How does Roth IRA income affect your total taxable income/tax bracket?

[sethmachine]

Hi,

I understand Roth IRA contributions are tax and penalty free once done after a certain age (59.5 I believe) or some other unlikely edge cases/loop holes. This includes tax free withdrawal of gains and principal (you can always take each principal contribution back tax free after 5 years of being in the account).

Hypothetically let's suppose the following situation in 2022:

* $100,000 withdrawal from Roth IRA which is some mix of principal withdrawal and gains.
* $10,000 income from personal brokerage account (all taxable)

Presuming I'm at the tax/penalty free age/requirements, would this mean my total income for 2022 would just be $10,000? So I'd only pay taxes on $10,000 and my bracket would be according to that? Would this mean I would qualify for various welfare/income assistance programs as my reported taxable income is at poverty level even though technically I raked in $110,000 in 2022 (far above poverty level)?

Another scenario: Suppose I haven't yet met requirements for Roth IRA withdrawal but I can withdraw principal. I assume any principal dollar I withdraw doesn't contribute to my taxable income, because it's dollars I already paid taxes for.

If Roth IRA income is truly tax free and it doesn't push you up in tax bracket, it does seem like the ultimate retirement vechicle--you can have your cake and eat it too.

[kork13]

In general terms, yes -- the Roth IRA is an incredible opportunity for truly tax-free retirement funds. In your scenario, your taxable income would indeed only be $10k for the year (assuming no other income sources, etc.).

I can't speak authoritatively to the various welfare programs, but I believe that many do also have means testing involved, where you have to report your assets and non-taxable income. However, a variety of federal tax benefits for low-income families are driven exclusively by taxable income -- EITC, higher education stuff, child tax credit, retirement saver's tax credit, etc. But of course, most people at 60+ years old won't be doing those things, because their kids have grown & gone, not paying for college, and not saving for retirement (because you're drawing it down).

Ignoring the potential to questionably qualify for welfare/low-income programs (not a goal I would ever strive for), the flexibility of the Roth IRA/401k is extremely powerful. Our retirement savings going forward are 100% Roth for that reason -- it'll allow us to control our taxable income to stay below whatever threshold we need it to be at while still providing for our needs/wants. If the 0% LTCG rate survives until I retire, that's definitely an attractive reason to have a low taxable income.

[parafly]

Welfare and income assistance programs vary by state. In any case, I believe they consider total income, not just taxable income to determine eligibility. They also take other factors into consideration such as bank account and investment account balances. It is not based on income alone.