Which is Better: Roth IRA or Traditional IRA #25
If you were a farmer preparing for their year ahead, would you rather pay the tax on the seed you plant or on the harvest of your yield from your labor? Most people will quickly look at this example and jump at the chance to pay tax on the seed rather than the whole harvest - is that really the best route to take? In many ways, this example works when it comes to comparing a Roth IRA and a Traditional IRA - while it might seem like a good idea to tax the smaller amount, it’s not always that black and white.
I know that the financial sector of the internet is full of confusing jargon and terms that only insiders really seem to understand. I don’t want hard-working men and women like you left to cobble a strategy together and figure out the best path to take all on your own. Tune into this episode as we dive into the details about Roth and Traditional IRA’s, you don’t want to miss a minute of this informative episode!
You will want to hear this episode if you are interested in...
Which is better, Roth IRA or Traditional IRA. [1:00]
Comparing the two options. [3:30]
Using a “Backdoor” Roth IRA. [5:30]
How you can roll your IRA into a 401K. [8:30]
Qualifying contributions. [10:00]
Closing thoughts [12:00]
Roth IRA or Traditional IRA?
What is a Traditional IRA? A traditional IRA is a way to save for retirement that gives you tax advantages. Contributions you make to a traditional IRA may be fully or partially deductible, depending on your filing status and income. If you’ve never heard the term Roth IRA, simply put, a Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to a traditional IRA.
You cannot deduct contributions to a Roth IRA.
If you satisfy the requirements, qualified distributions are tax-free.
You can make contributions to your Roth IRA after you reach age 70 ½.
You can leave amounts in your Roth IRA as long as you live.
The account or annuity must be designated as a Roth IRA when it is set up.
The same combined contribution limit applies to all of your Roth and traditional IRAs.
Going back to our example of the farmer, when it comes to Roth and Traditional IRA’s, the Roth IRA is like paying taxes on the seed and the Traditional IRA is like paying taxes on the harvest. If we knew what future tax rates were going to be, it would be really easy to point you to the better option, the truth is, we don’t know what the future holds, you just have to decide which risk is worth it to you and your situation.
Resources Mentioned on This Episode
https://www.investopedia.com/how-to-set-up-a-backdoor-roth-ira-4584775
https://www.tdameritrade.com/retirement-planning/ira-guide/roth-vs-traditional-ira.page