Final answer:
No tax will be assessed on the $1500.00 initial investment in a Roth IRA upon retirement, even in the 22% tax bracket, as Roth IRA contributions are made with after-tax dollars and qualified distributions are tax-free.
Step-by-step explanation:
An employee investing $1500.00 in a Roth IRA and who is in the 22% tax bracket upon retirement will be assessed no tax on the initial investment when they retire. Roth IRAs are structured so that contributions are made with after-tax dollars, which means taxes have been paid up front. Therefore, when funds are withdrawn in retirement, there are no additional taxes owed on the initial investment or on the gains it has earned, assuming the withdrawals are qualified distributions. This is one of the most significant benefits of a Roth IRA compared to a traditional IRA, where deposits are made with pretax dollars, and taxes are levied upon withdrawal.
It is advantageous to contribute to a Roth IRA when you believe that your tax rate during retirement will be the same or higher than your current tax rate, as it locks in the current tax rate on the contributed funds. According to the information from LibreTexts, the general contributions limits for IRAs for the tax years 2014 and 2015 were $5500 or $6500 for those age 50 or older, highlighting the opportunity for substantial tax-advantaged growth over time.