I know how Roth's work but I am trying to decide if I should use a Traditional or a Roth. I know one consideration is what you think your tax bracket will be at retirement. Here's the rub; if I am retired, I will not be making any money so I wouldn't be in a tax bracket, correct. So how much tax would be taken out of a Traditional when I am not making any money?
2007-01-20 12:54:49 · 5 answers · asked by Patrick R 2 in Business & Finance ➔ Taxes ➔ United States
You will still have income.
You are taxed on a traditional IRA as "ordinary income." This means it is taxed in the same way wages are taxed. But in fact it is taxed higher than regular wages if your IRA income causes some of your Social Security benefits to be taxed (and this can occur when your IRA distributions are $15,000 or even less).
Currently, Roth IRA distributions do not affect taxation of Social Security benefits.
2007-01-20 13:03:17 · answer #1 · answered by ninasgramma 7 · 0⤊ 0⤋
The amount that you withdraw from the traditional will be taxed at the same rate as if it was earned income.
But don't be so quick to choose a ROTH either. If you are in the same tax bracket when you retire that you were in when you earned the money then the ROTH and the traditional is a wash. Remember, in the traditional IRA the money that you SAVE on taxes also grows based on compounding.
Because most American's don't begin saving until they hit 30 years old the ROTH does not benefit them as much as they'd like to think it will. The ROTH benefits the wealthy and the young. The rest of us can invest in either...or both if we want to hedge our bets.
2007-01-22 08:48:46 · answer #2 · answered by digdowndeepnseattle 6 · 0⤊ 0⤋
Patrick, Congratulations on being smart enough to consider putting money away in any kind of IRA. I have thought about this very question myself and will be glad to share my thoughts with you.
The traditional IRA offers the advantage that the contributions are tax-deductible when made, but of course, when you begin to take distributions, they're fully taxable. Traditional IRAs also have minimum distribution requirements.
The Roth IRA offers the advantage that the distribuitons are completely tax-free althougth the contributions are not tax-deductible.
Generally, I prefer the Roth IRA because it's almost impossible to overstate the attraction of tax free distributions. I'll give you an analogy:
"The wise old farmer said, if given a choice, he'd prefer to pay tax on the 'seed' rather on the harvest." I believe that this analogy will show the simple logic that Roths are generally superior to traditional IRAs.
To your question about being in such a low bracket in retirement that retirement distributions from a traditional IRA probably wouldn't be taxed at a high rate, I ask you to consider that you'll probably acquire some other taxable investments over your career, perhaps some rental property or stocks and bonds. The income from these assets will be taxable. And one final consideration: If you save consistently and invest wisely (buying quality and practice diversification), you're going to be amazed at how much you'll retire with. And not having to pay tax on the distributions will make you one happy camper!
2007-01-20 13:20:31 · answer #3 · answered by Ben 2 · 0⤊ 0⤋
Sorry Patrick. You could be taxed, even in retirement if you're not working to earn money, but money you live on from any pre-tax account will be taxed at your CURRENT bracket, based upon the amount you take as income in the year. So, unfortunately, your theory about no tax is incorrect. You have to make a pitifully low amount in order not to be taxed...I can't remember the figure, but you can look it up on the IRS website - I believe it's somewhere around 7 grand. So, if you plan to live on less than that, you're free not to file a return. The traditional IRA's contributions are PRE-tax, meaning Uncle Sam doesn't yet have his cut in order to give you the benefit of having more money to put into the traditional IRA to earn growth and interest on. When you take the money out as income, the IRS will be looking for the tax you owe. Believe me.
2007-01-20 13:01:10 · answer #4 · answered by Anonymous · 0⤊ 0⤋
Well, if you're withdrawing from a traditional, then that's money you're making. And if you have other investments or bank interest, for example, that's income also. "Making money" doesn't just include wages or salary.
If you take $15,000 out of a traditional IRA for example, that is taxable income and would be taxed just like $15,000 in salary would be.
2007-01-20 13:38:02 · answer #5 · answered by Judy 7 · 0⤊ 0⤋