Do people still have to pay tax on traditional IRA when they retire and want to pull out the money?

I want to know what would be the advantage of putting money in the IRA account now if at the end of the day I have to pay tax when I withdraw them at the time of retirement?

My understanding is that if I put money in IRA now, it will reduce my income and therefore I have to pay less tax now. However, if I have to pay the same tax later at the time of retirement, what is the point?!

6 Answers

  • 3 weeks ago

    You don't pay "the same tax at the time of retirement".  You do pay tax -- but it's not the same tax.  Tax rates depend on your income, so it's likely that you would pay less when you are retired.

    Even if the tax was the same, paying it later is an advantage.

  • Anonymous
    3 weeks ago

    Traditional is taxed at withdrawl but you get reduced taxes the year you put funds in.

    Roth = no immediate tax break but no takes at withdrawl.

  • Jenny
    Lv 7
    3 weeks ago

    Usually people have a higher income while they are working than after they have retired. In that case they would be in a lower tax bracket and therefore would likely pay less taxes (or even pay no taxes at all) on the money they withdraw from the IRA after they retire than what they would have paid if they had gotten taxed on the money at the time they earned it.

    Of course that is all just an educated guess. 

  • Anonymous
    3 weeks ago

    Contributing to a traditional IRA does not reduce your income like

    an employee sponsored 401K where contributions are pre-tax. You can claim a deduction on your annual tax return which would normally reduce your AGI.

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  • Anonymous
    3 weeks ago

    "if I have to pay the same tax later"   You will pay a crap ton more tax later.   You will pay ordinary income tax on not just the money you deposited, but on all the growth of that money as well.   Not only that, you will be subject to required minimum distributions (which means you are required to make taxable withdrawals even if you don't need the money) and you may get hammered with medicare premium surcharges (because medicare premiums are based on taxable income).

    Don't invest in a pre-tax retirement account other than to obtain the employer match.

    Always use the Roth option.   Many employers offer a Roth 401k option which is GREAT.

    If you intend on retiring with a significant nest-egg, you're better off using a regular taxable account than a pre-tax account.   Why?   Because if you buy/hold stocks, the gains are tax deferred anyways.  And when you sell, you are taxed at the lower capital gains rate, not ordinary income tax rates.  And there are no required minimum distributions.

    Retiring Baby Boomers are discovering just how screwed they are by using pre-tax retirement accounts.   That is unless they retire with not a whole lot of money in which case it really doesn't matter much.

    ETA:  Coffee Drinker's answer is short-sighted and the math is way off too.    Put in $5000, pay the $1500 tax now and 40 years from now when that $5000 is $100k, you get 100k income tax free.   Or would you rather pay income tax on the whole 100k?  

    If you're doing it right, you WILL have a lower taxable income in retirement - by using Roth accounts.  

  • 3 weeks ago

    The first advantage is that the money you would have spent on taxes is in the account growing - sometimes for decades. 

    The second advantage is that you get a tax deduction when you are in a high tax bracket and then pay the tax when your income is lower and therefore you have a lower tax bracket.

    So lets say you put $5000 in a traditional IRA and the deduction saves you $1000 in taxes (20%). So you now have $5k invested and growing but it only cost you $4k in net out-of-pocket costs to make that investment. That extra $1,000 is growing as your investments grow, and hopefully worth many thousands of dollars by the time you pull money out and pay tax.

    The other advantage is the difference in tax rates. Most people will have less taxable income in retirement - putting them in a lower tax bracket. So if you were in a 20% tax bracket during the middle of your career when you earned that money, maybe you'll drop to the 12% tax bracket in retirement and now the tax on $5000 will only be $600

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