When to Pay Taxes on a Roth IRA
Most people look to making some kind of a retirement plan not so much as for the reaping of rewards in the form of a steady income after retirement, but to enjoy tax exemption during the current year. This is a well-documented fact and based on this, retirement savings plans (including 401 k, Roth 401 k and IRAs) are designed. However there is an exceptional case: Roth IRA. When do you pay taxes on a Roth IRA?
Contributions to the Roth IRA are not tax deductible. Direct contributions can be withdrawn at any time. Only at the time of withdrawal are the savings exempt from taxation. But even this option is not available in all cases. Since contributions to the Roth IRA do no reduce the Adjusted Gross Income (AGI) of a taxpayer, there is no tax exemption observed there either.
This might in fact even take the taxpayer over the limit of maximum income and make him or her ineligible for filing Roth IRA. If a taxpayer who opts for Roth IRA instead of any of the plain vanilla retirement savings plans comes under a middle or high income bracket will pay more taxes on the earnings diverted into the Roth IRA than a taxpayer who contributes to a plain vanilla retirement plan such as traditional IRAs. This is because contributions made to traditional IRAs are employee sponsored and tax deductible. And due to considerations of longevity of the taxpayer, the perceived tax benefit may never be realized by him or her.
It might be a pertinent conclusion to draw here that Roth IRA has been designed with the middle income group in mind. The stipulations are most profitable to them and often detrimental to the high bracket taxpayer. There are even incidences of double taxations when dividends are taxed at origin.
