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Roth IRA vs. Traditional IRA
Whether or not a Roth IRA is more beneficial than a traditional IRA depends on the tax bracket of the filer, the expected tax rate at retirement, and personal preference.
Individuals who expect to be in a higher tax bracket once they retire may find the Roth IRA more advantageous since the total tax avoided in retirement will be greater than the income tax paid in the present. Therefore, younger and lower-income workers may benefit the most from the Roth IRA. Indeed, by beginning to save with an IRA early in life, investors make the most of the snowballing effect of compound interest: Your investment and its earnings are reinvested and generate more earnings, which are reinvested, and so on.
Of course, even if you expect to have a lower tax rate in retirement, you’ll still enjoy a tax-free income stream from your Roth. Not the worst idea in the world.
Those who don’t need their Roth IRA assets in retirement can leave the money to accrue indefinitely and pass the assets to heirs tax-free upon death. Even better, while the beneficiary must take distributions from an inherited IRA, they can stretch out tax deferral by taking distributions for a decade and, in some specialized cases, for their lifetimes.14 Traditional IRA beneficiaries, on the other hand, do pay taxes on the distributions. Also, a spouse can roll over an inherited IRA into a new account and not have to begin taking distributions until age 72.
Some open or convert to Roth IRAs because they fear an increase in taxes in the future, and this account allows them to lock in the current tax rates on the balance of their conversions. Executives and other highly compensated employees who are able to contribute to a Roth retirement plan through their employers [for example, a Roth 401(k)] can also roll these plans into Roth IRAs with no tax consequence and then escape having to take mandatory minimum distributions when they turn 72.
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DISCLAIMER:
This video is for entertainment purposes only. I am not in any way acting as an agent or representative of the Department of Defense or United States Federal Government when presenting this information. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.
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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
When it comes to retirement planning, one of the most common dilemmas individuals face is whether to choose a Roth IRA or a traditional IRA. Both options offer tax advantages and have their own set of benefits and considerations, making the decision a complex one. In this article, we will delve into the differences between these two retirement savings accounts to help you determine which one is better suited for your financial goals.
The main distinction between a Roth IRA and a traditional IRA lies in how they handle taxes. A traditional IRA allows individuals to contribute pre-tax income, meaning that the contributions are tax-deductible in the year they are made. However, the withdrawals made during retirement are then subject to income tax. On the other hand, with a Roth IRA, contributions are made with after-tax income, but qualified withdrawals during retirement are entirely tax-free.
One significant advantage of the Roth IRA is the flexibility it offers. Contributions made to a Roth IRA can be withdrawn at any time, penalty-free. This means that if you find yourself in a financial emergency or need access to funds for any reason, you won’t face any repercussions for withdrawing your contributions. In contrast, traditional IRAs impose a 10% penalty on early withdrawals made before the age of 59 ½, in addition to income tax obligations.
Another aspect to consider is the impact on your tax liability in retirement. If you believe that your income tax rate will be lower during retirement, a traditional IRA might be the preferable option. By contributing pre-tax income and deferring income tax until retirement, you are effectively reducing your taxable income in your prime earning years and potentially benefiting from a lower tax rate in the long run. However, if you anticipate a higher income tax rate during your retirement years, a Roth IRA would make more sense, as qualified withdrawals would be tax-free.
Furthermore, Roth IRAs have no required minimum distributions (RMDs). Traditional IRAs, on the other hand, mandate distributions to begin at the age of 72, regardless of whether you actually need the funds at that point. By not having RMDs, a Roth IRA allows your investments to continue growing tax-free for as long as you desire, providing greater flexibility in managing your retirement funds.
Choosing between a Roth IRA and a traditional IRA can also depend on your current financial situation. If you are currently in a higher income tax bracket, a traditional IRA might be the more beneficial option. By deducting your contributions and reducing your taxable income, you could potentially save a significant amount in taxes. However, if your current tax bracket is relatively low, a Roth IRA could be advantageous. Although you won’t immediately benefit from a tax deduction, the potential for tax-free withdrawals during retirement might outweigh the current tax savings.
Ultimately, the choice between a Roth IRA and a traditional IRA depends on your personal financial circumstances, future income projections, and individual preferences. Consulting with a financial advisor or a tax professional can be beneficial in helping you make an informed decision based on your unique situation.
In conclusion, both Roth IRAs and traditional IRAs have their own advantages and considerations. Understanding the differences between the two, as well as your own financial goals, will guide you in choosing the retirement savings account that aligns best with your needs. Whether you prioritize immediate tax savings or tax-free withdrawals in retirement, it’s essential to assess your individual circumstances and consult with a professional to make the most informed decision.
Would we not be paying long term capital gains tax when we pull the money out as opposed to the much higher income tax upfront? This is what I don't get about roth.
i love the picture not just numbers. it makes it more fun to watch lmfao
Would it make financial sense to invest 5% with match with my employer and invest the other 10% into a Roth IRA as someone making around $45k at the moment.
What if you changed jobs and want to roll old 401k into an IRA. Traditional or Roth?
Is roth tsp shown differently on the tsp.gov website?
how does that pension system compare to a Scandinavian country's system?
I thought that, if I wait until age 59 1/2 to start taking money out of ANY IRA, I have no tax penalty. Now you are saying that with a traditional IRA, I WILL be taxed even if I don’t touch it until I am 59 1/2. How much am I paying?
Actually, I had a 8% match 8% delivered on Allied Signal (now HON), but got whacked in a divorce. Despite this I maintained the 8% contribution, taking on boarders working [when they used to have paid overtime]. And you know you get hit with maximum taxes as if you are a happy go lucky single guy, despite paying 30% of more of your income. Worse when the Ex spends it on themselves and you spend again on food and trips to Kohls. The double whammy, . So I was able to put more into my 401k which grew and grew. Of course I was restricted from Roth because I was single and made over 90K. Peter Theil managed to create a Roth worth 9 Billion maximum although it's come down lately. We'll I still do not have a Roth option, but Thiel still has 5 billion in his Roth.
Good point about traditional. “What are you doing with the savings now?” I never really thought of it that way. More in paycheck but mostly spent on silly stuff
Thank you!!
Ive learned more from ur one video than a bunch of ira videos! And im a person who doesnt understand taxes very well
Is it true that money now with worth more than money in the future? So if you save money now by not paying taxes (traditional IRA), then you can invest that extra money to make even more money? Or does it not work? Thank you!
can you make anotjer video simplyfying i dont understand sorry
so far, the best, clearest explanation. Thank you so much
Great video, loved the content. Personally, I do traditional and try to invest the difference. I think there's also potentially unknown benefits of keeping your taxable income as low as possible. One that happened just last year were Covid stimulus checks. If we had done Roth instead of Traditional, we wouldnt have qualified for multiple stimulus payments since we happened to be at borderline of the cut-off
Great video, loved the content. Personally, I do traditional and try to invest the difference. I think there's also potentially unknown benefits of keeping your taxable income as low as possible. One that happened just last year were Covid stimulus checks. If we had done Roth instead of Traditional, we wouldnt have qualified for multiple stimulus payments since we happened to be at borderline of the cut-off
Thanks Jake. With your advice, I would invest into a Traditional IRA while I'm taking college courses so I maximize my FAFSA reward, then start a Roth IRA once I'm done with college.
Just watched video, I have question if I live in Texas does that mean traditional is more beneficial for me ? I am currently in Roth TSP
You can take out up to $12,000 out of the traditional in retirement and claim the standard deduction to pay no tax on it (assuming you have no other taxable income).
Other cases where Traditional makes sense is when one is pursuing FIRE and retiring early adopting series of ROTH conversions after retirement. Second one is when you move from a high to low/zero income tax state in the retirement.
Sadly, I am one of the many that had major medical problems (renal failure). I am a physician and I went from earning $300,00+ to living on my group long-term disability (non-taxed). So I was one of the few that SHOULD use a 403(b) (pre-tax) and plan to roll it into a Roth IRA in the future because my income effectively went to 0. I would suggest that anyone that can do it, and know they are going to go down in tax bracket in the near future, eat the tax on a backdoor in the future if you have a current spike in income.
Hey Jake! Great explanatory video with in-depth analysis that everyone can learn from. I'm one of the 'high income earners' with goal to retire early so I'm trying to use all options I have at my disposal (including mega-backdoor Roth IRA). I'm wondering if there's a good ratio (or strategy around it) for traditional vs Roth 401K investment if my intention is to use the investment earning as my primary source of income when I retire early (i.e. overall tax bracket is <= current bracket) ? or its always one or the other ?
7:15 But I thought you couldn't put 10,000 into a ROTH?
Awesome Illustration of Soundness of your logic and compelling arguments, Jake ! Very insightful, thank you Jake !! Look forward someday for your thoughts on ROTH Conversion and if it is a good idea as well.
If you were a high income earner, you have no choice but to choose the traditional anyway, right? The Roth IRA has income limits…
Thank you for the video. For Roth IRA account, when I take out money, pay no tax… does it mean any amount I take out would be tax free?