First Person: How a Roth IRA Can Save the Financial Day

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When I was a stock broker and money manager I always touted Roth IRAs over traditional IRAs for the simple fact that they allow you to grow your money tax-free and then withdraw it tax-free when you hit age 59-1/2. However, along the way, I found that a Roth IRA can actually offer other little "hidden" bonuses that give it the ability to save the financial day if need be.

My earliest experience came when I purchased my first home. I needed a little bit more money to put down on the property and didn't know where to turn. I looked at my Roth IRA balance and decided I would simply take the money I needed from there. Now, at the time, I thought that the money would be subject to the normal 10% tax penalty that most early IRA withdrawals are, but when I looked into it a bit further I found that I could take up to $10,000 as a first time home buyer and not be penalized. So, I was able to take the money I needed without the hit.

A few years later, I lost my job and had no other choice but to cash in my Roth IRA. This was perfect as it did in fact get me to the next point in my life, but I dreaded tax time as I knew I would have to pay a big penalty. Then I found out another bonus with a Roth IRA.

While I did have to pay a 10% penalty on some of the money I took out, I did not have to pay it on all the money I took out. Here's how it works. Let's say the lifetime contributions are $3,000 and the money taken out is $4,500. Well, the only thing that is taxable is the money in excess of the total contribution, sort of like the profit.

I have since learned that you can even use Roth IRA funds to help pay for higher education. While I have not used this myself, and do not plan on using it as I have college funds set up for my children, it is still a great feeling to know it is available should I need it.

Of course these hidden bonuses do in fact kill the real purpose of a Roth IRA, which is to save money for retirement, and I am not suggesting that everyone goes out and cashes in their Roth IRAs. I do, however, wish to shed light on some of these issues so that perhaps someone else in need can use what is theirs to get through a tough time in life as I did. I think it should be a last resort, but it is a resort none the less.

More from this contributor:
What You Need to Know About a Roth 401(k)
The Major Differences Between a Traditional IRA and a ROTH IRA
Retirement Investment Planning in Your 30s