In this video I compare the advantages and disadvantages of investing through a Roth IRA versus a Traditional IRA and show you that what really matters in the decision is you tax rate when you make contributions and take distributions from these two types of tax advantaged accounts.
Used correctly, strategic tax planning using BOTH a Roth IRA and a Traditional IRA can save you tens of thousands of dollars, even $100,000+ during the course of your life.
00:00 Introduction Roth IRA versus Traditional IRA
03:28 Example why Roth vs Traditional are fundamentally the SAME
13:34 What causes your Effective Tax Rate to Change during Your Life
17:44 How To Save Money by Strategically using Roth versus Traditional
34:05 Summary matrix for IRA Contributions and IRA Distributions
Justin’s Personal Tax Planning Template (as seen used throughout the Roth IRA Conversion Video Series) can be found here:
*** 2024 Tax Planning ***
Roth IRA Conversion Video Series
– Part 4:
– Part 3:
– Part 2:
– Part 1:
#rothira #ira #taxplanning…(read more)
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Tax Planning 101: Traditional IRA vs Roth IRA
When it comes to planning for retirement, individuals often turn to Individual Retirement Accounts (IRAs) to help them secure their financial future. These accounts offer tax advantages, allowing individuals to either defer taxes on their contributions or enjoy tax-free withdrawals in retirement. However, choosing the right type of IRA can have a significant impact on your tax planning strategy. In this article, we will discuss the differences between Traditional IRAs and Roth IRAs, and how they can affect your tax planning.
Traditional IRA
A Traditional IRA allows individuals to make tax-deductible contributions, which can lower their taxable income for the year. The contributions grow tax-deferred, meaning that you won’t pay taxes on the gains until you start making withdrawals in retirement. This can be advantageous for individuals who expect to be in a lower tax bracket during retirement than they are currently.
However, once you start making withdrawals, the distributions will be subject to income tax at your ordinary tax rate. Additionally, you are required to start taking required minimum distributions (RMDs) from a Traditional IRA once you reach the age of 72, whether you need the money or not. These RMDs can increase your taxable income and potentially push you into a higher tax bracket.
Roth IRA
On the other hand, a Roth IRA is funded with after-tax dollars, meaning that your contributions are not tax-deductible. However, the earnings in a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free. This can be advantageous for individuals who expect to be in a higher tax bracket during retirement or want to minimize their future tax liabilities.
Another key benefit of a Roth IRA is that there are no RMDs during the account owner’s lifetime. This provides flexibility in retirement planning and can help you manage your taxable income more effectively.
Tax Planning Considerations
When deciding between a Traditional IRA and a Roth IRA, it’s important to consider your current and future tax situation. If you anticipate being in a lower tax bracket during retirement, a Traditional IRA may be the better choice, as it allows you to deduct contributions now and defer taxes on the earnings until retirement. On the other hand, if you expect to be in a higher tax bracket in retirement, a Roth IRA may be a better option, as it allows for tax-free withdrawals.
It’s also important to consider the impact of RMDs on your tax planning. If you don’t anticipate needing the money from your IRA in retirement, the RMDs from a Traditional IRA could increase your taxable income and potentially push you into a higher tax bracket. In this case, a Roth IRA may be a better option, as it does not have RMDs during the account owner’s lifetime.
Ultimately, the decision between a Traditional IRA and a Roth IRA will depend on your individual financial situation, including your current and future tax considerations. It’s important to consult with a tax professional or financial advisor to determine the best strategy for your retirement planning.
In conclusion, both Traditional IRAs and Roth IRAs offer tax advantages that can help individuals save for retirement. Understanding the differences between these accounts and how they can impact your tax planning is crucial for making informed decisions about your financial future. By considering your current and future tax situation, as well as the impact of RMDs, you can choose the IRA that best aligns with your tax planning goals.
* 2024 Tax Planning *
Roth IRA Conversion Video Series
– Part 4: https://youtu.be/Egi_4P9ZqaM
– Part 3: https://youtu.be/r9v9ViAY6J8
– Part 2: https://youtu.be/y0arsL9BvQg
– Part 1: https://youtu.be/Cs50gaN0Q90
From your example, it seems Traditional is MUCH better than ROTH while the Strategic Mix is MARKEDLY better than Traditional
This is great information and thank you for sharing. I have a basic understanding of the concept which is way more than I had before I watched this video. How would this apply if you were doing a rollover or a conversion from say a 401K? Thank you for your time.
Timeline: 35:15 I think my situation is very common, i.e, I was in the Tax Rates Low category at the beginning of my career. Therefore, I contributed mostly to Roth. Now nearing my retirement age, my Roth : Traditional balance ratio is about 3 : 1. I am at the peak of my career and in the Tax Rates High group. I plan to distribute from Roth when I retire in a few years. To do that, I have been converting from Traditional to Roth as much as possible in past the two years and over the next 5 years. Is this argument flawed?
I think for the average person maxing out their IRAs, they don’t really think about how they’re saving taxes with the traditional IRA. So if they put $7k in a Roth vs $7k in a traditional, they end up being better off with the Roth, correct?
All my IRA contributions were after tax contributions. How does this affect me when I convert to a roth??
I understand what you try to explain but in reality I will be forced to take out money from the traditional IRA during my RMD year and this pushes up my tax rate.
If you take the standard deduction do you still benefit from contributing to a traditional IRA? In other words can you still take the deductions from Traditional IRA contributions?
Why was the inheritance taxed at all?