Thread: What is an IRA?
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Old 07-14-2017, 12:08 PM   #6
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Default Re: What is an IRA?

As you say in your first post, a person receiving an income of $37,000 will be in the 25% income tax bracket. You're correct about that. So, if your taxable retirement income is over $37,000, you will be in the 25%. That doesn't mean all your income will be taxed at that rate. But that will be your tax bracket. Some of your income might not be taxed. For instance, if you have income from municipal bonds, you won't be taxed on that income. The first $6,000 (roughly) of your income, no matter where it comes from, won't be taxed. The next $9,000 (roughly) will be taxed at 10%. Also remember that money you have in a retirement account doesn't become taxable, until you withdraw it. If it's Roth money, you won't get taxed on the money you, yourself, put in there. (It was already taxed before you put it in the Roth, assuming it was money you earned.) But you will get taxed on the interest/dividends that your investment in the Roth earned . . . when you take out those earnings.

Only when your total income gets over $15,000 (not counting withdrawals of deposits from the Roth) will you start paying 15% tax on it. Then, only when your total income gets over $43,000, will you start paying 25% - just on the excess amount. ($6000 plus $37,000 = $43,000.) You'll only pay 25% on the amount of total income over $43,000. (Remember not to count any withdrawals of your own contribution to the Roth.)

When you look at a federal income tax table, the tax rates you see are marginal tax rates. Marginal means that's how much you pay on all earning over the minimum money for that tax bracket. Here's a link substantiating that:

How Tax Brackets Work: Examples and Myth Busting - TaxAct

I made a mistake above. I thought there was a zero percent tax bracket. There isn't. Only the amount of "the standard deduction" is not taxed at all. So, if your total income were $9,000, you'ld get a standard deduction of about $6,000, on which you'ld pay no tax. Then you would pay 10% on the $3000 that is over the standard deduction.

So remember: When you are retired you look at your taxable income. Don't count the first roughly $6000 and don't count any withdrawals of what you put in the Roth. Look at what income is keft, after taking away thise two things. Then divide what's left into bundles. You pay 10%, 15%, and 25% on the successive bundles. 25% only applies to the top bundle.

A Roth holds two kinds of money. There is the money you, yourself, deposited into it. Then there us the interest/dividents that got added to what you put in. You never pay tax on what you put in. You do pay tax on the earnings.

"The point" of a Roth is that you don't get a tax bill every year on your earning, like you do on the interest on money in a regular savings account. You only pay tax on earnings during the year you take that money out.

If your taxable income were $38K, you'ld only pay 25% on the last $1,000 of earnings.
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