Why Roth Investments Are Better Than Traditional

I am an Enrolled Agent with 20 years experience in the tax industry. You cannot convince me that taxes will be any lower in 20 years than they are now. Best case, they remain the same. I am FULL ROTH. When I do retire, I will have my income be tax free, I will be debt free, and the guy that had his career helping others file their taxes won't need to pay any taxes.

Also, when on a fixed income every dollar counts. If I don't have to budget for income taxes then my money can go further.

Recently retired and unsure if my 401(k) and IRA will provide a stable future. i need an approach that will align with my risk tolerance and financial goals, i set aside $1m to achieve this. Do you suggest i get into stocks or buy a rental property?

The 7k limit is ridiculous… we need to catch up with other Western countries that allow people to invest 20-27k a year (UK)

By god, this is the only time I've ever agreed with Davey

I'm considering investing around $700K in stocks as I've learned that savvy investors can still profit during challenging times. Do you have any solid stock market strategies for this year. I'm currently sitting on $500k inheritance and just wondering what better assets than stocks to invest in right now

I think the stock market will do well in 2024, so I'm thinking of putting $220,000 into stocks for my retirement. Any advice on doing this safely? Also, any important tips for the current financial situation?

The Roth vs. Traditional use the same multiplication elements, it just reorders them.

Roth: T * P * I^n
Traditional: P * I^n * T

The P, principle, I, interest or growth, and n, number of years, doesn't change with a Roth Conversion, only the size and timing of T, taxes.

The vast majority of people pay a lower tax rate when say they are making $200k then when they retire to a fixed income plus retirement account proceeds. So for a Roth you will give a chunk of your IRA money up front, shrinking your nest egg by about 40% and you are betting that income tax rates will be higher in retirement. I expect my tax rate to be lower (it's well over 50% with Federal, State, both sides of FICA, and various little taxes like disability AND I can control how much money I pay taxes on beyond SSI and RMDs.

Dave does like the financial advisors do but they push Roth conversions to get your assets under their management. Dave does it to sell his training and books. He needs to present the pluses and minuses of on both sides of everything but he bashes so many things that require only an eighth grade level of thinking and a little effort.

I think the retirement crisis will get even worse. A lot of people can’t save because of low paying jobs, inflation, and insane rental rates. And now that home ownership is out of reach for middle class Americans, they won’t have a house to retire with either.

I have a friend retiring, we both do very well financially. She said she was shocked that she qualified for ‘ObamaCare’ because her retirement accounts were Roth and do not count as annual income. Another perk to saving in Roth… for now (laws always change) you can actually retire in that 59.5 to 62 year old range and not have to worry about health insurance!

So the money in a Roth IRA is already tax? I can withdraw at anytime tax free?

this is like the 8% withdrawl rate - bad math - like everything with finance, it depends

where is the best place to buy a IRA Roth? Can I do it myself to avoid broker fees?

Dave is not mathematically accurate here. Roth/Traditional end up at the exact same net destination in the end. Assuming the beginning and ending tax rates are the same , you get taxed all the same either at the beginning or the end. The ONLY consideration is whether you anticipate being in a lower tax bracket in retirement (in which case Traditional wins, since you're taxed at the end) or a higher one in a retirement (in which case Roth wins, since you were already taxed at the begnning).

To use his example, (assuming a 25% tax rate for simplicity), if you put $200/month in a Roth for 40 years (post-tax), and it earns exactly 12% a year for 40 years (good luck with that, but these are his assumptions!), you'd have contributed $96,000 and end up with about $2.4M with no tax due at the end. If instead you put $266.67 a month into a Traditional (since unlike Roth, you don't have to pay tax on it first, this pre-tax $266.67 is equivalent to the post-tax $200 into a Roth at a 25% marginal tax rate, since $200/75% = $266.67) you'd end up with about $3.2M, which after 25% tax is.... you guessed it... the EXACT SAME $2.4M! In other words, it's the exact same scenario!

And it doesn't matter whether the money 2x's, 10x's, or 100x's, it's the exact same every time! Don't believe me, Google "investment calculator" and see for yourself!

(And furthermore, if you delve a little deeper, and start thinking about effective vs. marginal tax rates, standard deductions, etc.. then the scale is tipped even more in favor of Traditional (as opposed to Roth), since due to the post-tax nature of Roth contributions it's all at your marginal (read: HIGHEST) tax rate, while with Traditional the tax on distributions has the standard deduction and all of the lower brackets to push through before arriving at the marginal tax rate, so inevitably faces a LOWER effective tax rate!)

So if I make 60 K, how much should I contribute towards my Roth?

Not everybody has 5 millions, I have a traditional because for sure I'll be in lower tax bracket when I retire.

Dave failed to talk about the opportunity cost of not investing the tax savings from contributing to traditional.

What does he mean by "match"? I am completely new to any of this and I need help.

So that bit at the end about people not adjusting for taxes roth vs traditional doesnt make sense to me, because, at least the way my plan is set up, it takes a percentage of total pay and contributes that to the 401k of choice, so a 100 dollar contribution would end up only being somthing like 75 in the roth. Unless you bump up the percentage until you get a dollar amount you're happy with, i dont see how it's tricking you into putting more away for retirement.

So, if you have a financial advisor, listen to him/her and let them do the work for you. That said, people do put too much in traditional IRAs/401ks instead of Roth.

All in Roth is not ideal from a tax perspective too.

The best thing is when you're a small business owner that has more deductions than income, so you pay no taxes on income now and then invest in a Roth that you'll pay no tax on later. Then if you max your Roth, have your employer (which is you) contribute to a SEP IRA.

so if i’m making $160k per year in NYC, what’s the correct choice? what tax bracket am i in? someone help!

I make to much money and cant contribute to a Roth. Is it smart to backdoor traditional IRA to Roth every year?

what is this 'mega roth' some people are suggesting? so if we are retired (only social security and pension) and not working does this mean we cannot open a Roth IRA since we no longer have income?

No paperwork burden on the Roth

But what if you make too much to do a Roth!

Part of this is misleading. The only real difference in Roth vs Traditional is the tax bracket youre in at retirement when making withdrawals. The part about it being better to get a tax break on the $90k principle vs the $2.5 mil in total earnings after growth is wrong. If you tax $90k by X% at the start like with a ROTH and let it grow for 20 years OR if you let the $90k grow for 20 years and then tax it at the end by the same X% , you get the exact same number in spendable dollars. It's good to have a mix of both... so in 2023 for example, you could withdraw up to $45k from a traditional account at a tax rate of only 12% , and withdraw however else much you need to live from a ROTH which doesnt get taxed again at time of withdrawal.

Caveat: If youre balling out of control like Dave and withdrawing $200k+/year.. then yea, it probably makes sense just to do ROTH all the time.

Not taking into account if you have deductions and depreciation working for you later in life.

Roth is bad. For me I need the tax breaks that the 401k give me. Planning need less money when I retire.

What's that brown circle on Dave's head?

An interesting scenario to consider where traditional makes more sense; high earning dual income couple that lives dramatically lower than their income, and who DO end up in a lower bracket because they want to retire early living on 1/3 or 1/2 of their earning years income… and by retiring early, they would have decades before they get to required distributions. His argument is overly simplified. You need both in order to balance the 4-5 decades of retirement for this scenario.

Investing in a Roth IRA is a tax smart move for a secure retirement. Its benefits coupled with strategic investing, create a solid financial foundation. Partnering with a skilled adviser ensures informed decisions, optimizing gains and navigating the investments landscape with confidence. Secure your financial future wisely.

Wait, what does he mean by match? Sorry im new.

Ramsey is wrong and can’t do math. You should definitely keep some in traditional. You get the tax deduction now and can move it to Roth for free or cheap during retirement or any low-earning years.

Roth is better early in life and/or when you have a low income (low marginal rate). But traditional is better later in life (when there’s little time for growth) or when your income is high and the deduction for a deferral is super valuable.

Hey there, Sending love your way! I'm thrilled about getting my Roth going this year. Just a heads up, though, David Marvin Willis, I've encountered some hiccups with M1 Finance despite its great interface. Trying to withdraw my funds has turned into a bit of a nightmare—they just aren't processing it. I initially opened an account, funded it with $3k, but the next day, I decided to stick with my TD account. Trying to withdraw my funds has been dragging on for TWO WEEKS now, and it's frustrating. Reaching them is like finding a needle in a haystack, and a Google search revealed I'm not alone in facing payment issues. Keeping my fingers crossed that this gets sorted out soon. Definitely wouldn't recommend a platform that operates like this.

"IRMAA" Bumped up into higher tax brackets from Required Minimum Distributions Bumped up taxes from Cap Gains and Qualified Dividend Income Possibly bumped up into more taxation of your future Social Security Retirement income
Roth helps protect you from all of those devils as compared to "traditional" tax bomb

The hilarious and ironic thing about this is I got banned from the financial planning subreddit for stating the roth outperforms traditional in almost all financial models. Shows how many unqualified people there are out there giving financial advice.

Now that the Roth 401k will no longer have an RMD starting on 4.1.2024, it makes even less sense to do a traditional 401k.

You may end up retiring in a tax free state and then you will save on taxes when taking from you 401K but in case of Roth and if you are in a state with state tax you would be paying that tax on you wages before you contribute to Roth. And this is not just the usual Texas and Florida but actually 15 states that do not tax retirement income including 401K. Moreover you may work at some point in state free state and you can clear 401k from taxes by converting it to Roth then so you dont pay state tax. Obviously you need to be careful not to put yourself in very high tax bracket and not converting everything in one tax year. You can wait for a bad year when your retirement is beaten up and convert it at that point and get market rebound tax free. I did it in 2020 when my got negative 30% return at the bottom but continue to contribute to 401K only.
You need to be really stupid not to understand that contributing 6% from you paycheck to Roth is not the same as contributing 6% to 401K.

I prefer the flexibility of 401K to Roth 401

Actually it the exactly the same if you pay taxes now and contribute to Roth vs if you contribute to 401k before taxes PLUS the amount you were supposed to pay for tax. The market growth is really irrelevant - at the end it will be same amount after taxes. (if you tax brackets now are the same when at the retirement). So here are actually two more unknowns: what will be your tax brackets and if federal taxes are more or less than now.

It’s dependent on income projection

What if you own enough income property with enough depreciation to offset the taxes on the entire 2.5 million? You still deduct the 96k, and avoid the taxes on the rest up to the 2.5 because of the depreciation from real estate

Investing in a Roth IRA is a tax-smart move for a secure retirement. Its benefits, coupled with strategic investing, create a solid financial foundation. Partnering with a skilled adviser ensures informed decisions, optimizing gains, and navigating the investment landscape with confidence. Secure your financial future wisely! 💼💰

yes but with the roth you would not have the 90kish to invest during all this period

Roth IRAs for most working people are a horrible idea. Say you're working at your $80,000 a year job. You're paying taxes on a higher income, then you put in $2,000 in your ROTH. This money has already been taxed at 20%. Then when you retire, and are living only off social security and make $40,000 - the money you pull out of a normal IRA is only taxed at 10%. In a ROTH, you lose 10%. For high income people, it may work differently, but not low-income normal people.

And during your working years, this $2,000 actually costs you $2,400 (you paid $400 in taxes on this money before you put it in the ROTH). That's $400 more you could have invested in a normal IRA.

such awful advice.

You can only contribute $6500 in a Roth IRA annually. You can contribute 22k in a traditional pre-tax, which helps keep you in a lower tax bracket and grow your savings at a 30% increase over a roth. A Roth is a great tool to use after you max out your traditional IRA. Don't max out your Roth before you max out your 401k. Ramsey is wrong here. Don't take this advice

Your ability to present an impartial analysis that's not only informative but also more engaging than the sensationalized economic and financial news is truly commendable. I appreciate your dedication to providing a signal amid the noise. Recognizing the current economic downturn, I acknowledge the need to patiently await improvements. Thank you for your insightful efforts.

if I put $200 into either a ROTH or traditional, then yes the roth is better. But the point of the traditional is that you can afford to put $244 (assuming 22% tax bracket) into the Traditional vs $200 into the roth.

When he says “match” what does he mean? Kinda got lost there

Great advice. Now at age 66 wished I had more Roth. Now at age 66 retired where I want to be at a 12% tax bracket but now worry each day of how much my 1099 will tell me how much Fed Tax I will pay on my distribution taken each month. Traditional so wrong
Can I create or transfer a new Roth?