The other huge red flag here is the word "new" as in, setting up a new Roth IRA.
If you already have a Roth IRA, then it doesn't matter if you contribute to the same one or a new account. But if you don't already have a Roth IRA and you open one, your withdrawals won't be "qualified" until the account has been open 5 years. That means you could pay tax on your withdrawals if you withdraw the money too early.
Here's a comparison for you, I think I've included all the important details
| Investment account |
Roth IRA |
| Can invest any funds from any source, any amount. |
Can only invest if you have compensation from working, up to $7000 per year. |
| In most cases, will pay some income tax on capital gains and dividends within the account each year even if you don't make a withdrawal. |
No taxes due unless you make a non-qualified withdrawal. |
| Can withdraw money any time, will owe capital gains tax if you have a gain. |
Can withdraw the original principal contributions at any time without tax or penalty. If gains (earnings) are withdrawn and it has been less than 5 years since you first opened a Roth IRA in your name, the earnings are taxed as ordinary income. (You must also be over age 59-1/2 to make a tax-free withdrawal of earnings, but that is already cleared in your question.) |
| Your heirs inherit a stepped-up basis, and will only pay capital gains tax if there are additional gains between the date of your death and the date they cash out. |
Your beneficiaries must cash out within 10 years, unless the beneficiary is your spouse, a minor child, or a disabled person, but the withdrawals are tax-free.** |
| Goes through probate as part of your estate. |
Avoids probate and goes straight to the beneficiaries if you designate one or more beneficiaries. |
**Note that one source says that a beneficiary who makes withdrawals from a Roth IRA will owe income tax if it is less than 5 years since they opened their first Roth IRA. I couldn't find confirmation of this, but it might be worth asking an expert. Or, if you plan to make your adult child your beneficiary, have them open a Roth IRA now with any token amount of money so they start the 5 year clock for themselves now.
Update: I found a note on the. IRS web site that beneficiaries are not subject to the 5 year holding rule. However, you should designate your beneficiaries instead of letting the Roth account go into your estate, so your beneficiaries get the full benefits of the Roth account.
