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As you plan for your retirement, one of the key decisions you will need to make is whether to save in a Roth account or a pre-tax account. Both options have distinct benefits and drawbacks, and the choice you make can have a significant impact on how much money you have available in retirement.
In a pre-tax account, you contribute money before taxes are taken out of your paycheck. This reduces your taxable income for the year, which can lower your overall tax bill. However, when you withdraw money from a pre-tax account in retirement, you will have to pay taxes on the money you withdraw. This can reduce the amount of money you have available to spend in retirement.
Roth accounts, on the other hand, are funded with after-tax dollars. This means that you don’t get a tax break when you contribute money to a Roth account, but you also don’t have to pay taxes when you withdraw money in retirement. This can be a huge advantage, as you will have more money available to spend in retirement.
So, which option is better? The answer depends on your individual situation. Here are a few factors to consider:
Your Tax Bracket
If you are currently in a high tax bracket, it may make sense to contribute to a pre-tax account to lower your taxable income for the year. However, if you expect to be in a higher tax bracket in retirement, a Roth account may be a better choice.
Your Time Horizon
If you are young and have many years until retirement, a Roth account may be a good choice. This is because you will have many years for your money to grow tax-free, and you will be able to withdraw the money in retirement without paying taxes. However, if you are closer to retirement age, a pre-tax account may be a better choice, as you will be able to take advantage of the tax break now and may be in a lower tax bracket in retirement.
Your Investment Strategy
If you plan to invest aggressively and expect to earn high returns on your investments, a Roth account may be a better choice. This is because you will be able to withdraw the money tax-free in retirement, even if it has grown significantly. However, if you plan to invest more conservatively, a pre-tax account may be a better choice, as you will be able to take advantage of the tax break now and may have a lower tax bill in retirement.
Ultimately, the best choice will depend on your unique situation. Consider your tax bracket, your time horizon, and your investment strategy when deciding whether to save in a Roth or pre-tax account. With careful planning, you can maximize your $1 million for retirement and enjoy financial security in your golden years.
Nice job Eric.
Of course $1 Million Roth beats out $1 Million Traditional because $1M Roth is all tax free but this is not a valid comparison. By offering scenario 1M Roth vs $1M Traditional implies an apples to apples comparison but in reality it's a false equivalency. This is an invalid unbalanced scenario because $1M Roth requires a lot more pretax income at contribution than $1M Traditional. Assuming $20k pretax investment 50x growth & 24% Federal Tax Bracket at contribution:
$20k pretax income = [$20k * 0.76 =] $15,200 Roth + $4,800 tax : $15.2k * 50 = $760,000 Roth at retirement
$20k pretax income = $20,000 Traditional : $20k * 50 = $1,000,000 Traditional at retirement
alternatively since [$20,000 / 0.76 =] $26,315.79 pretax income is needed for $20k Roth:
$26,315.79 pretax income = [$26,315.79 * 0.76 =] $20k Roth + $6,315.79 tax : $20k * 50 = $1,000,000 Roth at retirement
$26,315.79 pretax income = $26,315.79 Traditional : $26,315.79 * 50 = $1,315,790.50 Traditional at retirement
So valid fair and balanced apples to apples comparison at retirement would be:
$760,000 Roth vs $1,000,000 Traditional or
$1,000,000 Roth vs $1,315,790.50 Traditional
At the age of 47 Roth IRA and Roth 401k all the way. I am currently in the 12% federal tax bracket (set to go back to 15% in 2026) Currently in my state top tax rate of 5.75%. Even if my federal and state rates stay the same; which I predict federal rate will go up. The fact that your social security benefits an be taxed from 50 to 85% on all income except ( than includes municipal bond interest) distributions from Roth IRA and Roth 401 k Im Roth IRA and Roth 401k all the way.
Really? Your comparing 1 million in Roth vs 1 million in traditional
But what did your client do with the money not paid in taxes using traditional?
I have been watching Jazz for the past three years, amongst other YouTubers. You're all big on what things could be like. This year I maxed out a traditional IRA, I did it with post tax money, expecting to offset my earned income, and when it came to filing I could not get any tax credit due to my income. I would like people to learn from my error, could you do a video on income restrictions when contributing to traditional or Roth IRAs, I think this would be useful for your audience.Regards C
Thanks Eric good info
Best of both worlds, retired 60 years old. Have 1 million in Roth and 1 million pretax. Spend the pretax million from 60 to 70. Let 1 million in Roth grow to 2 million in 10 years. Take my SS at 70 along with a 2 million Roth account. Basically pay no taxes at 70, as SS would be only income which then becomes tax free.
Of course the Roth will be more but when your at the 24 percent tax rate you do the deferral
Thank you for the content!