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I have a question contributing to a Roth
Old 02-16-2017, 04:40 PM   #1
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I have a question contributing to a Roth

Today my wife and I visited with our tax man. We were talking and he asked my wife if she wanted to but x$ into the ROTH this year. She said yes and he told her to take it out of the saving account we have at the local bank. This is an ordinary daily savings account we keep money in to life off of etc.

My question is why would you take money from a savings account put into a ROTH? There can't be any tax benefit taking money that we have paid taxes on to go into a ROTH is that correct? So why from a savings account to a ROTH what is the benefit to us?
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Old 02-16-2017, 04:46 PM   #2
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Presumably it's because you've already paid taxes on those funds. By moving it into a Roth, you'll avoid paying any further taxes on the gains.

You will be taxed on the money going into a Roth at some point. If you roll it from a tax-sheltered account (e.g. a traditional IRA), you'll pay taxes on the conversion. There's no free lunch, unfortunately.
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Old 02-16-2017, 04:56 PM   #3
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The benefit of a Roth is that there are no taxes on the growth of the account as long as you stay within the rules... no taxes on dividends reinvested, interest, appreciation, etc. Good deal if you qualify.
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Old 02-16-2017, 05:40 PM   #4
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The benefit of a Roth is that there are no taxes on the growth of the account as long as you stay within the rules... no taxes on dividends reinvested, interest, appreciation, etc. Good deal if you qualify.
+1. Contributions to a Roth are by definition after tax money. That is why you do not pay tax on the later withdraws, including the gains on the original $.
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Old 02-16-2017, 05:43 PM   #5
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With a Roth, you can take out the original contribution if you want to spend it later before the age of 59, and do it without tax or penalty. The gain has to stay in until you are 59, else there will be some tax and penalty. This ability to take out the money penalty-free makes it different than a traditional IRA, which is more restrictive but has the advantage of immediately reducing your taxes.

Generally, if you have already maxed out your IRA and have some left over money, there's no reason you should not stuff it in a Roth.
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Old 02-16-2017, 06:17 PM   #6
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Thanks. I know that the ROTH you don't have anymore tax after you start taking it out. I was a little confused by using money from a savings to use that to contribute to the ROTH. I would of thought the tax guy would say start with withdrawals from a 401K or IRA and put into the ROTH. I guess it doesn't cost us anything to take it from the savings account and put into ROTH. No tax advantage doing it but a benefit down the road.

Thanks I thought maybe I was missing something but I do understand his thinking now.
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Old 02-16-2017, 07:41 PM   #7
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I would of thought the tax guy would say start with withdrawals from a 401K or IRA and put into the ROTH. I guess it doesn't cost us anything to take it from the savings account and put into ROTH. No tax advantage doing it but a benefit down the road.
Did you question your tax man on why he didn't recommend doing a ROTH conversion (401K/IRA to ROTH)? You would have to pay taxes on any amount you withdrew from your 401K/IRA and converted to a ROTH. Most would recommend that those taxes be paid separately from the amount withdrawn so that would come out of your savings. Another thing to look at is your current tax rate and what you expect your tax rate to be down the road. If your current tax rate is low but is expected to be higher when you're likely to start withdrawals then doing a ROTH conversion now may be the way to go. And as already stated, if you have left over money at the end of the year looking for a home a ROTH is always a good choice.
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Old 02-16-2017, 07:48 PM   #8
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Originally Posted by street View Post
Thanks. I know that the ROTH you don't have anymore tax after you start taking it out. I was a little confused by using money from a savings to use that to contribute to the ROTH. I would of thought the tax guy would say start with withdrawals from a 401K or IRA and put into the ROTH. I guess it doesn't cost us anything to take it from the savings account and put into ROTH. No tax advantage doing it but a benefit down the road.

Thanks I thought maybe I was missing something but I do understand his thinking now.
There are two types of "tax advantages" for retirement accounts. Immediate (traditional IRA/401k) which reduces your current tax liability. Future (ROTH IRA/401k) which reduces your future tax liability.

For "most" people, assuming no changes to the tax code, paying taxes now and then investing that money without paying taxes on the growth results in more money overall. For some people (higher than average income), roth is either not an option or is not expected to result in more money overall. For some people, it is unclear (those near the cutoff limits for Roth generally). In those cases, OR if you don't trust that the tax situations aren't going to change, then having both is a logical choice for "diversification".
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Old 02-16-2017, 09:02 PM   #9
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Thanks. I know that the ROTH you don't have anymore tax after you start taking it out. I was a little confused by using money from a savings to use that to contribute to the ROTH. I would of thought the tax guy would say start with withdrawals from a 401K or IRA and put into the ROTH. I guess it doesn't cost us anything to take it from the savings account and put into ROTH. No tax advantage doing it but a benefit down the road.

Thanks I thought maybe I was missing something but I do understand his thinking now.
Taking the money out of a 401k or IRA causes taxable income and affects your AGI.

If the tax burden (including ACA subsidy loss) of doing that is low, maybe you could do that instead.
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Old 02-17-2017, 06:37 AM   #10
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Thanks for the advise and will do some checking to see my best options.
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