ken_sylvania wrote: ↑Mon Jan 08, 2024 2:43 pm
Ken wrote: ↑Mon Jan 08, 2024 2:35 pm
ohio jones wrote: ↑Mon Jan 08, 2024 2:30 pm
My parents take the RMD from their IRAs every year, and sometimes a bit more, and haven't paid a penny in taxes.
OK, if we are being pedantic about it. The RMD that they withdraw every year is considered ORDINARY TAXABLE INCOME. But they may have a low enough income or have structured their finances in such a way to reduce their tax burden down to zero.
Moving income from a higher income tax year to a lower income tax year in order to lower income taxes... is called.... tax avoidance! That's what IRAs are designed for.
Yes, but you are just guessing that your tax burden will be higher at age 30 when you put money into the IRA than it will be at age 70 when you take the money back out. That might be true for some people but untrue for others. Also the income tax rates can change during those intervening 40 years (tax rates can go up or down). So it is really just a roll of the dice.
What is actually happening is that you are taking the money that you would owe in taxes today and the government is letting you keep that money for 40 years and let you invest it and then pay taxes 40 years later when you take it back out. It is like a free loan from the government that you can invest and earn money on.
So with a traditional IRA the government is letting you keep your tax dollars to invest and earn money on now with the condition that you will owe taxes when you take the money out.
With a Roth IRA you pay taxes on the money today and then any earnings you get on the money is tax free and it is not considered taxable income when you take the money back out in retirement.
General rule of thumb. If you think your tax burden will be lower in retirement then today, invest in a traditional IRA. If you think you tax burden will be higher in retirement than today, invest in a Roth IRA. There are exceptions, but that is the rule of thumb.