Contributions

• When you contribute to a Roth IRA, you do so on an after-tax basis. This means that it does not lower your taxable income at all. Since you are contributing with after-tax dollars, the Internal Revenue Service allows you to take this money back out of your Roth IRA without paying any penalties. When dealing with the money that you directly contribute to your Roth IRA, you can take it out at any time and you will not have to deal with taxes or penalties.
  
  

Earnings

• After you contribute money to your Roth IRA, you can then put that money into various investments. For example, you could put it into the stock market or bonds to earn a return. When you earn a return for your Roth IRA, you do not have to pay any taxes on this amount of money. If you try to withdraw the money that you earn from investments, you will have to pay an early distribution penalty. You cannot start withdrawing this money until you reach the age of 59 1/2 and five years have passed.
  
  

Penalty

• If you have to pay an early distribution penalty, the IRS will charge you 10 percent of the amount that you took out. This amount will have to be paid when you file your taxes for the year in which you took out the money. In addition to paying the 10 percent penalty, you will also have to pay taxes on the money at your regular marginal tax rate. This means that withdrawing money from your earnings is a very expensive proposition.
  
  

Exceptions

• When it comes to taking money out of your Roth IRA, the IRS has a few exceptions that work in your favor. For example, if you need to buy your first home, the IRS allows you to take out $10,000 from your Roth IRA without paying any penalties or taxes, provided the account has been opened for five years. Besides buying a house, you can also use your contributions to the your Roth IRA to pay for your child's education expenses without paying any taxes or penalties on the money.