Roth IRA Taxes: How They Work and When You Pay
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You do not get an immediate tax break on Roth IRA contributions, unlike with a traditional IRA.
You add money to a Roth IRA post-tax (such as from a paycheck with taxes already taken out).
Earnings in a Roth IRA grow tax-free and qualified withdrawals are tax-free.
There are many different types of retirement plans, and one of the main ways to choose among them is to ask: How do they treat you at tax time? Let’s just say the Roth IRA is very polite.
Roth IRA taxes
Money you put into a Roth IRA is not tax-deductible, meaning you don't report Roth IRA contributions on your tax return, and you can't deduct the contributions from your taxable income. You pay taxes on the money before you put into a Roth IRA, and your investment grows tax-free.
You can withdraw those contributions at any time tax-free. In 2024, you can put $7,000 into a Roth IRA if you're under 50. If you're 50 or older, you can contribute $8,000.
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Roth IRA taxes on earnings
While you can withdraw your Roth IRA contributions at any time without tax or penalty, earnings are a different story.
As long as your earnings stay in your Roth IRA, they grow tax-free.
To take those earnings out though, you have to abide by the Roth IRA withdrawal rules. You need have had the account open for at least five years, and be at least age 59 ½, to withdraw your investment earnings without paying taxes on them. Otherwise, you'll face a fairly steep 10% penalty, plus income tax, on what you withdraw (though there are some exceptions).
» Learn more about Roth IRA early withdrawals.
Roth IRA taxes on withdrawals
Qualified Roth IRA withdrawals in retirement (meaning you followed the withdrawal rules) are not subject to income tax. That's because your contributions were made with money you’ve already paid taxes on, and your earnings have stayed in your account long enough.
» Like the sound of tax-free retirement income? Find out how and where to open a Roth IRA.
Roth IRA taxes vs. traditional IRA taxes
The main difference between how Roth IRAs are taxed and how traditional IRAs are taxed is when you pay the taxes.
With a traditional IRA, you put your money in the account before you pay taxes on it. Putting the money first helps reduce your taxable income in the year you make the contribution, which itself is a valuable tax benefit because it can help lower your tax bill.
In other words, you might get a tax deduction for putting money into a traditional IRA, reducing your taxable income by the amount of the contribution. When you go to take the money out in retirement, that's when it's subject to income taxes.
With a Roth IRA, you pay taxes on the money first, then put it into the account. Because you paid taxes before you put the money into your investment account, when you go to make a qualified withdrawal, there are no income taxes to pay.
Still, there are at least a couple of situations where a traditional IRA might be a better bet for you than a Roth IRA:
If your income is too high to open a Roth IRA, but you qualify for a tax deduction for contributing to a traditional IRA, then the traditional might be the way to go. In 2024, you are not eligible to contribute to a Roth IRA if you have a modified adjusted gross income of $240,000 or more for those married filing jointly, or $161,000 for single filers. (Another option if you don't qualify for a Roth IRA is a backdoor Roth IRA.)
If you’re pretty sure your tax bracket is going to be lower in retirement than it is right now, then it makes sense to pick a traditional IRA and delay paying taxes until retirement.
» Learn more: Roth vs. traditional IRA.
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