Question

I have a question about tax issues related to Roth Independent Retirement Accounts (Roth IRAs). What do I need to know about Roth IRAs and taxes — How are Roth IRA contributions taxed?

Answer

Regarding your question: how are Roth IRA contributions taxed, although there is no up-front tax deduction for Roth IRA contributions as there is with a traditional IRA, Roth distributions are tax-free when you adhere to certain stipulations. Because the funds in your Roth IRA have come from your contributions, and not from tax subsidized earnings, you can tap your contributions (but not your earnings) tax-free and penalty-free at any point you wish to do so. Roth IRAs are often an attractive savings vehicle to consider for individuals who expect their tax rate to be higher during retirement than it is currently. Roth IRAs allow you to pay taxes on money going into your account and then all future withdrawals are tax-free. Roth IRA contributions aren’t taxed because the contributions you make to them are usually made with after-tax money, and you can’t deduct them. Earnings in a Roth account can be tax-free rather than tax-deferred. So, you can’t deduct contributions to a Roth IRA. However, the withdrawals you make during retirement can be tax-free. They must be qualified distributions.

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