Roth IRA vs Traditional IRA: Which one is better? In today’s video we examine the similarities and differences between these two powerful retirement accounts, so we’ll answer whether you should open a Roth IRA or Traditional IRA!
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First of all, both of these accounts are individual retirement accounts, which means you can have them in ADDITION to your employer sponsored retirement plans such as your 401k, 403b, etc.
Second, you need to contribute to both of these accounts by April 15th – because there are contribution limits!
In both the traditional and the ROTH IRA, the max you can contribute to it is $6000 per year as of 2020, and $7000 per year if you’re over the age of 50.
Now one thing to note is that you cannot contribute $6000 each to both the ROTH and the Traditional IRA, in other words, the max contribution is $6000 across both accounts, but you can split them up however you like. I would say though in most cases that people tend to stick with one or the other.
And lastly, you need to have EARNED income to contribute to these.
The biggest difference between the ROTH IRA and the Traditional IRA is the manner in which they are taxed.
In the TRADITIONAL IRA, your get a tax deduction for your contributions, and your gains and earnings in the traditional ira are TAX Deferred. Which means that you’ll pay taxes on earnings when you withdraw them. One of the biggest advantage of having a traditional IRA here is that you can deduct the contribution from your income. So basically it reduces your taxable income every year.
The other thing you should know about Traditional IRAs is that you are required to make withdraws from them starting at age 70 1/2, but, you can also withdraw from them voluntarily after age 59.5 without penalty. Of course, you can always withdraw earlier with a penalty of 10% – but most people would not do that unless they want to cover an emergency.
The LAST Thing is that when you do withdraw you will need to pay TAXES on those at your ordinary income rate at that time.
So the question you need to ask yourself is, “WILL MY TAX RATE BE MORE IN THE FUTURE THAN IT IS NOW? ”
If you think you’ll be retired by the age of 59.5 and have a low tax rate, or believe that taxes will be lower in the future, you may want to go with a traditional IRA.
If you think your tax rate will be MORE in the future, either because you’re working more and have a higher income, or if you just think the government is going to increase tax rates overall in 30-40 years, then maybe the ROTH IRA is right for you.
The ROTH IRA is different than the TRADITIONAL IRA because whatever earnings you get in the ROTH IRA are completely tax free when you withdraw them. You fund your ROTH IRA with money that you’ve already paid taxes on.
Lastly, let’s talk real quick about income limits. The ROTH IRA cannot be contributed to if you make too much money.
If you make more than $139k a year single, or $206k combined married, you cannot contribute to your Roth IRA – but there is one way to get around this and it’s the backdoor Roth IRA.
Essentially what you do is contribute to a traditional IRA, convert it to a Roth IRA, and then you’re able to get around the income limits. Funny, I know right? It’s like, the IRS didn’t think about this or they just don’t care to fix it, so this is what most people do if they make more than that.
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▶️ My name is Humphrey Yang, I am an entrepreneur who has built businesses and am passionate about Personal Finance. This channel is dedicated to helping people (whether you’re 21 or 81) become better with Personal Finance, Investing, and Entrepreneurship. I hope these videos help!
Disclaimer: I am not a financial advisor, any investment commentary are my opinions only. Some of the products and services that appear on this channel are from companies that I have an affiliate relationship with, such as Robinhood, for which I recieve a small percentage made via those links, but it doesn’t cost you anything extra!…(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
Clear and succinct financial education channel! Thank you Humphrey! Just have a quick question.
What are some of the limitations (if any) to a back door IRA?
So who thinks the Government won't raise taxes over time. What about ROI? If I can make above average returns, then the Roth might be a better choice. The question is would I rather get taxed on the seed I plant or the harvest?
Does capital Gains or Losses applies to IRA or Roth IRA?
So I can contribute $6000 to my Roth IRA today and make a distribution of $5000 tomorrow? If so can I contribute that $5000 back before the April 15?
I use fidelity to buy company stock
Is there a way I can use that in other platforms.
Quick question if anyone can help me out. Because i still haven’t been able to find an answer to this question anywhere. Will a small percentage contribution say 6-10% to traditional IRA affect my NET (take home) pay by much or will i see a significant difference in my take home pay?
thank you a ton
Hello Humphrey. New Subscriber. Thank you for the videos very helpful. I had a specific question – Is there any benefit of having both a Trad IRA and a Roth IRA and if so, how would you split the contributions?
Hi Humphrey – Very well explained! I have a Roth IRA that I've contributed to over the years. Recently I've notice its total amount has gone way down (I have never withdrawn anything from it). I assume this is due to the current market downturn,but it's kind of scary. Is there a chance some of the earnings could come back when the market improves? Also: are my contributions still safe, in case I ever need to withdraw those? –Thanks! (subscribed)
I opened a 401 k because it was what every other person in my job had. But as I found out more about retirement plans I now want to open a Roth IRA. My question is should I stop contributing to the 401 k and send all my contributions to the Roth IRA or should I contribute to both?
When IRA is maxed out what’s the best investment vehicle? I have a brokerage acct but I hate paying taxes on the gains.
Great video Thank for the help
Trying to open a ROTH IRA but what would be better SPAXX OR FDIC. Is making me chose one
I have chosen a Traditional IRA as I am self-employed and really am looking for all the deductions to help me at tax time each year
Thanks. Explained perfectly for my needs
Best video explaining Traditional vs Roth IRA. Thank you!
How do you make money on roth? Does your money grow?
Investments is the best way to find balance between saving and living, This way
you have your savings
intact and then live comfortably off the revenue coming in from your investments.
Financial freedom is possible, you just need to know what to do
and when to do it. I am a living testimony.
lmao whoops commented on the wrong video
What is a gold IRA and are they worth investing in?
Awesome explanation, Humphrey, thank you!
This is what should be taught at schools
Nice video, I am new to online investments, I have been practicing using a demo account. I like to
prepare for my future, I wanna start up a Roth IRA account. I don't know much about it or
which is better. I am scared that I don't know enough to start all by myself.
I am willing to try, but I need help with what to do next.
Humphrey – Thanks for the great content! Question… What happens if you are unemployed at the time of retirement? Do you fall under the lowest tax bracket in this instance? Any info will be appreciated!
Thanks a lot. This helps immensely.
So, what happens if there is a pause in earned income? And after you take out that 70k in your example can you still only put back 6k a year? Or can you put that 70k back shortly after, if you had it?
This was very helpful
Any help on purchasing a 2nd home with a Roth Ira? What if I sell my 1st home then purchase another?
This is hands down the best explanation video on this topic!! Thank you
Thanks hubby is a doc and we are trying to figure out the back door Roth conversion
Great video, I can watch this all day, well I have to say having multiple sources of income is the best peace of mind anyone can get. I have a construction firm that deals on repairs and renovations on buildings, I also decided to go into investment in stock. The firm however for some months has gone down revenue wise, I just manage to pay my workers from the little that comes in. Luckily for me I have my stock to fall back to, thanks to my stock broker Suzanne Stephens Ellis, I do not have to do anything, and I get my returns in due time.
Great explanation…
no one ever discusses the age factor. What if you are 60 years of age already?
Had no idea about the backdoor roth option. HUGE! Thanks for the knowledge.
I just turned 19 and wanted to get my goal of starting a retirement plan at 18 but anyway I want a retirement plan but I like how you can take money from the Roth IRA in case if any emergencies so my questions is the traditional ira better for just retirement planning and Roth IRA is better for retirement/ investments …
Thanks for the video!
Man.. I got got lost real quick. Didn’t understand any of it.
Question abt roth IRAs – if you have one and you eventually reach the income limit and can no longer contribute to your roth ira, what happens do the account? Does it just sit there until you do something with it?
Hello Mr. Yang,
I landed an entry level job in the finance industry and today a client asked me what the difference was between a Roth and traditional.
My question to you is how do you speak so confidently when you discuss these topics?
I get really nervous when trying to educate clients on retirement accounts or financial products.
Thank you sir!!
Can I also have 457B thrift retirement plan and Roth IRA?
8:35 Do it…
Humphrey, thank you for the video. I am a little confused. You say that the earning in Roth IRA is tax-free. But in the example, when one withdraws $70,000 if he or she has contributed $60,000, one will be penalized for withdrawing $10,000 from the earning. When can one withdraw the earning without being penalized?
Cant find the video of backdoor roth IRA.
I wanna watch and i will only watch your video. You are inspiring man and you sound so positive
Please don’t treat your retirement accounts like emergency funds ffs
You forgot to mention that you are not a Financial Advisor 🙂
Could you please talk about Spousal Traditional IRA?