Roth IRA vs Traditional IRA: Which Is Better?

Roth IRA vs Traditional IRA: Which one is better? In today's video we examine the similarities and differences between these two powerful retirement accounts, so we'll answer whether you should open a Roth IRA or Traditional IRA!

Resources for the video:
https://www.bankrate.com/finance/taxe...
https://bit.ly/3m6blNm
https://www.fidelity.com/retirement-i...
https://www.investopedia.com/how-to-s...
https://www.irs.gov/retirement-plans/...

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First of all, both of these accounts are individual retirement accounts, which means you can have them in ADDITION to your employer sponsored retirement plans such as your 401k, 403b, etc.

Second, you need to contribute to both of these accounts by April 15th - because there are contribution limits!

In both the traditional and the ROTH IRA, the max you can contribute to it is $6000 per year as of 2020, and $7000 per year if you're over the age of 50.

Now one thing to note is that you cannot contribute $6000 each to both the ROTH and the Traditional IRA, in other words, the max contribution is $6000 across both accounts, but you can split them up however you like. I would say though in most cases that people tend to stick with one or the other.

And lastly, you need to have EARNED income to contribute to these.

The biggest difference between the ROTH IRA and the Traditional IRA is the manner in which they are taxed.

In the TRADITIONAL IRA, your get a tax deduction for your contributions, and your gains and earnings in the traditional ira are TAX Deferred. Which means that you'll pay taxes on earnings when you withdraw them. One of the biggest advantage of having a traditional IRA here is that you can deduct the contribution from your income. So basically it reduces your taxable income every year.

The other thing you should know about Traditional IRAs is that you are required to make withdraws from them starting at age 70 1/2, but, you can also withdraw from them voluntarily after age 59.5 without penalty. Of course, you can always withdraw earlier with a penalty of 10% - but most people would not do that unless they want to cover an emergency.

The LAST Thing is that when you do withdraw you will need to pay TAXES on those at your ordinary income rate at that time.

So the question you need to ask yourself is, "WILL MY TAX RATE BE MORE IN THE FUTURE THAN IT IS NOW? "

If you think you'll be retired by the age of 59.5 and have a low tax rate, or believe that taxes will be lower in the future, you may want to go with a traditional IRA.

If you think your tax rate will be MORE in the future, either because you're working more and have a higher income, or if you just think the government is going to increase tax rates overall in 30-40 years, then maybe the ROTH IRA is right for you.

The ROTH IRA is different than the TRADITIONAL IRA because whatever earnings you get in the ROTH IRA are completely tax free when you withdraw them. You fund your ROTH IRA with money that you've already paid taxes on.

Lastly, let's talk real quick about income limits. The ROTH IRA cannot be contributed to if you make too much money.

If you make more than $139k a year single, or $206k combined married, you cannot contribute to your Roth IRA - but there is one way to get around this and it's the backdoor Roth IRA.

Essentially what you do is contribute to a traditional IRA, convert it to a Roth IRA, and then you're able to get around the income limits. Funny, I know right? It's like, the IRS didn't think about this or they just don't care to fix it, so this is what most people do if they make more than that.

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▶️ My name is Humphrey Yang, I am an entrepreneur who has built businesses and am passionate about Personal Finance. This channel is dedicated to helping people (whether you're 21 or 81) become better with Personal Finance, Investing, and Entrepreneurship. I hope these videos help!

Disclaimer: I am not a financial advisor, any investment commentary are my opinions only. Some of the products and services that appear on this channel are from companies that I have an affiliate relationship with, such as Robinhood, for which I recieve a small percentage made via those links, but it doesn’t cost you anything extra!