Review of Roth IRA Taxes

Roth IRAs allow yet one more opportunity to manage one's income taxes. The aim of writing this piece is to look into the various tax-savings advantages, chiefly, that there are no Roth IRA taxes.

First, qualified distributions from a Roth IRA are paid free of federal income taxes. There are great benefits to minimizing your federal and state income taxes after retiring and using those funds for day-to-day expenses, as well as other arbitrary expenditures such as travel. This preferred Roth IRA tax treatment also extends to the Roth IRA distributions that are made to your beneficiaries.

Additionally, a Roth IRA comes with no minimum distribution requirements. The biggest advantage of a Roth IRA over a conventional IRA is that it provides you with more certainty over the withdrawals from your retirement accounts. It is fully up to your discretion when and how much you want to take out from your Roth IRA account. If you have different sources of income to support you in retirement, you have no need to take Roth IRA distribution as compared to the forced distributions of traditional IRAs. And even when you do take qualified Roth IRA distributions, you have no Roth IRA taxes.

An additional Roth IRA tax benefit is that the Roth can lower the taxes you pay on your Social Security benefits. Because the Roth IRA withdrawals are not taxable and not added to your "provisional income," they have no negative impact on Social Security benefit taxes. On the contrary, traditional IRA withdrawals are ordinary income, and as such, augment your income and the amount of tax you pay on your Social Security benefits.

The above should not imply that there are no Roth IRA taxes. Distributions which are not qualified are taxed. Qualified distributions meet one of these criteria:

made on or after the date you attain age 59½
made after your death or
attributable to your being disabled

Furthermore, it is essential for a Roth account holder to fulfill a 5-year holding period based on the calendar year for which the original Roth contribution was made. As a simple example, the contribution made to the Roth on 4/1/2010 for 2010, does not meet the 5 year requirement until December 31, 2014. Qualified Roth IRA withdrawals are tax-free from federal income taxes, but it does not mean they are also exempt from state Roth IRA taxes. This depends on the tax laws in your particular state.

Some people get money into a Roth IRAs not through direct contribution but by conversion of a traditional IRAs. Such a conversion is subject to Roth IRA taxes as the money form the traditional IRA will be most or completely pre-tax contributions.