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I need a little clarification regarding IRA contributions. If every year you contribute $2000.00 to regular IRA's (this being after tax dollars). When you turn 59 1/2 you are then required to withdrawal from the IRA, isn't this money then taxed again. So in effect aren't you taxed twice on the yearly contributions when you withdrawal out of your IRA (age 59 1/2).

I thought the benefit to an IRA is taxed deferred growth. With a Roth this is not the case - it just means that you will not be taxed on withdrawal. If a reg. IRA has to have withdrawals at age 59 1/2 what is this amount? Wouldn't one be able to reduce there income when they retire to offset there tax bracket?


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Greetings, 3first, and welcome.

<<I need a little clarification regarding IRA contributions. If every year you contribute $2000.00 to regular IRA's (this being after tax dollars). When you turn 59 1/2 you are then required to withdrawal from the IRA, isn't this money then taxed again. So in effect aren't you taxed twice on the yearly contributions when you withdrawal out of your IRA (age 59 1/2).>>

You seem to be confused about a few issues here. First, you don't HAVE to start withdrawals from a traditional IRA until age 70 1/2. Age 59 1/2 is important only becuase that's the earliest age you can take money from a traditional IRA and escape a penalty tax on top of ordinary taxes on the money in the IRA that was allowed to grow untaxed throught the years.

Second, you will not be taxed twice on contributions to a traditional IRA that came from after-tax money. You will only be taxed on the earnings which have not yet been taxed. In a Roth IRA, you wouldn't be taxed at all if the account has been open for at least five years and you're older than 59 1/2. Only the traditional IRA is taxed. Here's how it works:

You put in $20K of after-tax contributions over the years. At age 60, you start withdrawing some money, so you take $10K. In that year, the account has a market value of $50K. That means $20K / $50K, or 40% of the money in the IRA has already been taxed. Therefore, if you take $10K out, 40% ($4K) will be untaxed, but the rest, or $6K, must be declared as income and taxed.

<<I thought the benefit to an IRA is taxed deferred growth. With a Roth this is not the case - it just means that you will not be taxed on withdrawal. If a reg. IRA has to have withdrawals at age 59 1/2 what is this amount? Wouldn't one be able to reduce there income when they retire to offset there tax bracket?>>

None of the earnings in a traditional IRA or a Roth IRA is taxed while it is in the IRA. When the earnings come out of the traditional IRA, they will be taxed as I described above. When they come out of the Roth, they will come out tax free.

And yes, many people do end up in a lower tax bracket in retirement. Just as many stay in the same tax bracket. And a few end up in a higher bracket.

When you're talking about ONLY after-tax contributions to an IRA, then a Roth IRA will win over the traditional IRA every time regardless of the tax bracket now or in retirement. That's because earnings on the traditional IRA will be taxed. Earnings on the Roth won't.

Regards.....Pixy
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