10%) penalty along with the requirement to claim the distribution as part of your gross income.
Regarding the second part of the question, the answer is yes. You can take as much as $10,000 out of the account to help finance a first home purchase. An account holder may also remove funds to cover unpaid medical bills or school tuition.
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The major difference between a Roth individual retirement account and a traditional IRA is the timing of the taxation. When you establish a Roth account, you make contributions into the account after you pay taxes on the amount contributed. As a result, distributions you receive from the Roth account at a later date are subject to tax. You are never compelled to take the required minimum distributions when you have a Roth account, because the taxes have been paid. Penalty-free withdrawals have the same minimum age, and the same exceptions apply to early withdrawals from Roth individual retirement accounts.
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Spouses that inherit individual retirement accounts have two choices. They can retitle the account to make it an inherited account and assume the role of the beneficiary. The other option is roll it over into their own account. This is traditionally referred to as the spousal rollover. Non-spouse beneficiaries of both types of accounts would be required to take minimum distributions. They would be taxable for traditional account beneficiaries, and Roth beneficiaries would receive tax-free distributions.
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