General Tax Rules for Roth IRAs and other Investment Accounts

What is that old saying? Oh, yeah. The only two certainties in life are death and taxes. Well, I’m pretty sure the first event is going to happen to all of us, but believe it or not, you do have some control over the tax part. And that’s what we’re going to talk about today: Roth IRA tax rules.
Now, there are different types of retirement accounts. There’s the Traditional IRA, the Roth IRA, and then you have the regular investment account that you may be funding to help pay for retirement. And there are different tax advantages and disadvantages to each one. It can be a complicated topic, figuring out where you stand, tax-wise, with each one. So I’m going to try and break it down into basics for you.
First, let’s talk about taxes and a regular investment account. Here’s the lowdown:

With this type of account, you pay taxes first, and then make your contribution with post-tax dollars.

As your investment grows, it may be subject to taxes on dividends and capital gains.

At withdrawal, you pay capital gains taxes on your earnings.

Ouch! That doesn’t sound like much fun. You get taxed coming and going on that type of account.
Now, let’s talk about the Traditional IRA, also known as the tax-deductible IRA.

With this account, you get a tax deduction on your contributions.

Your contributions grow tax-free.

You pay income taxes on your withdrawals.

Ok, that sounds a little better. You only get taxed at the end.

Finally, we get to the Roth IRA.

You pay income taxes on your contribution dollars.

Your contributions grow tax-free.

On withdrawal, you pay no income taxes.

With this option, you pay taxes at the outset, and in your golden years you get to take the money and run, so to speak.

As you can see, there are various tax obligations with the different types of retirement accounts. Which one is best for you may be a matter to discuss with a tax professional.