A Roth IRA is similar to a traditional IRA because investment income can build up within the account, untaxed. However, distributions from a traditional IRA will be subject to income tax if contributions have been made with pre-tax dollars, which usually is the case.
Roth IRAs, on the other hand, are always funded with after-tax dollars. Subsequently, they offer the chance for tax-free distributions. Once you have had a Roth IRA for more than five years and you are over age 59 1/2, all withdrawals will be tax-free. The five years are counted from the first day of the year the first Roth IRA account is opened.
Suppose, for example, you convert your traditional IRA to a Roth IRA on October 31, 2005, paying all the deferred tax, as required. That makes January 1, 2005, your official starting date. By January 1, 2010, you will reach the five-year mark and you can withdraw as much or as little as you wish, tax-free, even though the funds have been in the account less than five years.
