Advantages of Roth IRA Tax Treatment

Roth IRA tax treatment is very favorable compared to other types of retirement accounts. Here are the basics of how Roth IRA taxes are handled and what this means for you as an investor.

After-Tax Contributions

A Roth IRA is funded with after-tax money. While this may not seem like a big advantage to you, it allows you to save more money for retirement. Both the IRA and Roth IRA allow you to put up to $5,000 per year into them. When you put $5,000 into a traditional IRA, taxes will eventually come out of that amount. However, if you put $5,000 into a Roth IRA, you have already paid the tax, and therefore, you are essentially putting more money into your retirement.

Investment Returns and Withdrawals

When you deposit money into a Roth IRA, you are allowed to invest it into the financial markets. You are allowed to keep any returns that you get from these investments without paying taxes on them. When you reach the age of 59 1/2, you can start withdrawing money from your Roth IRA. At that point, everything that you withdraw is tax-free. You have no tax liability to worry about with this money as you would with a traditional IRA.

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