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And Roth IRAs are funded post-tax. That means he paid taxes on the income already, before he put the money into the IRA. That's why it's "tax-free".

by sp332 5y ago

peytoncasper 5y ago
I think that's fair, although, and correct me if I am wrong. Its his current income tax, so it's highly likely that his income tax bracket is lower than the cap gains tax that would normally be applied on investments like this. That being said, I tend to agree. Its to prevent double tax in which you're trying to promote a better investment. Your long term health and retirement.
- pontifk8r 5y ago
  I'm correcting you: Unless he makes less than $40,000 in salary, the capital gains tax rates are going to be lower than the tax rate for ordinary income. The chart in this article reveals more: https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp https://www.investopedia.com/articles/personal-finance/10151...
colordrops 5y ago
Are you suggesting any investment that is made after you've paid taxes on it should be tax free regardless of growth? Roth is an exception, not the rule. Tax is cyclical, not a one time thing, by design. It was never the case that you only ever paid tax once, and it's confusing to me that it's even being suggested otherwise. Roth is a very special exception to this.
- sp332 5y ago
  Not just anything, but the other kind of IRA lets you put money in without paying income tax first.
  - colordrops 5y ago
    Why are you ignoring the most significant difference with the other kind of IRA?
    - sp332 5y ago
      That with a Roth IRA you pay the tax rate when you're working, and a normal one you pay according to the tax rate when you're retired?
      - colordrops 5y ago
        Once again you are leaving out an important detail. The amount of money that you pay the tax on for a Roth is often orders of magnitude less than a traditional IRA, regardless of rate. You are avoiding A LOT more tax with a Roth. It's a fixed initial payment with a Roth, yet it scales indefinitely with a traditional IRA. It's a huge difference.
        sp332 5y ago
        I was never clear on how much difference it made. Either you pay (say) 20% up front or you pay 20% later. With compound growth multiplying in the middle, does it really make a difference to how much you have at the end? 0.8 * (1.07 ^ 20) == (1.07 ^ 20) * 0.8
        colordrops 5y ago
        Your math is wrong. (0.8 * 1.07) ^ 20 and (1.07 ^ 20) * 0.8, which are not equal. I'm assuming that 0.8 is the percentage after tax, 1.07 is the deposit, and 20 is the growth.
        lmm 5y ago
        No, your mathematics is wrong. The growth rate (1.07) is what's compounded, not the deposit.

And Roth IRAs are funded post-tax. That means he paid taxes on the income already, before he put the money into the IRA. That's why it's "tax-free".

by sp332 5y ago

And Roth IRAs are funded post-tax. That means he paid taxes on the income already, before he put the money into the IRA. That's why it's "tax-free".

peytoncasper 5y ago

I think that's fair, although, and correct me if I am wrong. Its his current income tax, so it's highly likely that his income tax bracket is lower than the cap gains tax that would normally be applied on investments like this. That being said, I tend to agree. Its to prevent double tax in which you're trying to promote a better investment. Your long term health and retirement.

pontifk8r 5y ago
I'm correcting you: Unless he makes less than $40,000 in salary, the capital gains tax rates are going to be lower than the tax rate for ordinary income. The chart in this article reveals more: https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp https://www.investopedia.com/articles/personal-finance/10151...

colordrops 5y ago

Are you suggesting any investment that is made after you've paid taxes on it should be tax free regardless of growth? Roth is an exception, not the rule. Tax is cyclical, not a one time thing, by design. It was never the case that you only ever paid tax once, and it's confusing to me that it's even being suggested otherwise. Roth is a very special exception to this.

sp332 5y ago
Not just anything, but the other kind of IRA lets you put money in without paying income tax first.
- colordrops 5y ago
  Why are you ignoring the most significant difference with the other kind of IRA?
  - sp332 5y ago
    That with a Roth IRA you pay the tax rate when you're working, and a normal one you pay according to the tax rate when you're retired?
    - colordrops 5y ago
      Once again you are leaving out an important detail. The amount of money that you pay the tax on for a Roth is often orders of magnitude less than a traditional IRA, regardless of rate. You are avoiding A LOT more tax with a Roth. It's a fixed initial payment with a Roth, yet it scales indefinitely with a traditional IRA. It's a huge difference.
      - sp332 5y ago
        I was never clear on how much difference it made. Either you pay (say) 20% up front or you pay 20% later. With compound growth multiplying in the middle, does it really make a difference to how much you have at the end? 0.8 * (1.07 ^ 20) == (1.07 ^ 20) * 0.8
        colordrops 5y ago
        Your math is wrong. (0.8 * 1.07) ^ 20 and (1.07 ^ 20) * 0.8, which are not equal. I'm assuming that 0.8 is the percentage after tax, 1.07 is the deposit, and 20 is the growth.
        lmm 5y ago
        No, your mathematics is wrong. The growth rate (1.07) is what's compounded, not the deposit.