Out-to-Lunch
Thinks s/he gets paid by the post
Why aren’t the dollars going into the IRA taxed? My marginal rate is 25%. I had to earn 90/(1-.25)=120 to get the 90 residual which I’ve paid $35 of taxes on. Now the 90 is aftertax until I put it into my IRA and call it a rollover. Plus the extra 10 cost me >13 including the taxes. Eventually that $100 payment back to the IRA will be taxed again.
Let me try a slightly different way:
Let's say that you have a $1000 tax liability you need to pay. You have $1000 in a tIRA. And you have $1000 in a taxable bank account.
Scenario 1: You pay your taxes from your bank account. Now you have no tax liability; you have $1000 in your tIRA, and you have nothing in your bank account. And you owe a penalty for underpayment.
Scenario 2: You make a withdrawal of $1000 from your tIRA, and have it all withheld for taxes. Later, you take your $1000 from your bank account, write a check to your tIRA as an indirect rollover. After that, you have no tax liability; you have $1000 in your tIRA, and you have nothing in your bank account. Just as before. But you do NOT owe a penalty for underpayment.
What you seem to be missing is that when you put the (previously taxed) money into the tIRA, you are PREVENTING the taxation of the money that was taken out before. So, I guess you could insist on saying that your previously taxed money is being taxed again, but you are ignoring the fact that it prevents you from paying taxes on the money that you withdrew earlier (which had never been taxed before).
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