The Roth IRA can create significant tax-free wealth for investors, by eliminating costly tax drags.
Perhaps most importantly though, it can also increase the value of other retirement accounts.
⏰ *IN THIS EPISODE* ⏰
00:00 Introduction
00:59 The “Fantasy Land” Scenario
01:30 Back To The Real World
02:52 Mechanics Of The Roth IRA
04:18 “Hidden” Benefits Of The Roth IRA
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When it comes to retirement savings, one popular option is the Roth IRA. This type of individual retirement account offers many benefits, including tax-free growth of your investments and tax-free withdrawals in retirement. However, many people are confused about how the Roth IRA actually works. Let’s break it down so there’s no more confusion.
First, it’s important to understand that the Roth IRA is funded with after-tax dollars. This means that when you contribute money to your Roth IRA, you don’t get a tax deduction like you would with a traditional IRA or 401(k). However, the trade-off is that all of the money in your Roth IRA grows tax-free. This can lead to significant savings over the long term, as you won’t have to pay taxes on any of the investment gains you earn.
Another key feature of the Roth IRA is that you can withdraw your contributions at any time, tax-free and penalty-free. This makes the Roth IRA a flexible option for saving for retirement, as you can access your money in case of emergencies or unexpected expenses. However, if you withdraw any earnings on your investments before age 59 1/2, you may be subject to taxes and penalties.
In addition, Roth IRAs have income limits that determine whether you are eligible to contribute to one. In 2021, the income limits are $140,000 for single filers and $208,000 for married couples filing jointly. If your income exceeds these limits, you may not be able to contribute to a Roth IRA directly. However, there are ways to get around these limits, such as using a backdoor Roth IRA conversion.
Overall, the Roth IRA is a powerful retirement savings tool that can help you achieve your financial goals. By understanding how it works and taking advantage of its benefits, you can set yourself up for a secure and comfortable retirement. So don’t let the confusion surrounding the Roth IRA deter you from taking advantage of this valuable investment option. Start saving today and watch your money grow tax-free for the future.
Good video, precise, not too drawn out.
Only thing I’d say is you wouldn’t consider the capital gains portion since you’d likely sell when you’re in the 0% for cap gains.
Being in the 12% US federal tax bracket I also get qualified dividends taxed at 0% in a taxable brokerage account. I also contribute to a Roth IRA and a Roth 401k. So most if not all of my retirement income will be tax free!!!
This is a great tax bracket breakdown reference. Thanks! I printed it out and added it to my tax planning envelope. And I shared this video with several people I know.
The surprising part of this to me is the difference that first 3,000 loss do to income tax is compared to the fairy tales land in the first scenario. Really shows the importance of maxing out every year.
Don't forget about RMDs: Required Mandatory Distributions. I believe they are eliminated completely for Roth IRA and Roth 401(k) for 2024 or maybe it starts next year, 2025. These darn things need planned for as well as they can really muck things up if you're trying to stay in the lower tax brackets in retirement.
My Hedge Fund buddy says ALWAYS defer taxes, a Roth is the opposite…. Your volunteering to pay taxes in advance. That plus your often volunteering to pay those taxes when you're tax bracket is high …
Helpful video thanks! Confused a bit by the last part. Can you confirm that withdrawals from a roth 401k/IRA still county as income? Or are you saying that because they are not taxable the withdrawals do not contribute to your total income? So lets say I withdrawal $40,000 a year from my roth 401k (wether thats dividends or selling shares). Does that 40k count towards my income even though its not taxable? Or is my income effectively zero (assuming no other income sources)?