In this fascinating video I analyze the pros and cons of Roth IRAs versus Traditional IRAs to see what makes sense to do, and I think you may find the results surprising.
Timestamps:
0:00 Intro
0:39 Interesting article about someone who said they lost out on $400k due to going with a Roth instead of a Traditional IRA
1:22 Overview of Roths & Traditional IRAs
2:23 Chart comparing Roths vs Traditional IRAs
2:41 Examples of investing with pre & post tax dollars
4:07 Chart cont.
4:46 Backdoor Roth
5:02 Chart cont. (RMDs)
8:39 Earned Income
9:53 Diving into the article
10:55 Census bureau data on income
11:35 Tax brackets
11:39 Rule of thumb as to if a Roth or a Traditional IRA is better
12:01 Article cont.
13:59 Dave Ramsey says a Roth is usually better
14:55 Rother conversion ladder
17:15 Ramsey cont.
17:52 Roth or Traditional from a member on my Discord
19:15 Article cont.
19:34 Roth vs Traditional IRA online calculator
20:15 Another Roth vs Traditional spreadsheet & discussion with someone on my Discord
20:56 A website that says Traditional IRAs are better for most people
22:37 Lots of opinions on which is better
23:29 Tax rates in the future
24:41 Lots of options for what you do
25:11 Interesting finding about a popular dividend stock
27:07 Please use my Seeking Alpha Affiliate Link (I’m sponsored)
27:24 Outro
NBANeil’s spreadsheet:
Dividend Limey’s spreadsheet:
My Seeking Alpha Premium Affiliate Link ➜
Chat with me on my free Dividend Discord chat server ➜
Follow me on Instagram ➜
Follow me on Twitter ➜
Support me & get Patreon perks ➜
My Dividend Merch (10% donated to St Jude) ➜
Donate to St. Jude’s Children Hospital:
An Estimate of My Dividend Portfolio on M1 ➜
Please use my Amazon Affiliates Link ➜
Thanks! As an Amazon Associate I earn from qualifying purchases.
Please LIKE, COMMENT and SUBSCRIBE to support this channel – it helps me immensely! Also, please SHARE this video with your friends 🙂 Thanks, I really appreciate it!
Get more great info – Subscribe! ➜
Share this Video ➜
Watch this Video next ➜
Feel free to ask questions on Instagram, Twitter, Reddit, email, or here on YouTube. Listen to my videos as Podcasts on iTunes, SoundCloud, Spotify, Castbox.fm, etc.
Listen to my Videos as Podcasts on iTunes ➜
Listen to my Videos as Podcasts on SoundCloud ➜
Reddit ➜
Investing Books to read (as an Amazon Associate I earn from qualifying purchases):
The Intelligent Investor ➜
One Up on Wall Street ➜
Attributions/SEO/Useful Links:
Disclaimer: I am not a financial adviser. These videos are for entertainment, inspiration, and educational purposes only. Investing of any kind involves risk. I am only sharing my opinion with no guarantee of gains or losses on investments. Please consult an appropriate adviser and do your own research before making any decisions on anything. I am not responsible or liable for any actions you take. The data shared may be inaccurate.
Copyright © 2023 GenExDividendInvestor. All rights reserved.
#RothIRA #TraditionalIRA #401k…(read more)
LEARN MORE ABOUT: IRA Accounts
INVESTING IN A GOLD IRA: Gold IRA Account
INVESTING IN A SILVER IRA: Silver IRA Account
REVEALED: Best Gold Backed IRA
When it comes to saving for retirement, one of the biggest decisions you’ll need to make is whether to go with a Roth IRA or a traditional IRA. Both options have their own set of advantages and disadvantages, so it’s important to weigh the pros and cons before making a decision.
A traditional IRA offers immediate tax benefits, as contributions are typically tax-deductible, which can lower your taxable income for the year you make the contribution. This means you can potentially save money on your taxes now, giving you more money to invest in your retirement savings. However, when you eventually withdraw funds from a traditional IRA in retirement, you’ll have to pay taxes on the contributions and any investment earnings.
On the other hand, a Roth IRA offers tax benefits in retirement. Contributions are made with after-tax dollars, so you won’t get any immediate tax benefits. However, your withdrawals in retirement are tax-free, including any investment earnings. This can be a huge advantage if you expect to be in a higher tax bracket in retirement or if you simply want to minimize your tax burden in your later years.
So, which one wins? The answer largely depends on your individual financial situation and your personal preferences. Here are a few key factors to consider when choosing between a Roth and traditional IRA:
– Current tax bracket: If you’re in a high tax bracket now and expect to be in a lower tax bracket in retirement, a traditional IRA might be the better choice. On the other hand, if you’re in a lower tax bracket now and expect to be in a higher tax bracket in retirement, a Roth IRA could save you money in the long run.
– Age and retirement timeline: If you’re younger and have many years until retirement, a Roth IRA can provide significant tax-free growth potential. However, if you’re close to retirement or in retirement already, a traditional IRA might make more sense, as you can take advantage of the immediate tax deductions.
– Estate planning: Roth IRAs are not subject to required minimum distributions (RMDs) during the original account owner’s lifetime, whereas traditional IRAs are. This means that if you want to pass on your retirement savings to your heirs, a Roth IRA can offer more flexibility and potentially lower tax consequences.
Ultimately, there’s no one-size-fits-all answer to the Roth vs. traditional IRA debate. Both options have distinct advantages, so it’s important to carefully consider your individual financial goals and circumstances before making a decision. It’s also worth noting that you may be able to diversify your retirement savings by contributing to both types of accounts, as long as you stay within the annual contribution limits.
No matter which option you choose, the most important thing is to start saving for retirement as early as possible. The power of compounding can make a huge difference in the long run, and having a well-funded retirement account can help you enjoy financial security in your golden years. So, take the time to weigh the pros and cons of both Roth and traditional IRAs, and choose the option that best aligns with your long-term financial goals.
In this fascinating video I analyze the pros and cons of Roth IRAs versus Traditional IRAs to see what makes sense to do, and I think you may find the results surprising.
Timestamps:
0:00 Intro
0:39 Interesting article about someone who said they lost out on $400k due to going with a Roth instead of a Traditional IRA
1:22 Overview of Roths & Traditional IRAs
2:23 Chart comparing Roths vs Traditional IRAs
2:41 Examples of investing with pre & post tax dollars
4:07 Chart cont.
4:46 Backdoor Roth
5:02 Chart cont. (RMDs)
8:39 Earned Income
9:53 Diving into the article
10:55 Census bureau data on income
11:35 Tax brackets
11:39 Rule of thumb as to if a Roth or a Traditional IRA is better
12:01 Article cont.
13:59 Dave Ramsey says a Roth is usually better
14:55 Rother conversion ladder
17:15 Ramsey cont.
17:52 Roth or Traditional from a member on my Discord
19:15 Article cont.
19:34 Roth vs Traditional IRA online calculator
20:15 Another Roth vs Traditional spreadsheet & discussion with someone on my Discord
20:56 A website that says Traditional IRAs are better for most people
22:37 Lots of opinions on which is better
23:29 Tax rates in the future
24:41 Lots of options for what you do
25:11 Interesting finding about a popular dividend stock
27:07 Please use my Seeking Alpha Affiliate Link (I’m sponsored)
27:24 Outro
NBANeil’s spreadsheet: https://docs.google.com/spreadsheets/d/1ZBQM2mcYi-IWJRwgH_C9v3LwaBE5qNgpkC_GbJ-f9vk/edit#gid=0
Dividend Limey’s spreadsheet: https://docs.google.com/spreadsheets/d/15IjjmpfHvIc5lDeygVOpLzAj3mpdpKXQix4QB3oKEMQ/edit#gid=1269137998
My Seeking Alpha Premium Affiliate Link ➜ https://www.sahg6dtr.com/2352ZCK/R74QP/
Chat with me on my free Dividend Discord chat server ➜ https://discord.gg/kkSr5FY
Follow me on Instagram ➜ https://www.instagram.com/genexdividendinvestor/
Follow me on Twitter ➜ https://twitter.com/GenExDividend
Support me & get Patreon perks ➜ https://www.patreon.com/join/genexdividendinvestor
My Dividend Merch (10% donated to St Jude) ➜ https://teespring.com/stores/genexdividendinvestor
Donate to St. Jude’s Children Hospital: https://www.stjude.org/donate/donate-to-st-jude.html?sc_icid=header-btn-donate-now
An Estimate of My Dividend Portfolio on M1 ➜ https://m1.finance/g_gwV-4Pk5sm
Please use my Amazon Affiliates Link ➜ https://amzn.to/2YLxsiW
Thanks! As an Amazon Associate I earn from qualifying purchases.
Please LIKE, COMMENT and SUBSCRIBE to support this channel – it helps me immensely! Also, please SHARE this video with your friends 🙂 Thanks, I really appreciate it!
It depends on a couple of factors. First, do they live in a state with income tax? It depends on the tax code in the state and if the traditional IRA lowers their state taxes.
Second, people usually decide on a fixed amount to invest. So if two investors chose to invest $100 dollars in a Roth and traditional IRA the question that should be asked is what are you doing with the tax savings? If the tax savings is not being invested in in a retirement account, taxable brokerage, HSA or paying off a mortgage or high interest debt, i.e., the refund (tax savings) was used to buy a new iPhone or for a down payment for a new vehicle then it wont be used for the future taxes of the investment and growth. Consider the following example using simple flat tax and assuming that tax laws and inflation never change:
Traditional
$6.5K is invested in a traditional IRA and grows to $100K at retirement and person saves 20% $1,300 in taxes today, but they fail to put that tax savings into a taxable brokerage or pay off mortgage etc. Let's assume they draw 5,000 annually and their growth of portfolio equals the 5% withdrawal and their tax rate is 10%, excluding social security tax, IRMAA, RMDS. Assume that person lives 30 years: 5,000 x 10% x 30 years = $15K in taxes. So they would need to take out $5,500 each year to pay taxes. They withdraw $150K for living and $15K for taxes so they paid 10% which was a lower rate than when they were working but they paid more and ran the risk of depleting their portfolio.
Roth
Same scenario, but person pays $1,300 in taxes today they withdraw $5K for 30 years no taxes at retirement. They withdraw $150K, but only paid $1,300 dollars in taxes .8% effective tax. So yeah I'd probably pay $1,300 up front.
Third can the person max out the IRA or do they use the tax saving to apply to the IRA? If they cannot max it out and they will adhere to applying the tax savings to the IRA then it would benefit them to do the traditional IRA.
Fourth, income level may restrict a person from doing Roth, but there is the backdoor Roth. And many people during retirement do Roth conversions, before RMDs and to lower their IRMAA and other taxes.
There are probably other factors, but for us we live in a state without state income tax, our tax bracket is 22% we're in the lower part. We have kids so child tax credits reduce our taxes and our effective tax rate has been between 7-13%. There were times we couldn't max out our Roth, but considering that we were just paying 7% today on what we put in why would we even consider paying taxes later on what we put in and the growth? We have a taxable brokerage, my wife has a 403b Roth at her workplace and I have a pretax 457, but we max out the Roth then contribute to the others and I make sure to use the tax savings for 529s or paying additional principal off the mortgage. We will both have pensions that are taxable and will cover about about 40-45% of our working income with COLAs. If social security isn't reduced we will have about 60% covered by our pensions and SS. We won't have what GenExDividendInvestor amount in his portfolio, but we will have a good mix of Roth and Pretax retirement so we can adjust with the changes in tax laws.
I'm not a tax expert I'm just aware of the 30 plus trillion in debt and Fedzilla grows bigger every year so taxes will have to go up. Just my opinion
I assume you under 59 1/2? If so, do you pay your tax brackets tax + an additional 10% penalty on withdrawals from the IRA?
What it all comes down to is that you don't know what the tax brackets/rates will be in the future and how much you will make or be forced to convert each year to minimize the effect of those tax brackets/rates. Next, the government increasing tax brackets/rates or even creating an additional tax specifically for pretax accounts is no problem at all and highly likely to happen. Its very difficult to raises taxes on something whose only reason for existence is to avoid any and all taxes after you deposit your money. The only choice would be to eliminate Roth accounts altogether, in which case you would simply withdraw the money tax and penalty free by a certain date and that's that. Conversely, and inescapable trap is set the day you deposit money into pretax accounts. Anyway, the cases for pretax vs Roth and which is better are specific to the individual. No one can predict exactly how it will shake out for themselves let alone others. You might win a little, you might lose a little. Chances are it will be about the same.
Ive always been doing ROTH so that I dont have to worry about taxes later but this video is making me rethink this. I'm paying a lot in not only federal but also CA state tax. I will still max out my rothIRA but switching to trad in my 401k.
Do you hold 3m is it safe
1
Roth is the clear winner for long term investors. Example: Roth investor contributes 100K and over 30 years account value grows to 600K. Same for the pre-tax investor. With Roth you pay taxes on 1/6 to have 100% tax free upon withdrawal (500K of growth). With pre-tax you have 1/6 tax free to then have to pay taxes on the 500K growth and the original 100K. It is the compounding growth of the Roth over decades that makes it the clear winner. In this scenario the 500K compounded growth is tax free for Roth and not for the Pre-tax investor.
In my taxable account I went into dividend investing route. In my Roth I did the buy and hold route with an S&P 500 etf and total market etf along with some Berkshire B stock and SCHD.
I am planning on being rich in life, so I am planing to be in higher tax bracket. Doing a mix of both is the best. A huge plus of Roth IRA is when you die your kids inherit the account without needing to pay taxes and they get tax free growth for a decade or so after.
Gen Ex, you sometimes say you wouldn’t recommend a particular stock, like a sin stock, for your children’s portfolios. Can you share some of the stocks you do recommend for them? Thank you.
Awesome vid as always. Thanks for the great info!!
Fascinating. The Roth is supposed to be better, hence the max annual income to contribute.
I really like David Mcknight's power of zero strategy minus his IUL stuff. Look him up it might not be a strategy that you would use especially if you have a large taxable account. My goal is to be in the zero percent tax bracket in retirement.
Penalty free withdrawals on contributions alone makes a roth better than traditional
Back door option
That's what she said
Inappropriate, dude.
No mention of 401k-Roth accounts.
Best plan of all? Establish a 401k, 401k-ROTH, traditional IRA and ROTH IRA. Add to each as able and benefit your projected tax situation.
Definitely establish a ROTH IRA for your working children, as their income tax rate is likely to be low, and one needs to hold this account for at least 5 years before being able to take out anything penalty-free.
When does ROTH suck? When a blue chip, dividend paying stock you are holding in a ROTH-IRA goes out of business OUCH (e.g., GE.)
One issue not discussed at all, 401k traditional tax deferred deposits lowers your taxable income. This lowers the taxable income determines your later social security payment amount (OUCH!!! Losses compounded annually with every COLA increase). If you want your social security payments to be as high as possible, you want your taxable income to be as high as you can manage.
But who cares about Social Security. It won't be around in a few more years anyway.
Converting a Traditional IRA to a ROTH IRA later, means you will pay taxes on all the converted earnings made in the Traditional IRA.
Best time to convert to a ROTH is when your earnings have tanked massively and you know that is going to be temporary, convert when the losses are the greatest.
I took advantage of the 2020 COVID income losses to withdraw penalty free (Trump's executive order) from my 401K, paid the income taxes, but bought a house with cash. (Guess how much houses cost now? Maybe more people than just me did that? Yes, I paid a chunk in taxes, but the equity gains in my home, mortgage free is even better value for me.)
All the rest of my income is now in ROTH IRA, I cashed out and paid taxes on everything else. Roth is an account that can be transferred to heirs if needed.
I don’t suppose you could discuss the tax implications of investing primarily in growth stocks and indexes within a Roth throughout your career and then selling some or all of those positions prior to or during retirement and purchasing dividend positions for tax-free income? If this is all done within the Roth using the settlement account would there be any gains realized to tax upon the transition from growth to income positions?
With roth IRA, pension, social security, I will make more in retirement than I make now (hopefully). But that could change with age if I make more later in life. Currently 40. And I don't want to deal with tax payments in retirement. Another account to mention and discuss is a HSA. It is something I am considering esp. because of my health issues (conginital heart condition).
401k Roth has no contribution limit though…. Traditional Roth has Limit.
One of the drivers for me, is that I can withdraw from the Roth at the end, or hopefully never. My intention is to leave the Roth to my children, and based on today's laws, they wouldn't have to pay any taxes. I think I can live from social security, my 401K, and my brokerage account, and never have to touch the Roth. So, hopefully I can leave it to my kids without creating tax issues for them.