My understanding of IRA's is that with a traditional IRA, you put in money that has not been taxed and when you take a distribution, the money is taxed, but hopefully at a lower rate since you'll be retired and not making as much money. With a Roth IRA, you have already paid taxes on the money you put in so you don't have to pay any taxes on future distributions after you're eligible.

My situation is, last year... well I guess year before last, I made a very small contribution to my Roth IRA during the year. When I did my taxes with TurboTax last year, it got to the point where it asked if I made a contribution to a Roth IRA and I put in the amount I contributed. When I did that, my taxes owed WENT UP on their little calculation thing. I thought, "Hunh..... what's up with that?" I thought there was an error. I did it a couple times and the tax went up and down. I put in the maximum contribution of $5,000 to see what would happen and my taxes owed went up $300! WTH? Is this a typical "too much of a good thing and the government adds something hidden behind the scenes so they get their's", is there an error in TurboTax or am I completely out of whack on understanding how Roth IRA's work? I don't understand how your income tax owed would go up based on a contribution of dollars that have already been taxed. I thought I would try to find out before doing my taxes THIS year. :) Thanks.

Pat

There must have been something else going on. When you make a contribution to a Roth IRA there is no effect on your current taxes what-so-ever. If you had made a contribution to a traditional IRA you should see your current tax bill go down. So I wonder if perhaps what you were doing was flipping back-and-forth between defining the IRA contribution as traditional versus Roth? That would cause it to look like your taxes go up with a Roth contribution, but in reality what happens is your taxes go down with a traditional IRA contribution.

One other possibility - if the program thought you were trying to convert an existing traditional IRA to a Roth IRA it would calculate the taxes owed for that conversion - could that have been the problem?

Maybe the software considered $5,000 to be too much for your income level, in which case an excise tax was added. I would have to examine ALL aspects of your return to be certain.

I only contributed $100 in 2010 but it still made my taxes go up... I don't remember by how much. I was just confused by it and that is why I tried the $5,000 entry just as a curiosity to see how much it would have increased my taxes. I *definitely* had it set to Roth IRA and not a traditional IRA.

I don't see how this would happen. To dig deeper I suggest that you look carefully at Form 1040 under conditions of both with and without the Roth IRA contribution, and see where the differences are. As stated earlier, unless your earned income is below the amount contributed it should have no effect on taxes owed.

I agree Ebaines... that's what I will do this year, actually look at the form and the instruction booklet and see what the rules are. I just never took the time to do that last year since it was not a large amount. I appreciate both of your responses!

Pat

You make too much money. Over 169,000, the contribution starts to be limited. Above 179,000 and you can no longer contribute. Subject to a 6% penalty for over contribution. I just ran into the same issue. $300... which happens to be the 6%. Bummer :-(
You can find this by clicking on the "Explain this" at the beginning of the Roth wizard in turbo tax.

Although, I am thinking I may be better off paying the penalty each year than not contributing... will need to do the math on that one.

No, dwiebking. You would be best off contributing to a (non-deductible) Traditional IRA and then immediately converting to a Roth IRA. That way you can contribute the full amount; there is no income limit (thus no over-contribution penalty), and it behaves exactly like a Roth IRA (assuming you don't have any existing deductible Traditional IRAs).

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Originally Posted by dwiebking

You make too much money. Over 169,000, the contribution starts to be limited. Above 179,000 and you can no longer contribute. Subject to a 6% penalty for over contribution. I just ran into the same issue. $300....which happens to be the 6%. Bummer :-(
You can find this by clicking on the "Explain this" at the beginning of the Roth wizard in turbo tax.

Although, I am thinking I may be better off paying the penalty each year than not contributing......will need to do the math on that one.

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NewAcct's suggesstion is valid; the non-deductible IRA rollover to Roth IRA gambit has been discussed in other forums and has been valdiated as legal.