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I'm in my mid 20s and opened up my first retirement savings this year, in the form of a private Roth IRA (having nothing to do with an employer or paychecks). From the research I did beforehand, I learned the basic difference of the Roth is that you pay taxes on contributions but the final amount you withdraw in retirement is completely tax free.

So here's the question... when do I actually pay taxes on my contributions? Currently I have had a $100 automatic transfer going from my bank account into the IRA each month.

Remember when answering this question, my Roth IRA has nothing to do with an employer or my paychecks. It's a private account that I simply send money to each month directly out of my checking account.

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    You could see the difference clearly by entering a previous year's numbers into Turbotax or the like, then 'switch' the amount you put in back and forth between Traditional IRA <-> Roth IRA. You can see the total taxable income, and therefore federal/state/local tax change as you mark the contributions as Traditional vs Roth. – user117529 Oct 19 '17 at 1:58
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There's no additional income tax burden created when you decide to make Roth IRA contributions, your Roth IRA contributions are taxed at the same time all your income is taxed.

If you earned that $100 by working a job, then your employer likely withheld taxes when they paid you. If you earned it through self-employment, then you'll pay estimated taxes on that income quarterly, etc. In any case when you file your annual tax return the actual taxes owed vs taxes paid gets reconciled and you're left with a refund or owe an additional sum.

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    Never mind I get it now. If a person were to qualify, and open a post-tax traditional IRA, they would simply deduct the contributions from their taxes, (rather than having an employer remove them pre-tax). – WakeDemons3 Oct 18 '17 at 14:25
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    @WakeDemons3, that's almost right - opening a traditional IRA (assuming you're under the income limits) would allow you to deduct the amount you contribute from your income for that tax year. The deduction reduces your taxable income, which saves you money up front. This contrasts with the Roth IRA, where you don't get an income deduction because you're using post-tax money. – JW8 Oct 18 '17 at 15:53
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    To simplify somewhat: say you make $1000 at a 10% tax rate. You pay $100 in taxes, $100 goes into your Roth IRA, and the rest ($800) goes into your bank account. If you contribute to a traditional, $100 goes into your IRA, you pay 10% tax on the remaining $900 ($90), and the rest ($810) goes into your bank account. – Ethan Oct 18 '17 at 18:00
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    @WakeDemons3: you have the terminology backwards. 'Pre-tax' means a trad IRA where you contribute money that is excluded from income tax now, but will be taxed when you withdraw it, normally in retirement. 'Post-tax' means you contribute money on which you do pay tax now, and will not owe taxes on it in the future; this is usually a Roth, but can also be a nondeductible contribution to a trad -- in the latter case, the nondeductible 'basis' is not taxed in the future but the earnings are, while in a Roth the earnings also avoid tax in the future if you follow the rules. – dave_thompson_085 Oct 18 '17 at 22:00
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    It reconciles at tax time. You are correct, the employer isn't privy to your plans. But, if you plan to deposit $4000 or so, you can adjust your withholding, adding one "allowance." This will reduce the tax withheld, so you won't wait until tax time to see the money you just saved in tax. – JoeTaxpayer Oct 21 '17 at 13:53
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It has everything to do with post-tax earnings.

You can only contribute into a Roth IRA up to either $5500 or your taxable compensation (wages, salaries, self-employment income, commissions, etc.), whichever is less. So your contributions have already been taxed as income (either withheld or when you file your 1040 next year). Importantly, this means that you can't contribute gifts, previous savings, unearned income, or under-the-table earnings that you don't report* into a Roth (of course, this only is a factor if you report less than $5500 in income since money is fungible).

*Note: I mention this for completeness, not as a recommendation, unreported income can get you into hot water, just ask Mr. Capone...

  • If that's the case (the Roth IRA "tax" just means your income was taxed), then why would anyone ever open a post-tax traditional IRA? (One in which you pay taxes on the withdrawal after retirement). Why would they even exist? – WakeDemons3 Oct 18 '17 at 14:08
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    Income limits. You may make too much to contribute to a Roth or a tax-deductible IRA. You still benefit from the delayed tax, though. See this question on exactly that. But yes, given the option, a Roth IRA is better in every way than a non-deductible (post-tax) traditional IRA which is why the rollover option is popular. – pwcnorthrop Oct 18 '17 at 14:15
  • @WakeDemons3 "Why would someone contribute to a non-deductible, traditional IRA" should be asked as a separate question. – stannius Oct 18 '17 at 17:32
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    "You can only contribute into a Roth IRA up to either $5500 or your taxable income, whichever is less." Not so; the limit is based on taxable compensation (wages, salaries, self-employment income, commissions on sales etc) and not on taxable income which can include interest, dividends, capital gains on sales of property etc. – Dilip Sarwate Oct 18 '17 at 20:20
  • @DilipSarwate Indeed an important distinction, thanks! – pwcnorthrop Oct 18 '17 at 20:43
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Your annual contributions are capped at the maximum of $5500 or your taxable income (wages, salary, tips, self employment income, alimony). You pay taxes by the regular calculations on Form 1040 on your earned income. In this scenario, you earn the income, pay taxes on the amount you earn, and put money in the Roth IRA.

The alternative, a Traditional IRA, up to certain income levels, allows you to put the amount you contribute on line 32 of Form 1040, which subtracts the Traditional IRA contribution amount from your Adjusted Gross Income (line 37) before tax is calculated on line 44. In this scenario, you earn the income, put the money in the Traditional IRA, reduce your taxable income, and pay taxes on the reduced amount.

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    This is the answer the OP really seems to need, that you don't pay more taxes (now) on a ROTH IRA (compared to the rest of your income), instead you pay less taxes (now) on a Traditional IRA (compared to the rest of your income). – user3067860 Oct 19 '17 at 15:57
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You pay it this tax year. Whether that's now due to W-2 withholding, or later with your 1040 next year, or with your 1040-ES all depends on your particular situation.

  • You pay the taxes in the year you earn the income, regardless of what year you put it into your Roth. – stannius Oct 18 '17 at 18:22
  • @stannius if your 1040 form shows that you owe a chunk of money, then you are paying this year's taxes next year. – RonJohn Oct 18 '17 at 19:40
  • @RonJohn: and if the chunk you owe next April is more than 10% and $1k, you may be paying a penalty as well. However, if you have taxable compensation this year, on which you owe tax not later than next April 15 (or next business day), you have until that same deadline to make IRA contributions for this year (although you must be careful the IRA custodian records and reports it as a previous-year contribution). – dave_thompson_085 Oct 18 '17 at 22:02
  • @dave_thompson_085 "and if the chunk you owe next April is more than 10% and $1k, you may be paying a penalty as well." Very true. But that still means that it very much within the realm of possibility. – RonJohn Oct 18 '17 at 23:36
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You pay taxes in the normal way -- when you earn the money. Just like all your other income.

What makes a Roth special is what happens when you withdraw. You don't pay any taxes at all since you already paid them. And there are some other convenient features.

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