What Is the Percentage Tax Rate for Roth IRA?
A Roth IRA is a tax-advantaged retirement account that was instituted in 1997 as part of the Tax Payer Relief Act. The Roth IRA was created to give people an incentive to save more money for retirement. However, your ability to contribute depends on maximum income levels that are adjusted annually. For 2009, if you are single, you cannot make more than $116,000. If you are married and file a joint return, you cannot make more than $176,000. And if you are married but file separate returns, you cannot make more than $10,000.
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Taxes on Contributions
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When you contribute to a Roth IRA, there is no tax deduction for the contribution. You are still responsible for paying income taxes on any money that you contribute. For example, if you contribute $4,000 and your tax rate is 25 percent, you are still responsible for paying the $1,000 in taxes you owe in the year you make the contribution. Because of this, when deciding whether to make a contribution to a Roth IRA or a tax-deferred retirement plan such as a traditional IRA or a 401(k), you should consider whether your tax rate will be higher at retirement or in the year you make the contribution. If it will be higher at retirement, Roth IRAs are a good investment.
Taxes on Earnings
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While your money remains in the Roth IRA, there are no taxes on your earnings. This is beneficial because if the money were not in a tax-sheltered account, your earnings would be reduced by taxes.
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Taxes on Withdrawals
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When you withdraw your money from a Roth IRA, it is not included in your taxable income as long as it is a qualified withdrawal. To make a qualified withdrawal, you must be at least retirement age, which in 2009 is 59 1/2, or meet certain early withdrawal requirements, such as the permanent disability of the account holder.
Excess Contribution Tax
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The contribution limit for Roth IRAs is adjusted each year to account for inflation. For 2009, the limit was $5,000. If you were 50 or older, you could contribute an additional $1,000 to a total contribution limit of $6,000. If your contributions to your Roth IRA exceed these limits, you have to pay an additional 6 percent tax on the contributions. You can avoid paying this extra tax if you withdraw any excess contributions, as well as the earnings on those contributions, before your taxes are due.
Early Withdrawal Penalty
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If you withdraw money from the account and it is not a qualified withdrawal, the withdrawal is subject to a 10 percent tax on early withdrawals, in addition to any other taxes.
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