Enter the Roth individual retirement account. Roth IRA contributions are made with after-tax dollars, so its distributions in retirement are tax-free. That’s a good perk, but there’s more: Because you’ve already made Uncle Sam whole, you can pull out your contributions at any time without tax or penalty. The word “contributions” is important here; the IRS has different rules for withdrawing the investment’s earnings, which may be taxed or penalized if the distribution isn’t qualified.
Roth IRAs rules offer an extra dose of flexibility in certain circumstances if you need more than what you’ve contributed. First-time home buyers can withdraw up to $10,000 of earnings tax- and penalty-free, as long as they’ve owned the Roth for at least five years. Earnings also can be tapped for qualified education expenses such as graduate school without penalty, though you will have to pay income taxes on the withdrawal.
IRA vs 401(k): Which should you invest in?