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Roth IRA Questions

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Regular Contributor

Roth IRA Questions

I am thinking of opening a Roth IRA, and I have some questions.

I know on a Roth you pay the taxes initially, but when you withdraw (after the age of 59 1/2) you do not pay any taxes.  How are the initial taxes paid on a Roth?  Are the taxes paid based on my income for the year in which I contribute, or is there an additional tax besides my income tax for that year?

If I open a Roth IRA certificate at one financial institution, and after the term of the certificate is up, I can then transfer the money from the Roth to a different financial institution that allows me to invest the Roth in the stock market, correct?

How is the transfer from one financial institution to another undertaken?

Thank you.

Message 1 of 32
31 REPLIES 31
Senior Contributor

Re: Roth IRA Questions

You paid taxes on your investment via income taxes when you earned that cash.  If you had an extra 2000 to save in 2010 and you tucked that cash away in a money market until you use it to invest 2000 in a Roth in 2018 then you paid the taxes in 2010. If you used money earned in 2018 then you will pay the taxes on it when you file your 2018 taxes.  

 

There is no special accounting needed for Roth contribution unless you are converting  traditional IRA to a Roth. 


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Message 2 of 32
Regular Contributor

Re: Roth IRA Questions


@MakingProgress wrote:

You paid taxes on your investment via income taxes when you earned that cash.  If you had an extra 2000 to save in 2010 and you tucked that cash away in a money market until you use it to invest 2000 in a Roth in 2018 then you paid the taxes in 2010. If you used money earned in 2018 then you will pay the taxes on it when you file your 2018 taxes.  

 

There is no special accounting needed for Roth contribution unless you are converting  traditional IRA to a Roth. 


 

Thank you for the reply. 

 

And I never have to pay taxes on any interest earned on the Roth IRA, correct?

 

 

Message 3 of 32
Senior Contributor

Re: Roth IRA Questions

That is my understanding.  


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Message 4 of 32
Regular Contributor

Re: Roth IRA Questions


@MakingProgress wrote:

That is my understanding.  


 

Thank you!

 

Message 5 of 32
Frequent Contributor

Re: Roth IRA Questions

Roth vs regular IRA, imo it all depends what tax bracket you are in now and what tax bracket you will likely be in when you retire.

 

Based on my historical retirement savings and returns, I will likely be in a lower tax bracket when I retire than I am now while working.  So I take the tax break up front with the regular IRA.  If you are in a low tax bracket now and plan on a good amount of investing likely resulting in a large retirement account, then a Roth may be the better choice.




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Message 6 of 32
Regular Contributor

Re: Roth IRA Questions


@Workin4abetterFICO wrote:

Roth vs regular IRA, imo it all depends what tax bracket you are in now and what tax bracket you will likely be in when you retire.

 

Based on my historical retirement savings and returns, I will likely be in a lower tax bracket when I retire than I am now while working.  So I take the tax break up front with the regular IRA.  If you are in a low tax bracket now and plan on a good amount of investing likely resulting in a large retirement account, then a Roth may be the better choice.


 

Thank you for the information.  Hopefully, I will be in a higher tax bracket down the road, but currently I am in about as low as a tax bracket as possible.  Smiley Frustrated

Message 7 of 32
Frequent Contributor

Re: Roth IRA Questions

The beauty of the ROTH is that because all funds going into the ROTH have already been taxed - you will NEVER be taxed on monies coming out. Furthermore, should you need any of of your ROTH principal prior to age 59-1/2 - you can pull any of your invested amount out with no penalty. You can't the funds that have grown from the investments without penalty. Gosh, I really wish that Roths had been available years ago...

Message 8 of 32
Regular Contributor

Re: Roth IRA Questions


@CGeorge wrote:

The beauty of the ROTH is that because all funds going into the ROTH have already been taxed - you will NEVER be taxed on monies coming out. Furthermore, should you need any of of your ROTH principal prior to age 59-1/2 - you can pull any of your invested amount out with no penalty. You can't the funds that have grown from the investments without penalty. Gosh, I really wish that Roths had been available years ago...


 

Thank you.  

 

And after the term of the certificate is up, I can transfer the Roth to a different financial institution and invest the Roth into the stock market, correct?

 

 

 

Message 9 of 32
Established Contributor

Re: Roth IRA Questions


@ZZWW2017 wrote:

 

And after the term of the certificate is up, I can transfer the Roth to a different financial institution and invest the Roth into the stock market, correct?


 

I think you should be clear what a Roth IRA is: think of it as a brokerage account that comes with tax benefits and some limitations. You can open a Roth IRA with a lot of financial institutions; full-service or discount brokerages (Fidelity, Schwab, Vanguard are good ones) make it very easy to set one up.

 

As the owner of the Roth account, you are allowed to deposit a limited amount of money (your contribution) to the account ($6,000 in 2019) per year. You can then use whatever cash is in your Roth account to buy investment vehicles like individual stock, mutual funds, ETFs, bonds, treasuries, CDs, etc... Your choices are usually limited by the financial institution that holds your account -- for example you have a lot of options at Schwab, but maybe a Roth IRA account at a local bank would be limited to CDs and mutual funds.

 

As for transferring accounts, let's say you have a Roth account at Merrill Lynch, you can open another one at Vanguard (combined contribution cannot exceed maximum). Later you decide you want to consolidate it all at Fidelity: so you open a Roth IRA at Fidelity then transfer what's in your Roth at Merrill and Vanguard to the Fidelity Roth IRA.

 

As for withdrawing money, let's say you contributed $25,000 into your Roth over the last 7 years. It has grown to $60,000 because you invested well. You can withdraw that $25,000 contribution penalty- and income tax-free. You cannot touch the $35,000 in gains until you turn 59 1/2 years old; if you withdraw it before that, you will be taxed and penalized. When you reach official retirement age, you can do what you want with the money -- withdraw it all at once, leave it alone, or in-between -- and it will be completely (federal) income tax-free.

 

As your tax rate is currently very low (according to your previous post) it is very smart to contribute to a Roth (if your company has a Roth 401k, might be even better). It is also very smart to invest that cash wisely and let that money grow in the Roth over a long time (don't withdraw it).

Message 10 of 32
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