1

I understand that a Roth IRA offers the benefit of paying taxes up front so that when the investor withdrawals the money at retirement, the funds won't be taxed.

My confusion is that I have yet to see my Roth investment taxed. Here's my scenario:

  1. Fund my Roth IRA account's brokerage site with $1000 from my checking account
  2. Invest in two mutual funds at $500 each
  3. When I look at my statements I see $500 in each fund, gaining growth with the market. The only decrement being fees. There's nothing about taxes.

Part of me expected to see my $1000 immediately reduced by a portion of funds going to the govt in the form of tax. I expected to deposit $1000 and suddenly my account has say $850 (for example) since with Roth you pay tax up front. Why didn't this happen?

Thank you!

6

The money you invested in your Roth was taxed as income when you filed your income tax.

A Roth contribution is "post-tax" as opposed to a standard IRA or 401k contribution which are "pre-tax". Pre-tax contributions lower your taxable income for the year. In example, you had income of $100,000 and made a standard IRA contribution of $5000. Your taxable income would be $95,000. In the case of a Roth contribution, the same $5000 investment would not reduce your taxable income for the year.

3

The money in the checking account was already taxed. It was income this year or last, or a gift from somebody, or earned interest that will be taxed.

If it was a deductible IRA you would declare it next April and get a refund from the government.

  • So how would it if it was a traditional IRA and not a Roth IRA? Wouldn't it be the same process? – dankeshawn Feb 21 '15 at 15:18
  • 1
    @dankeshawn: If it was a traditional IRA (and the contribution was deductible), you would report the IRA contribution on your tax return, reducing your income by the amount of the contribution. – BrenBarn Feb 21 '15 at 17:34

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