How are Roth Ira's taxed?

Question

I understand they are pre-taxed. Does that mean the bank where they open the account fills out a form at account openening and with all contributions to tax it then, or is it up to the IRA holder to figure that out? Also, when the IRA holder dies, does the beneficiary have to pay any taxes on the money? Wether it be income tax or estate tax.......

Answer 1

Your Roth Contributions are made with after Tax money, you paid taxes on it before you put them in the Roth IRA. they are not deductible on the Federal Tax Return. Contributions are reported to the IRS by the Administrator on form 5498, and no further reporting is made by the contibutor or Acct holder

Traditional IRA's are contributed on a Pre Tax basis.

Distributions from a Roth can be taxable to the extent it is not a qualified distribution (see publication 590) Earnings on a Roth can be taxable

Distributions from a Traditional IRA are taxed as the distributions are made

Publication 590
http://www.irs.gov/publications/p590/index.html

Inherited distributions are taxable to the beneficiary to the same extent that it would have been taxable to the account owner at the date of death

Answer 2

Roth IRAs are NOT pre-tax. Contribituions are made with tax-paid dollars. The accumulations are tax-free and the distributions are tax-free if made after age 59 1/2.

Retirement accounts are part of the estate. If the estate exceeds the exclusion amount, currently $2 million, estate taxes will be paid by the estate. Beneficiaries do not pay estate taxes.

Traditional IRAs are taxable when the beneficiary withdraws the money, however, since the contributions were made with pre-tax dollars. Roth IRAs are not taxable since the contributions were made with tax-paid dollars.

Answer 3

there is no tax consequence so long as withdrawal is made after age 59 1/2. Under that age, there is a penalty. The bank or whoever is holding the Roth, does not report taxes or cost basis, just distribution amounts. Even in a traditional, cost basis is not a factor because you pay on the entire amount of withdrawal in an IRA situation, unlike a regular brokerage or other type of account where you pay on gains.

As far as a death beneficiary goes: they pay on the distribution. Beneficiaries can have it distributed to them over a period of years or lump sum. That is taxed as regular income for a Traditional. Same rules apply to Roth as if it was theirs.

Answer 4

You've already paid taxes on what goes into the Roth. When you take the money out, you pay taxes on the gains, not the principal. While most companies will track this for you, it's best that the IRA holder keeps her own records, just to make sure.

Not sure on the death questions.