Novice question!
I am young and single, I now have a Roth account set up at my discount broker, but I’m confused on how I can fund this: My work paycheck is deposited into my checking account every 2 weeks, can I just transfer money out of my checking account since taxes have already been taken out of my paycheck and then send it off to fund my Roth IRA account??? or must it come directly out of my paycheck??? In other words: Do I have to pay more taxes on the money I deposit into my Roth from my already taxed take-home pay?? Hope someone understands this!
Permalink Submitted by Alan Spross on Mon, 2009-10-19 22:44
You can simply write a check out of bank account to fund your Roth IRA.
The IRA rules do not contain provisions where you would ever incur double taxation, at least with respect to income taxes. If you contribute too much or make other errors, you could incur an excise tax penalty. But there is no difference whether the IRA is funded directly from your paycheck or through some other account. A Roth contribution is taxed before being contributed and a deductible TIRA contribution is taxed when it is distributed.
You can also use your Roth as an emergency fund of last resort. Although you will lose tax deferral by taking out funds before retirement, you can still tap the Roth up to your amount of regular contributions tax and penalty free at any time you wish. The point is that you do not need to forego contributing to your Roth because you do not have enough in emergency funds because that Roth money is not locked up in any way. Just don’t tap it unless you really need to. This way, if the emergency never develops, your Roth continues to generate earnings which will eventually be tax free in retirement, and even for a first home up to 10,000.
Permalink Submitted by Charles Pape on Mon, 2009-10-19 22:54
OK GREAT! Then I’ll just transfer money from my checking account: Then at April 15th tax time, there are no forms to fill out for the Roth IRA correct??? No boxes to check off ect.??? – Since the money came from my checking account and it was taxed take-home pay, the money I contribute is all mine in 40 years (I will not withdraw any till retirement) Thanks for the help, makes it much easier now!
Permalink Submitted by Alan Spross on Tue, 2009-10-20 02:38
Right. You do not have to report regular Roth contributions on your tax return UNLESS you qualify for the Savers Credit, which is an IRS tax credit for lower income taxpayers that make IRA or employer plan contributions.
The Saver’s Credit (officially known as the Retirement Savings Contribution Credit) is reported on Form 8880. But the most you can make to qualify is 27,750 if you are single.
You have until 4/15/2010 to make your 2009 Roth contribution. When you contribute after January 1st, be sure to show on the check which year the contribution is for, since contributions between January and April 15th could be for the prior year or the current year (2009 or 2010).