Why Roth Investments Are Better Than Traditional
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Why Roth Investments Are Better Than Traditional
When it comes to saving for retirement, there are several options available, including traditional and Roth investments. While both types offer tax advantages, Roth investments have several distinct benefits that make them a better choice for many investors.
One of the main advantages of Roth investments is the tax treatment. With a traditional investment account, contributions are made with pre-tax dollars, meaning you don’t pay taxes on the initial investments. However, withdrawals in retirement are taxed at your ordinary income tax rate. On the other hand, Roth investments are funded with after-tax dollars, so withdrawals in retirement are tax-free. This can be particularly beneficial if you anticipate being in a higher tax bracket in the future. With a Roth account, you essentially lock in your tax rate at the time of contribution, providing you with tax-free income in retirement.
Another reason why Roth investments are better than traditional is the flexibility they offer. Unlike traditional accounts, Roth investments allow for penalty-free withdrawals of contributions at any time. While it’s generally recommended to leave your investments untouched until retirement, the flexibility to access funds in case of emergencies can provide peace of mind. Additionally, Roth accounts do not have required minimum distributions (RMDs) like traditional accounts, meaning you can leave your investments untouched for as long as you wish. This can be beneficial if you don’t rely heavily on your retirement savings and prefer to pass them on to your heirs.
Furthermore, Roth investments provide a hedge against potential tax increases in the future. As government policies and tax laws can change over time, there is always the possibility of higher tax rates in the future. By choosing a Roth account, you mitigate the risk of increased taxes on your retirement income. This can be especially advantageous for younger investors who have more time to grow their investments and potentially face higher tax rates in the future.
Lastly, Roth investments offer estate planning advantages. Since contributions to Roth accounts are made with after-tax dollars, they are not subject to estate taxes upon your passing. This means that if you leave your Roth investments to your heirs, they will receive the funds tax-free. This can be a significant benefit for individuals who wish to leave a tax-free inheritance to their loved ones.
In conclusion, Roth investments offer many advantages that make them a superior choice compared to traditional investments. From tax-free withdrawals in retirement to the flexibility of penalty-free contributions, Roth accounts provide greater peace of mind and financial security. Additionally, the potential for future tax increases and the estate planning benefits further solidify their superiority. Before making a decision, it’s advisable to consult with a financial advisor to assess your individual circumstances and determine which investment option aligns best with your retirement goals.
It all depends on how much you withdraw in retirement
Dave is wrong, RMD now starts at age 73 1/2 not 70 1/2. Not that it makes much of a difference. Your investments in the traditional IRA keeps growing in value.
Until you know who starts changing laws.
I love that in this video Dave is basically saying if you read between the lines "my audience is full of financially dumb people so I have to keep my advice super simple even if it's not optimal because they can't deal with the nuance of taxes" Roth is not always best but it depends an several different factors which most of the audience is not gonna understand or want to understand. If you want to give a very generic blanket statement that Roth is good sure but doesn't mean it's always better than traditional.
One thing he didn’t address is compound interest/growth. If someone is contributing a certain percentage of their paycheck, where the amount is like his example $100 vs $130 contributed… let’s multiply that by 5: so $500 monthly in a Roth 401k vs $650 per month in a traditional 401k. Let’s start at age 20 and go to 65 with a 10% return. Traditional will net $6,870,306. Roth will net 5,284,928. So the traditional account will have an extra 1,585,378 sitting there to earn you even more compound growth/money. It’s not going to be removed in a lump sum either on your retirement date so I don’t understand why he faulted the woman’s advisor for traditional. He thinks being taxed later so you can use that money now for compound growth over several decades is bad??
Dave often says when doing yearly taxes, you don’t want a big refund because it means you’re loaning Uncle Sam money for free. Well getting taxed now is basically the same. Why not be taxed later and invest the money for a compounded 10% return over decades??
One of the best tax savings advice!! I love putting the $22500 into my Roth 401k Account. Roth will always beat traditional because 100% tax free growth is more than 75% every day of the week!
You absolutely should invest more money if investing in an IRA vs a Roth to offset the taxes. If you max the IRA then contribute the extra money to a brokerage account.
Another Youtuber said it best. Paying taxes in retirement will feel a lot worse than paying taxes when you're working.
No one seems to talk about this but if you put say 15% of your income into your Roth 401k the employer match, whatever that is, is not deposited into your Roth, by law they have to deposit it into your traditional 401k. I did not know this until I made a phone call asking what the heck are you doing lol. Just fyi. You can however move it over at a later date and pay the taxes before you retire.
Not if you make too much money to qualify for Roth
It's going to be so much easier not paying taxes on what you pull out of Roth. With a Roth, the amount you see is what you have. With a traditional IRA, a percentage of what you see as your balance is going to be taxes.
Thinking about this subject matter again. Why do you think the government implemented the Roth IRA? Answer: It allows them to collect tax money up front instead of waiting 30, 40 years or more as with a Pretax IRA. The government does nothing to help the citizen, always to further their agenda. As several people have commented previously, from a tax standpoint, there are certain scenarios where the Roth is preferable, certain scenarios where Pretax is preferable. Another consideration is due to the passage of the SECURE Act in 2019, heirs to a Pretax IRA must distribute the proceeds (and pay taxes) within ten years of inheritance. Prior to the SECURE Act, one could string thorse withdrawals out over a lifetime.
Dave failed to mention that Roth’s are better to leave to your family once you die too. My kids will get my Roth dollars tax-free, where traditional dollars will require my kids to pay taxes on it.
I don’t know? Does anyone think the government is going to make us pay less taxes over time?
Get your Roth before they legislate it away. Max it out and put it all-in Tesla Stock while it is on steep discount.
For me Roth means paying 32% now. No thanks.
WOW DAVE JUST FIGURED OUT A QUESTION I HAD FOR THE LAST 13 YEARS…..
What will the 2.5 mil be worth In 40 years from now compared to today?
I put every extra nickel into traditional instead of after tax money into roth so probably ended up with an extra $200,000. I won't pay that much total taxes until mid to late 80s. Family history has me gone by then.
Simple: taxes are going up and will continue to go up to pay down the deficit.
I think the right decision is to contribute to both roth and traditional personally because you cannot predict future taxes and you get the benefit today of the traditional. Of course I'm not a licensed financial professional, so take this opinion how you will.
I appreciate the mental thought to "trick" yourself in to saving more, but there are certainly many of us who moved to locations with higher taxes for work (e.g. NY or California) but have no intention of retiring here. Of course federal and state rates may change, but if I'm still getting taxed at coastal rates when I retire, something has gone horribly wrong.
It's also worth considering state tax differentials. E.g., many military members manage to not pay taxes on their income, but they may retire to a state that does tax incomes. Or vice-versa, a New Yorker planning to retire to Florida may do better with traditional.
Investing in Roth IRA can be a good choice since they are funded with after tax dollars, your contributions can grow tax-free over time. When you withdraw money from your Roth IRA in retirement, you won’t have to pay tax on it, which will help you keep more of your hard-earned money. Compounding is the process of earning interest on your initial investment, as well as on the interest that investment earns. This means that over time, your investment can grow exponentially. So the earlier you start investing, the more time your investment has to grow through compounding.
You're taxed on your income, then taxed on your retirement fund, then taxed on everything you buy, then if don't pay your property tax you lose your house.
Maximizing Wealth building is so complex for people who aren’t math savvy. I hear what Dave is saying but it really depends. I’m married with two kids now so my effective tax rate is what sub-20%? So getting money in my 401k at that rate I considered ok. But maybe I’m missing something in the retirement calculation since I won’t be claiming the kids in those days. HELP!!!
I'm not sure who needs to hear this, but saving for a better investment is a tremendous step toward financial independence because you're saving a day off work.
What a great call!
God bless David Lee Roth for inventing the Roth 401K!!!
I think the people who argue for traditional over roth assume that you are putting more in each year in the traditional due to the tax savings. But if you're putting in the same percent (15%) each year no matter if it's traditional or roth, then roth always wins.
3 bucket strategy-
Brokerage account
Traditional 401k/IRA
ROTH
HSA if applicable
I am retired and did the traditional, The difficult thing when you retire is every time you take money out of a traditional you have to pay taxes. It also pushes your SSI into taxable dollars. Dont Know if roth withdraws do that. I have delayed SSI which Dave recommends not to but it lowers my tax burden on 401k withdraws. I am going to start SSI at 64. retired at 58
WE KNOW ONLY ONE WHO IS NOW RETIRED WITH LESS INCOME THAN WHEN WE WERE WORKINGH FULL TIME.
ROTHS ROCK BECAUSE OUR TAXES WILL GO WAY UP IN 2026.
WE BEGAN CONVERTING IN 1998 AND NOW OUR ROTHS HAVE 300% MORE THAN OUR TRADITIONAL.
BY AGE 85 MY PLAN IS TO HAVE MOST OF MY TRADITIONAL UNDER 100K.
I will be 40 in October and I have been maxing my ROTH IRA out since I was 28. I do not regret it at all. The tax benefits are almost criminal.
AVP
the cap on a Roth is so low you will never make anything. over 20 years you can only put like 130k max contributions
i'm not sure but i once found a financial blog and this guy was a fricken genius, mathematically. he concluded almost always the traditional is better than the roth, with lots of 3rd order math. the problem seemed to be that with the roth you are taking the very first $ you make every pay period and taxing them. his very complex analyis found almost no situation where the roth is better. Here is an excerpt:
" Conclusions
We have seen that for people with median income and above, taking advantage of the tax benefits of a Traditional 401k has long term tax advantages, allowing one to become Financially Independent in the shortest possible time
We also saw that the impact of Social Security, Pensions, and RMDs also favor the Traditional solutions over the Roth
In conclusion, the preferred investment vehicle is the 401k. The HSA is also great. Only when all other options have been exhausted does the Roth start to look interesting, except for families with poverty level incomes (ideally temporary)"