IRA Question?

Question

I opened an IRA a little over a month ago. I know they are tax-defered, but that since I put the money in my IRA after I get my paycheck (like a few days later, I do not have the IRA money automatically withdrawn), I may end up paying all those taxed again after I retire. Do I need to worry about this? Is there any way for the bank and/or government to know I already paid taxes on it or when I switch it over to the IRA is it already taken care of?

Answer 1

You need to find out what kind of IRA you have.  You could have a traditional IRA or a Roth IRA.

If you have a traditional IRA, you could choose to take a deduction from your income for the contribution to the IRA.  The defers taxes until you withdraw the money when you retire.  You are correct that you would pay income taxes on the entire distribution.

If you have a traditional IRA, you could also choose to make after-tax contributions to the IRA.  This is done in cases where you do not qualify for the deduction.  You would pay taxes only on the income from the account when you take withdrawals.  You would not receive a deduction in the year of the contribution.  You notify the IRS of the after-tax contribution when you file your tax return, using Form 8606.

If you have a Roth IRA, you do not take a deduction for your contribution.  When you retire, all earnings and the contribution are tax-free to you.  The IRS receives notice each year of your contribution from your financial institution.  You do not have to record your contribution on your tax return.

Find out which kind you have.  If it is not the kind you want, you can change your account to the type of IRA you want.  Your financial institution has the forms necessary to do this.

Answer 2

On your tax return at the end of the year, you will deduct your IRA contribution for the year.  So you will NOT have paid tax on it before it went in.  This assumes you are opening a traditional IRA, not a Roth IRA - for Roth's you pay tax up front, but not when the money is withdrawn.

Answer 3

When you go to do your tax return, there will be deduction on the front of the form (1040A or 1040) to remove the money you offloaded to an IRA.  That will lower your income and your income tax.

The money withheld from your paycheck is just a guestimate--the tax return is the reality of what you are paying.

Answer 4

i would personally recomend keep track of all "after-tax" money you put on your IRA. if you are going to use the same IRA for pretax contribution have recoreds separately. that will help a lot when you'll be withdrawing that money. otherwise IRS will make you pay taxes on entire amount as opposite to earnings on those "after-tax money"