Roth IRAs (Individual Retirement Accounts) allow for tax free withdrawals of both contributions and earnings.
The person who opens a Roth and makes periodic contributions can withdraw those original contributions at anytime without penalty and with no tax owed. The rules are spelled out in IRS Publication 590, “Individual Retirement Arrangements”.
As for earnings, a Roth contributor must wait five years (calculated by the IRS as beginning January 1st of the year for which the first Roth contribution was made) before earnings can be withdrawn tax free. And the Roth contributor must be 59 1/2 years old to avoid the 10% penalty for early withdrawal on the earnings and avoid income tax on the earnings.
The Roth contributor who converts to a Roth (as opposed to opening a Roth as in the preceding paragraph) must hold the assets in the Roth for five years or until he turns 59 1/2, whichever comes first, to make penalty-free withdrawals of the converted amount. The earnings on that converted Roth are treated differently. The converter must hold the Roth for five years to withdraw any earnings tax free. The age 59 1/2 category does not come into play. Fortunately, the withdrawal rules for Roth IRAs provide that any distributions come first from contributions, then from conversions, then from earnings so there is no need to keep separate the conversion amounts from the earnings.
If you have questions about this or other estate planning issues, contact a law firm that concentrates in estate planning matters.