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Although the earnings are tax exempt, it is not necessary that the earnings are tax-free. This is what makes it different from a traditional IRA.
You can contribute money to your Roth IRA in two ways. One way is by depositing income which can be in the form of earnings from self-employed work, wages or alimony. The other way of contributing money to a Roth IRA is converting funds from a traditional IRA to Roth IRA. You can do this by taking the funds from a traditional IRA and depositing the same into a Roth IRA within 60 days of receiving the funds. However, if you annual gross income exceed $100,000, you cannot rollover money from a traditional IRA to a Roth IRA.
If you use all the funds in your traditional IRA and convert it to a Roth IRA, you will have to pay income tax. This is because Roth IRA accepts money only after tax deduction. In addition, if you withdraw the money before you reach 59 1/2 years, you will have to pay a 10 percent penalty for withdrawing the money early. However, there are exceptions to the early withdrawal penalty but you will have to prove your need.
The purpose of a Roth IRA is help a person grow his money tax exempt so that he can lead a richer and fuller life after retirement. It is another vehicle for saving retirement money, and is quite popular and attractive because of it tax exempt feature.
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