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In this article, quoted a few times on this site, there is a discussion on maaser deductions. He says:

  • Tax-free income that went into a retirement (or other) account designated specifically for you that has no required vesting period — such as contributions into your 401k, tax-deductible IRA account, or non-qualified deferred compensation program is not considered maaser income in the year it is earned; instead, it will be considered maaser income in the year it is received. (Note: not everyone agrees with this. Some hold that this income is liable for maaser in the year it is earned and is then received "maaser-free" later.)

    • As a general rule for other cases not outlined above: don't include income that will be taxable in a coming year (like 401k contributions);
    • include income (or benefits) received this year on a tax-free basis (like FSA income).

Here, he seems to be talking about traditional 401(k)s and IRAs. My question is, what about Roth (post-tax) 401(k) or IRA accounts?

On one hand, he mentions that he is specifically talking about tax-free income or income that will be taxed in a coming year, which would exclude Roth retirement accounts and require maaser to be taken in the year that the income is earned and received "maaser-free" upon future distributions.

On the other hand, it seems odd to me that the fact that the U.S. government takes taxes on a Roth account ahead of time should affect the maaser status of a retirement account. In either case, one could have have the income deducted from one's paycheck and deposited into a post-tax retirement account without ever having actually touched the money. So if the only difference between traditional and Roth retirement savings accounts is when the tax is taken, why is the maaser status different?

So which is it? Are post-tax retirement accounts subject to maaser now and distributed maaser-free later, or do we skip maaser distributions now and give them upon taking income from the retirement account?

  • I would expect you to pay maaser on the earnings from the Roth 401(k) even if the US government does not tax those earnings. No sources, though. – Monica Cellio Jan 18 '15 at 2:16
  • The source is discussing whether the tax free status of the money illustrates that it is discrete from other "earned income" - if you don't really earn it in that moment (since it is immediately put into a pension without passing through your hands), that would remove your obligation to take maaser, since it's equivalent to the EMPLOYER investing money no your behalf. A post-tax account is one in which you legally "collect" the money before investment - it's fully the EMPLOYEES money and thus taxable and subject to maaser at the point of earning. Tax status is a coincident effect, not a cause. – Isaac Kotlicky Sep 9 '16 at 10:34
  • @IsaacKotlicky That's not really true. 401(k) money, whether Roth or traditional never enters the employee's hands directly; however, in both cases it is clearly the employee's money, not the company's. The company has no right to the (vested) 401(k) balance, the employee chooses how to invest it from a set of options, the employee has the right to take a loan or early withdrawal from the money, and the employee can roll the 4o1(k) over to an IRA or another 401(k) outside the company's control upon terminating employment. – Daniel Sep 9 '16 at 13:45
  • No one is saying that the employer "has the right" to the money. Just that one legally is the employer investing the money on behalf of the employee prior to the check issuance and the other is the employee investing the money concurrently to the issuance of salary. And your statement is inaccurate - I can pull money out of my own pocket to invest in a 401(k), but that money by definition is all post-tax. – Isaac Kotlicky Sep 9 '16 at 13:49
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UPDATE

Actually, it is not as much a matter of paying maaser, but of the ease of calculation. For example, consider an investment of money in tax-free municipal bonds. The money that you take from the bank to pay for the bonds has already had ma'aser "taken out". Thus, when you cash in the bonds, only the interest or profit on the bonds is subject to ma'aser. This is similar to a Roth IRA or 401K that you fund from your own bank account. On the other hand, if you take money from your bank account and supplement it with the appropriate amount of ma'aser money for an investment, then all of the money in that investment including the principal will be subject to ma'aser when you withdraw it. This makes it easier to perform calculations and to handle the money.

Using the tax status of the money is merely a convenience to allow you to determine how much of that money is subject to ma'aser. Since the government keeps track of the Roth IRA tax status, you can pay ma'aser on the post-tax investment and let the government calculate the difference for you.

On the other hand, if the money came in to the Roth IRA by direct deposit, and you had calculated your ma'aser based on your net paycheck received, then you would consider every penny in that account (including the original post-tax investment) as pre-ma'aser.

Another analogy would be money that you put into a pushka at home. You wait until the pushka is full before sending a check to the charity. Here to, any ma'aser that is in the account, will be taken and sent to the charity when you take out the money. In fact, I would say that if a bond matures and no longer earns interest, you can send the appropriate amount of ma'aser and consider the entire bond as "post-ma'aser". It is as if you had bought that portion of the bond from ma'aser for yourself.

I hope that this makes the concept clearer.

ORIGINAL

When I was setting up my accounts, the matter was more a function of the way ma'aser is calculated rather than when the tax is taken. If the money is direct deposit, then you can calculate the ma'aser on the amount that is deposited into your checking and savings account. In that way, the Roth is treated the same as the 401K and is subject to ma'aser when you withdraw it.

Many discussions consider the tax withheld on your paycheck like the expense in a business and not subject to ma'aser (since you never receive it). In that case, any tax refunds are considered income and subject to ma'aser. Similarly, any money withheld from your paycheck is never received by you and is an expense and not part of your income.

That is why a store pays ma'aser on the net and not the gross sales as only the profit is subject to ma'aser.

If something that is not considered a maaser expense is withheld from your pay chack, then you would have to add it back into the calculation. However, this normally does not occur. An example might be if your company withholds a charitable donation that is deductible, you would have to remember to put it on your schedule A. Just counting the net pay is just the normal way of handling matters.

I go into more detail on the matter at Can tax ever be considered maaser?

Maaser Kesafim and the Development of Tax Law

Text on this

Amazon

Maaser Kesafim: Giving a Tenth to Charity Domb, Cyril (editor) Halacha Feldheim 1999

From times of old it has been an honored Jewish practice to give maaser, a tenth of our earnings to tzedaka, charity. Yet a great many questions arise when we proceed to fulfill the mitzva. For example: how is income defined? Are capital receipts subject to the obligation of maaser? If they are, how should indivisible assets be dealt with? Is there a specific "tax year"? What expenses are allowed? How is capital investment to be dealt with? How are charities defined, and is there an order of priorities in the matter? To find answers, a research team of the British Association of Orthodox Jewish Scientists made a careful study of the Shulchan Aruch and the responsa literature. Where no clear-cut answers could be found, the next step was to turn to the great Torah authorities of our day. This book is a record of the results of their investigations.

  • Any expense withheld on the paycheck? What about health insurance premiums? What if my office sells cookies and lets me buy them by taking a deduction from my paycheck? – Daniel Dec 18 '14 at 22:40
  • @Daniel I expanded on the subject. I did not have time earlier to go into full details. – sabbahillel Dec 18 '14 at 23:51
  • It occurred to me that this doesn't answer the question because I'm asking in the context of the source cited in the question and this answer directly contradicts it. The source says "Tax-free income that went into a retirement (or other) account designated specifically for you that has no required vesting period — such as [...] tax-deductible IRA account [...] is not considered maaser income in the year it is earned." He specifically says that no maaser is owed on IRA contributions which are always paid into the employees bank account first. – Daniel Sep 9 '16 at 13:58
  • @Daniel Yes, you can subtract it from the net when you transfer it to the IRA account. However, I was speaking about direct deposit which puts the money directly into the IRA account. In fact, that is the way I read the quote that you bring. When you get your paycheck, the money is transferred to the 401K or IRA without you actually seeing it. That way, you never really "got it". I will expand upon that point. I am reading the question again and will try to expand on the answer. – sabbahillel Sep 9 '16 at 16:34

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