Roth or Traditional IRA/401k
Welcome everyone! In today’s video we are going to discuss the differences between a Roth IRA and a traditional IRA or 401k. We are going to go over the benefits of each, and determine the optimal strategy for saving and investing money for our retirement.
What is an IRA?
Individual retirement account that allows annual contributions up to 6,000, or 7,000 if over the age of 50.
What is a ROTH IRA?
a special tax advantaged retirement account that you can make contributions to post tax, but withdraw from tax-free. Any gains you make are all tax-free after 59.5 and as long as the account is at least 5 years old. If you withdraw prior to 59.5 or prior to the account being 5 years old, you could face a 10% penalty and pay income tax unless you meet a few specific circumstances. There are many circumstances, so if interested please check out the link below.
What is a Traditional IRA?
an individual retirement account that provides a tax advantage by being pre-tax when saving money for retirement. this is not the same as a 401k, which is employer sponsored and offers a higher annual contribution maximum (up to 19,500 in 2021).
The benefits of a Roth vs. Traditional
All gains/ withdrawals are tax free. This is great when you believe you will be in a higher tax bracket when you retire. Another good time for this is when you have a low income, and won’t gain much advantage from the pre-tax benefits of a traditional. A Roth doesn’t have any required minimum distributions at age 72. Also, if you need to withdraw contributions at any point, you can withdraw them tax free since you already paid taxes on them. You can pass your money onto an heir and they won’t have to pay any taxes on it either.
The benefits of a Traditional vs. Roth
Contributions are made pre-tax which lowers your taxable income. This is especially important if you are close to a tax bracket reduction such as 165,000. Traditional is usually recommended when you have a high annual income. Another benefit of the traditional is that your money will go further and “seem” like you have more money at the time. If you take 10% out of your 1,000 paycheck per week, you are saving 100 dollars, however, after taxes, you may really only lose 75 dollars out of your actual paycheck. This would make it seem like you have an additional 25 dollars per paycheck vs. if you had invested post-tax in a roth. You can take that extra 25 dollars and invest that in a brokerage account as well!
Downsides of a Roth
Contributions are made post-tax is the biggest, as this makes it seem like you won’t have as much money in each paycheck faster. Also, if you make more than 140,000 per year, you will not be able to contribute to a Roth unless you use the back door Roth IRA strategy which can get confusing.
Downsides of a traditional
Your withdrawals are taxed as ordinary income when you retire. If your account has grown substantially, so will your taxes. You have to take required minimum distributions monthly after age 72. If you pass on money to your heir, they will have to pay taxes on it as well. Early withdrawal penalties on all money withdrawn, not just the contributions.
All in all,
Both IRA accounts can be extremely beneficial, but you need to do your own research and determine what will be best for your personal retirement and future. I personally believe if you have an employer sponsored 401k that offers a company match, you should contribute at minimum, up to the company match since this is free money, and then max out your Roth IRA. After that, you can put more money into your 401k. A healthy mix of both is also a good option. The worst option is to not utilize either option, because you think you don’t make enough money. One thing my father always told me when I was younger was to put the money in 1% at a time, and after a week or two you won’t even notice the money being taken out.
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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. While it is possible to minimize risk, your investments are solely your responsibility. It is imperative that you conduct your own research. I am merely sharing my opinion with no guarantee of gains or losses on investments….(read more)
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So to expand on the membership idea you had. People should sit down and make monthly budgets. Write down your monthly income. Write down your monthly expenses. And try to eliminate the non essential expenses. But also try to leave some play money (dinner, movies, drinks, etc.).
Good info!