Am I paying taxes twice on Roth IRA?

4 Replies

Years ago when I was a bit more naive in my financial knowledge I opened up a Roth IRA Investement account with Schwab. Over a years I have added little bits of money here and there mostly to play around with the market and get my feet wet. I have been funding this Roth IRA via a manual transfer from my Checking account which is all money that was already taxed. I was thinking about it, and I didn't realize this entire time that I might have been getting taxed twice on this money since a Roth IRA taxes you "on the way in" right?

However, I looked at my statements and account and couldn't find anything that talked about the amount I was taxed, nor did I ever notice a deposit getting taxed ($1000 deposit went into the account as $1000). So does Schwab just assume this money is already taxed since its not coming directly from payroll? If I had a Traditional IRA whould this work any differently since you aren't supposed to get taxed until "the way out"?

I guess I am just trying to understand these 2 types of accounts a little more. Thanks for any insight!

You're not getting double-taxed not to worry. You are correct, the money you are funding the Roth with has already been taxed through your payroll when you make the transfer, that's all it is is a transfer. Schwab doesn't take out "more tax" because you're putting money into a Roth. If you were to make the same transfer to a traditional IRA, you wouldn't see the "tax break" until you file taxes at the end of the year. The transfer to a traditional IRA reduces your AGI (adjusted gross income). Basically, any contributions to a retirement account outside of work, you wouldn't see any tax effects until filing at year-end.

Originally posted by @Matthew Hintzke :

Years ago when I was a bit more naive in my financial knowledge I opened up a Roth IRA Investement account with Schwab. Over a years I have added little bits of money here and there mostly to play around with the market and get my feet wet. I have been funding this Roth IRA via a manual transfer from my Checking account which is all money that was already taxed. I was thinking about it, and I didn't realize this entire time that I might have been getting taxed twice on this money since a Roth IRA taxes you "on the way in" right?

However, I looked at my statements and account and couldn't find anything that talked about the amount I was taxed, nor did I ever notice a deposit getting taxed ($1000 deposit went into the account as $1000). So does Schwab just assume this money is already taxed since its not coming directly from payroll? If I had a Traditional IRA whould this work any differently since you aren't supposed to get taxed until "the way out"?

I guess I am just trying to understand these 2 types of accounts a little more. Thanks for any insight!

Not correct. You don't get taxed twice. If you withdraw your money when you retire, it will be tax free. Both earning and you contribution. ROTH IRA might not be saving you money. May be you will be in lower tax bracket when you retire, if so its better to offset your income with traditional IRA now when you are in higher bracket.

Sometimes your AGI is high enough to make deductible traditional IRA contribution, then Roth might make sense.

 Your situation needs to be analyzed by your tax advisor. 

@Joel Johnson - ok thanks a lot that all makes sense now!

@Ashish Acharya - is it very common for you to be in a lower tax bracket when I retired? I am 28 now and figured I would only go into a higher tax bracket the older I get as I intend (and figure most people do the same) on gaining more equity and wealth throughout the years.  With that assumption I thought a Roth seemed more applicable as I only believe taxes will go higher in the future which means getting taxed now is better than getting taxed in ~35 years.

A better question might be, why am I investing in an After-Tax vehicle that I can't touch until I retire instead of investing my money in something that I CAN CONTROL, and that also defers capital gains tax (via a 1031 exchange)? Not to mention the benefits of leverage, appreciation, depreciation, and cash flow. :)

401(k)s and Roth IRAs are invested primarily into paper assets (i.e. the stock market), which we all found out in 2008 are actually very risky and give us no control over our investments.

Check out "Rich Dad, Poor Dad" by Robert Kiyosaki. His books will blow your mind. Then combine that knowledge with BP's books on property investment. OMG!