<p>I have a little cash ($3500) in a money market and would like to transfer it into a Roth IRA. A regular IRA doesn’t work for me.
I am confused about the tax consequences. I was told that I would incur a big tax bite now by moving the $ because I wouldn’t pay tax when I took it out at retirement. I’m confused as I paid tax on it when I earned it and had to pay tax on it during the years when it earned something.
Can a smart person clarify this for me?</p>
<p>You don’t pay any additional tax when you open the Roth account. It’s just that this retirement contribution is not tax-deductible, as some traditional IRA contributions are. In exchange for the contribution not being tax-deductible now, the earnings on the Roth will be tax-free down the road.</p>
<p>The web site Fairmark (fairmark.com) has a lot of good info about taxes.</p>
<p>I do know that we DID HAVE TO PAY TAX on the ROTH. The whole idea of a ROTH is that you pay the taxes now (when you’re younger and usually when you have an income coming in) rather then later (when you’re retired and usually don’t have an employment income coming in). The more we thought about it, it may not have been the best idea. Right now we’re in a high tax bracket. When we retire, we will be in a lower tax bracket (less income). Maybe we should have left it in a normal IRA and paid the taxes later when we will be in a lower tax bracket. I won’t even attempt to give advice on this–you should talk with your accountant or someone at the bank. All I can tell you is that we had to pay taxes upfront on our ROTH.</p>
<p>At the time, the gov’t allowed people to pay it off over a 4-5 year period (which is how we did it). I don’t know if that’s the way it’s still done. We paid taxes on the entire amount that we put into it.</p>
<p>I had a Roth for one year. I invested it in the stock of a locally based homebuilder. My $2000 is now worth less than $200…so if you make investment choices like I did, paying taxes on the gain will be the least of your worries!</p>
<p>Nysmile, no need to shout. Just read the original post. The OP said s/he had already paid tax on the income s/he was planning to use for the Roth investment and wanted to know if there would be additional taxes owed when the Roth account was opened. The answer is no.</p>
<p>I believe what nysmile is referring to is converting from a tax-deferred account (i.e., 401k, 403b, deductible IRA, etc.) to a tax-free Roth account. If you have paid taxes on the $3,500 AND you have at least $3,500 of earned income then you can open the Roth IRA with no tax penalty.</p>
<p>BTW, consider what missypie has said. Since gains inside a Roth IRA are not taxed, there is an incentive to select riskier stocks in hopes of above average capital gains. That doesn’t always work out. Instead, you might want to consider some investments with payouts normally taxed as ordinary income. Good luck!</p>
<p>Shout? Well, maybe so because the last thing we needed during those 4 to 5 years was to pay additional taxes. I’m still wondering if we should have left it in the original regular IRA. Oh well, it’s history now.</p>