Opening a Roth IRA and putting my already taxed money into it?

Question

My current job doesn't offer a retirement plan until after 3 years of work. So, in the mean time, I have to save elsewhere.

I'm thinking of opening a Roth IRA. I'm planning on just taking 15% of my paycheck and putting it into my Roth account. Obviously my paycheck money is taxed. When I put it into my Roth IRA, will my Roth tax me AGAIN when I take it out (when I reach retirement?) or is there a way to take money out of my paychecks and have it directly (untaxed like a 401k) put into my Roth IRA?

Answer 1

I think contributing to a Roth IRA is a wonderful idea.  As people have told you already, the money that is in your Roth is not liable for income tax when you take the money out.   If you are 25 years old and you save $5000 per year with a 7% average annual return, in your Roth IRA then when you are 65 years old, you will have over $1 million dollars!  That is over $1 million TAX FREE dollars.  That would come out to $416.67 per month.  If you can manage that, I think that you should definitely go for it. That would mean that you put $200,000 in and take over $1 million out tax free.

Answer 2

A ROTH has deposit limits, you may not be able to put 15% of your paycheck into it.

The earnings on a Roth are taxed when you take them out. You can take out your deposits at any time with no tax as they were already taxed once.

You might want to talk with an investment person. There may be better alternatives to a Roth if you want to put away 15% of your pay.

We use A.G. Edawrds, now Wachovia.

Answer 3

OK you have that mixed up.

A regular IRA contribution would be pretax and you would see the effects on your tax return. then when you make withdrawals on the regular IRA during retirement you would have to pay taxes on the contributions and on any of the gains.

A Roth IRA contribution would be post-tax money and when the withdrawals are made during retirement they wold not be subject to taxes. neither the contributions nor the gains on those contributions would be taxes.

slight mix-up but you were on the right track to start saving for retirement. Good Luck!!

Answer 4

You have two good choices.

1.  Do as you are thinking and open a Roth IRA and have a portion of your paycheck deposited.  And YES, the proceeds are TAX FREE when you withdraw them during retirement.  

2.  You can have your money deposited into a Traditional IRA, and you can avoid taxation on that money now, but pay regular income tax on it when you withdraw it during retirement.

Here's what I do.  I actually have both.  When I have a particularly good year, I put all I can in my Traditional IRA, because my tax bill is high this year and I need every tax cut I can get.  When I have a less than great year, I put money in my Roth and pay the lower tax rate now and can enjoy the money tax free in retirement.

Answer 5

Contributions to a Roth IRA are after tax, and there is never any further tax (or penalty) on those (already taxed) contributions drawn at any time (which come out of a Roth first).  Gains are only subject to tax/penalty if drawn out too soon, and are NOT taxed if you have had a Roth IRA for at least 5 years and are at least age 59.5.

The general thought is to pack as much as you can into a Roth IRA when young and tax rate is lowest.  When eligible for your 401(k) contribute at least enough to that to get any company match and continue to fund the Roth IRA.  If you have money left over (or if bumping into a higher tax bracket) bump up your 401(k) contributions.

Having a mix of tax deferred [401(k), IRA] and tax free [Roth IRA or Roth 401(k)] withdrawls will give you more flexibility in retirement, and hopefully result in less tax than if everything was tax deferred.