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Roth IRA Tax

Quite often, it seems when people hear the phrase Roth IRA tax they seem to hear the words Roth IRA tax savings, or even tax exemption. Let's be clear about this, a Roth IRA is not going to help you avoid paying your taxes. Not only that, but in certain cases converting to a Roth IRA or simply withdrawing from a Roth IRA can cost you a fortune in taxes.

However, you understand that a Roth IRA account will allow you to withdraw your money tax-free? After all, you've already paid your income tax on your earnings prior to making your contributions, and that's the whole point - that your withdrawals are going to be tax-free. Not only that, but compared to a standard IRA, a Roth account offers the additional advantage that you have no obligation to make any minimum withdrawals, or even any withdrawals at all.

All this is true - up to a point, and it's that point which is important to bear in mind. Whether you're looking to open a Roth account or convert your previously existing standard IRA to such an account, you will need to bear in mind a range of implications, consequences and limitations, all of which relate to the issue of tax.

If you already have a Roth account open, or you are looking to open one as your first IRA account, one of the key things to consider is any possibility that you will need to withdraw from the account at some time in the future. If you reach the age of 59 and a half, and have had the Roth account open and active for at least five years, then of course your withdrawals will be entirely tax-free.

However, if you are under this age and try to take money from your account, you're going to face some stiff penalties in the form of taxes. There are two possible charges which you could incur - one is the income tax on any earnings you have made from the Roth account, and the other is a standard 10% penalty fee for early withdrawals.

Assuming that you're in the 28% income tax bracket, this adds up to almost a forty percent tax charge on your Roth IRA withdrawal, and this could really be quite a significant sum in itself. If there is any likelihood that you will need to withdraw from the account early, then if you have any alternative options you would do well to give them serious consideration - such as opening a standard IRA. Roth IRA tax penalties can cause serious dents in your investment, and yet this isn't the only issue that you will need to take into consideration.

The other tax issue concerning your Roth IRA account is the income tax you could face as a result of any withdrawal or distribution you receive. By withdrawing $10,000 from your IRA, not only will you be paying income tax on this, but over the course of the year your gross salary, or MAGI will have increased, and this could result in you being bumped into the next tax bracket.

Being pushed into a higher tax band could really cost you over the course of the year; say jumping from a 15% to a 28% tax band would make a great difference to most people, and could even affect any payments you planned to make during the remainder of the year. However, even this isn't the end of the issues you should consider as far as Roth tax is concerned.

If you do find that as a result of an early withdrawal or distribution your adjusted gross income has been increased so that you are placed in a higher tax band, then this could have the effect of disqualifying you for a number of tax related benefits. These could include dependent child benefits and college tuition tax credits.

All of these factors together, from the income tax due on a withdrawal, to the 10% penalty fee, the risk of moving into a higher tax band to the possibility of losing out on benefits, are all factors to consider as far as Roth ITA tax matters are concerned.

Nevertheless, there's also the issue of a conversion from a standard IRA to a Roth account too. If you decide to convert an existing IRA to a Roth account, then you will need to bear in mind that as your contributions towards your existing account have been pre-tax, and a Roth account's contributions will be made after income tax allowance has been calculated, you will need to pay tax on the amount which you are converting.

But remember- converting this amount and incurring income tax charges will also mean that your annual AGI will have increased, resulting in the same issues as described above. As long as you are aware of these Roth IRA tax issues then you have nothing to worry about, and a great deal of tax-free investing to look forward to. However, taking decisions which ignore these issues could cost you a great deal more than you anticipated. Back to "Roth IRA Rules"