Two more reasons to utilize a Roth: Medicare premiums and taxes on Social Security benefits are based off of…your taxable income! Using a Roth to bring your taxable income below certain levels will save a retiree a ton of money in Medicare premiums and Social Security taxes. 😊
Hi Erin! I am a fan of your channel and appreciate how each video is packed with insights. This video in particular helped me understand a blind spot I had around Roth IRAs (that contributions can be taken out without penalty). Thank you for what you do!
I retired in October 2021 and 59 1/2. Before I retired, I did Backdoor Roth IRA, and maxed out the 401K Roth. I know I took the tax hit, but all of the money I contributed was in the Roth. Since I had so many years before the 401K Roth was an option and even then I didn't take the opportunity to use it, it was nice to build up different buckets of money. Now that I am retired on a lower annual amount, I am converting as much as I can without exceeding my tax bracket. Next year, I will do my last 'big' conversion to not get hit by IRMAA at 65. At 64, I will probably have about 60% in Roth and 40% in traditional. That significantly will reduce my RMDs at 75. Even with modest conversions after 65, I should be able to have all IRAs as Roth without changing tax brackets. Tax free for me and ultimately for the kids.
Max it out while you can!! I can no longer contribute. I am 42 and should be continuing to contribute to a retirement account (IMO). My annual taxable income is under $50K, but it’s not EARNED income because I was diagnosed with a neuromuscular disease and became disabled, out of the nowhere. Was a healthy athlete growing up, healthy adult lifestyle, steady job. I am not allowed to contribute to any IRA because my income is from SSDI. My illness is disabling, but not terminal, so life expectancy is the same. MAX OUT YOUR ROTH WHILE YOU CAN!!
I did that for a few years then realized I was not on track to save up a house down payment while I was far ahead of my goals for retirement savings. I decreased the 401k contributions to get my match and am back on track for my near and long term goals
@@pprb123 true, sometime we over invest on retirement. But one good thing with Roth is we can take our contributions anytime like house down payment. And if you have big money in 401k you can take loans against balances in special circumstances like first house down payment. So don’t worry.
I'm just 31 I wouldn't dare max out my 401k until later years in my 50s... I put like 12k towards a brokerage account instead and about 12k to the 401K. Tying up that substantial amount of money in a 401k for that long of a time period just seems like a bad idea.. Who cares if you have 3m+ in your 401k if you can't do anything without incurring a really bad tax penalty on the initial contribution or waiting 10-20 years to withdrawal it.
@Lolatyou332 I would agree with this. Thankfully, I have a 457B plan to contribute to, which does not have an early withdrawal penalty. Best of both worlds! Yes, planning for early retirement here.
I wish I didn't wait to start my ROTH until last year but it's already taking off like crazy, I max it out as early as possible to allow compounding to take its course.
Thanks, that helps me further decide to take advantage of the 403b Roth I have access to - no need to do a backdoor roth anymore, or annual limits. The points you make about future tax changes and rule changes are really valid to consider.
Wow, I watch to financial youtubes all the time. This is one the best ones I've seen. You are very practical and spell things out in an easy to understand fashion. Also, your delivery is great. Great voice, great appearance... please keep it up! Mark
If you're only over the earnings limit by a little, add more to your 401k to make yourself eligible for the Roth IRA. It's hard to pass up the benefits of the Roth IRA each year, as you can't make retroactive contributions. I really wish you could though.
I opened my first Roth I.R.A in 2010 and I have all my 5498s. Lol. I have been mixing out my Roth for a few yrs. This year I am insane to max out my Roth 401k and Roth IRA. Yay🎉🎉
Hi Erin. My wife and I really enjoy your videos. We find them very informative. As I get closer to retirement I'm doing more research on my retirement account, how much should I have in order to comfortably retire, etc. Of all the videos I see about that, none of them take into account pensions. I'm a federal employee so I an annuity in addition to my retirement (TSP) and my social security. I know pensions are a rare thing but I'm hoping that you would do a video on calculating how much a pension would be worth when determining one's financial strength in addition to the retirement (TSP, 401K, etc.) account and expected social security benefits. Thanks.
My only 'add' is that if you have an investment idea / concept which might pay 'outsized' gains, then a Roth is a perfect place to park your funds. Peter Thiel placed $2,000 of Paypal to become $5B from Paypal. It will never be taxed. Maybe you loved Apple or Tesla and were mostly certain it would triple. $10,000 would become $30,000 and no capital gains and no future tax from a traditional IRA.
Tax code changes taught me to build resilience into my portfolio. Diversification is key! My set manager helped me spread my investments across different asset classes like stocks, bonds, and real estate so that a positive tax code cha age here can help minimize the impact of aa negative tax code change there adjustments.
Focus on two key objectives. First, stay protected by learning when to sell stocks to cut losses and capture profits. Second, prepare to profit when the market turns around.I recommend you seek the guidance a broker or financial advisor.
There's one instance where I disagree with most financial content creators and you said it. The "don't use the Roth IRA as an emergency fund" line. I feel like it's totally okay to start an emergency fund in a Roth IRA IF: you can't max it out. You could put it into a safe vehicle like a money market account inside the IRA. If you need it, it's easy enough to get out in emergencies. If you don't, well guess what, you just started funding a Roth IRA. Of course if you can max out the Roth IRA, then it's a different situation, but that's how I see it anyway. Any thoughts?
I think your point 8s valid, the only reason I don't entertain it is because I feel like the type of people I talk to aren't disciplined enough to treat an emergency fund like an actual emergency fund, so telling them not to touch retirement get me the results I want for them. If someone is financially savy enough to Google the rules, then they don't need to be talking to me, lol so it doesn't come up
You use a Roth to accumulate wealth for retirement, not to buy a house, not to fund an emergency, not to get your hair died purple. You lose the benefit of Roth by being a forced seller in a down market to fund an emergency, removing principal to fund an emergency, or holding cash and cash equivalent to ensure safety to fund an emergency. An emergency fund isn't for investing or wealth accumulation. Yes, there are opportunity costs having an emergency fund, but those are offset for all the reasons why you don't use a Roth to hold an emergency fund.
Roths are great if you have 'earned' income and can wait to access gains until you're freaking 60. Been retired a while with years and years to go. Whoopee!
Since the 2017 TRUMP Tax Cuts my Wife and I have been Back Door Rothing $50,000 a year and still staying in our 24% Tax Bracket. Tax time has been a blast :( Next year is our last year and then we are done. At 60 we will have 1/4 of our Portfolio in Roth, 1/4 in Taxable Brokage and 1/2 in the Bad Tax Deffered.
I don't think I've asked this before but one thing I haven't seen anyone talk about is when during the year to take withdrawals. Most people talk about what you can take on a yearly basis but from a budgeting standpoint that seems like a nightmare. We're big budgeters in my home and taking a lump some once a year seems contrary to that - and, truly, anyone else that isn't rolling in it. We can put it in an account and draw on it but it would make more sense to at least do it quarterly. I wonder however if that would only increase transaction fees. Long story short, like the channel and common sense you promote.
Suppose you end up with 600k invested for retirement. Are still married. Would it matter much if Roth or 401k tradiional? Standard tax deduction and all?
Great video and really good point you made near the end about high earners. If you think your tax rate will be lower in retirement than it is now, then a Traditional IRA/401k may be better. There's an interesting experiment you can try in a spreadsheet: Compare the ending income from a Roth Vs Traditional when you have the same income to invest, you get the same appreciation over time and your tax rate is the same at the start & end dates. You end up with exactly the same $$.
That's the thing though right? It doesn't actually end up the same if you calculate the taxes properly. The traditional comes out ahead because you pay the effective tax rate on traditional withdrawals but the full marginal rate for the Roth. People like to say 24% vs 24% but it ends up closer to 24% vs 12% taxation
One thing though. If you want to buy something in retirement like a motorhome or property or whatever, you could yank out a large chunk in that tax year without getting dinged.
@@jeffwhite3021 Yep, it's a balance of what tax you paid to get the money into the Roth vs the potential tax you'll pay getting money out of a Traditional IRA.
It's only 7,000$ so I don't see a huge risk in just throwing it in there when most of the time lump sum is better anyway. I just max it out Jan 1st and forget about it until next year when I do estimated taxes.
Excellent video! I love the Roth flexibility. Some financial planners in my area believe that collectively there is so much money in Roth accounts that Congress in the future will tax withdrawals being unable to ignore a potential revenue stream.
find new financial planners, then. Roth is by statute not taxable. end of story. What Congress could do is impose stealth taxes that wouldn't directly tax Roth in the form of unrealized wealth taxes; however, those would immediately be challenged. Given recent SCOTUS rulings around takings clause, the probability of unrealized wealth tax appears to have decreased. Plus that would be politcially suicidal. A more probable route would be to sunset, impose lower income phase out, or eliminate at a certain income level. Congress can do anything with deferred, which is the lower hanging fruit.
I fully expect that RMD's will also apply to Roth accounts in the not too distant future. I would not count on this account type being able to shelter your money tax free for life. I'm actually surprised this hasn't already been done.
@@jorgevelasquez9955 If your older Roth IRA or Regular IRA (any IRA) passed the 5 years. You also have to wait to be 59 1/2 to withdraw any gain without a 10% penalty. For a Roth IRA, you can withdraw your contribution at any time without penalty.
Thanks for all your great info Erin off topic if I roll over a t bill say $1000 Dollars does the profit money get rolled over also or do they send that to your bank account . If that makes any sense . Thank you ..
Roth 401k is a great option. The IRS has allowed it to function almost exactly like a Roth as of 2024. You do not have required minimum distributions like a 401k or Traditional IRA anymore. Your contributions are made with post-tax dollars, and the growth and withdrawals are all tax free. I currently do Roth 401k at work.
One negative of the traditional IRA is the deduction limit in addition to contribution limit. There's an income range where contributing is allowed but does not grant any tax benefits
Depends on your age. I personally just max out the Roth IRA and then contribute to a normal 401k and then a brokerage account. Roth 401K has had differences in the past so I suspect that it's possible they may have different restrictions on the account in the future. Regardless I'd recommend maxing out your Roth IRA before the Roth 401K. If your younger
@Lolatyou332 I'm asking simply because the contribution limit on a roth is 7000 per year but within a roth 401k its 23,500 per year. If roth is generally better, then obviously the roth 401k is the best choice.
Hey Erin , very good video . I can do better editing in your videos which can help you to get more engagement in your videos . Pls lmk what do you think ?
Don't sleep on the taxable brokerage. 0% tax up to 90k of capital gains if you are married is huge IMO. Full flexibility of when to use it and how to use it. If you die with money in it, the step up law allows your heirs to take it tax free. I'm dropping out of tax deferred accounts entirely: Roth or taxable. Deferred is dumb (for someone in my tax bracket at least).
Yup 💯 The real winner for people with families… I have a certain yearly amount for the 401k, the IRA, the HSA…. Everything else in the brokerage: education funds are a few etfs, savings are there, dividend portfolio for fun is in there.
Yeah, that seems correct to me for anyone with the 0% tax rate on long-term capital gains (supposing that they stay in that bracket and that the tax rate in that bracket never increases). The major loss to me is that one needs to enforce discipline on themself even better; do not withdraw until you is 𝘤𝘦𝘳𝘵𝘢𝘪𝘯 that you want to do so. Pretend like it is an IRA, with all of the same penalties and rules. There are some other details of difference between the options, but I opine that they matter less.
Thank you. I have been commenting stuff like this for years and I never see anyone else acknowledge it. Do deferred tax up to any company match you can get but after that I’m done. I do use Roth but put a healthy amount in taxable.
I was pretty into the Roth IRA, but then I realized that my wife and I could withdraw up to almost $100k a year from a taxable brokerage account tax free, and I don't imagine we'll ever be much richer than that. So I'm not really sure what the advantage is for the Roth in that case.
It's better to have it in a Roth IRA.. My brokerage account is my largest portfolio just because I'm going to retire early in my 50s, your Roth IRA isn't for the early years, it's for the latest years as it gets the most time to grow. There just isn't any reason to not contribute to a Roth IRA unless you plan on retiring VERY early.. Hell even when I'm in my 50s and retired I'll probably still contribute money to the Roth IRA just to take advantage of it while I can before I start taking SS.
@@Lolatyou332 you’ll still need earned income to continue to contribute after you “retire” I still coach high school sports and that gives me enough “earned income” to fund my Roth
I'm just surprised not everyone under 50 maxes out their Roth IRA... You're limited to 10k married and 7k single... It's easy to hit for almost every income range above 40-50k.
There are many things to like about the Roth IRA but if I had to pick one, I would say that Roth withdrawals do not cause many of the problems that Traditional withdrawals do. For example, Roth withdrawals do not count as income when it comes to the IRMAA surcharge. Roth withdrawals do not impact the taxation of Social Security benefits, either. Roth withdrawals do not count when applying for a Marketplace healthcare plan. Traditional IRA withdrawals do impact all of the above and cause even more headaches. The Roth IRA can save you from a lot of complications and nasty surprises in your retirement.
All correct and important, but you still generally want some “pretax” if you can save a lot on the front end, and will have opportunities for low taxes in retirement due to lower income and standard deductions. It is a balance. An all Roth portfolio, means you paid too many taxes up front. The trick is figuring out the correct ratio.
Another great video and discussion on this very important topic. I'm certain it will help many people and encourage you to continue putting out this great content. Have a great week Erin! Larry, Central Valley, Ca.
Another great video. Absolutely the flexibility with Roth. Also consider it a form of "tax insurance" against SS taxability, potentially punitive RMDs, increased rates coupled w/ bracket compression, Medicare surcharges, etc. While we don't love paying 22%/24% today, it is KNOWN and tolerable.
Roth emergency fund… Erin, your advice doesn’t hold up to the math. Why would anyone put after-tax money into a taxable account when they could put it into Roth and access the principal anytime penalty-free? It’s the best of both - until (and after) the emergency funds are needed, the gains compound tax-free forever. Roth should be the first savings account to be filled up, and taxable accounts should be the last.
she explained why. Roth is a retirement vehicle and you lose the benefit of compounding taking the money out for an emergency. emergency fund isn't for investing, it's to fund an emergency like income disruption. Yes, it's in a taxable account, but it shouldn't be in equities or riskier assets. Because of Roth benefits, you should be taking more risk in terms of asset class in a Roth compared to an emergency fund where you want essentially no risk. You don't want to be a forced seller in a down market when you need your emergency fund trying to tap your Roth to fund an emergency. Keep your money in vehicles for which the vehicle is intended. Granted, if there is a black swan emergency, of course you will tap whatever assets you have.
Thanks, but I understand the nuances well. If you had $7k and had to decide whether to put it into Roth or into a taxable savings account, there is no scenario where you should not fill the Roth first. There is no ‘catching up’ if you don’t exercise your Roth allowance each year. Being in Roth doesn’t mean it has to be invested any more risky than you would in a taxable account. Worst-case, you withdraw some principal with no penalty, and if you “re-pay” your emergency fund that’s when it goes into a taxable account. But if you never need to drain your emergency fund, you’ve made good progress toward a Roth nest egg.
@@hornbaker you are continuing to compare an emergency fund, which is not for investing, with retirement fund. Correct, there's no catching up, but there is no regaining and catching up when you take out. I didn't say difference in risk between roth and taxable. I said your emergency fund in a taxble shouldn't be in riskier assets, it should be in cash and cash equivalents, so you aren't a forced seller in a down market, you aren't jeopardizing future tax free gains in your Roth, and you are preserving cash in liquid form to fund an emergency. The presumption with Roth is to maximize the tax benefits, which means your riskier positions (e.g. equities) are going into a Roth because you expect them to grow more appreciably over time. In contrast, your less riskier positions in your allocation (e.g. bonds) are going into tax deferred. Again, you are conflating investing with an emergency fund which isn't for investing. Yes, you take an opportunity cost with holding emergency fund in cash and cash equivalent, so you aren't taking a bigger cost loss tapping into other things like Roth IRA. But, hey, if you want to put your emergency fund in a Roth IRA, then have at it.
The concept of an ‘emergency fund’ doesn’t dictate where money is stored, just that it is kept accessible. Separately, there is no scenario where it’s better to put money into a taxable account and leave Roth empty. So, fill Roth first. A Roth account can do anything a taxable account can, including hold cash, but if you don’t fund it each year that’s a permanently lost opportunity. In the future, you‘ll have the choice of investing the Roth differently, but not if the funds didn’t get deposited. The message here should be two-fold: 1) Always put savings into Roth before taxable, and 2) Invest $X conservatively as an emergency fund. These two points are not mutually exclusive; they complement each other.
@@hornbaker the concept of emergency fund does dictate where money is stored, becuase it has to be liquid when you need it and has to be available in the amount you need it. Again, Roth is for retirement, emergency fund is not. If you are holding cash and cash equivalent in a Roth, you are literally contradicting your maximization point. you hold cash and cash equivalent for your emergency fund, to ensure you have the amount of money you need and aren't a forced seller in a down market, when you need it without penalty. An emergency fund isn't for investing. Taking out principal from your Roth to fund an emergency defeats the whole point of using Roth to accumulate for retirement. You obviously do not understand the concept.
Say you just make slightly over the MAGI amount. Could you put more money into a traditional 401k to lower your MAGI which would then let you contribute the full amount again into your Roth IRA? I'm guessing yes because I think that's what the M stands for, modified right? I'm still far from reaching that amount, but hoping the future I will make that amount so I'm curious. Thanks!
I was thinking the exact same thing. The MAGI should be lower when you do the traditional 401k route. Backdoor ROTH IRA is slightly more complicated to do. The question is if you reach this level, you're already half way into the current 24% nominal/marginal tax bracket, which will expire and revert back to 28% after Dec 2025. Is it worth it to stick with 24%-28% or switch to hybrid traditional/ROTH 401k to readjust below the threshold. Unless you make so much even with max traditional 401k deferral, then Backdoor ROTH IRA may be your only option.
We're doing an ESA, 2 HSAs, max 401k, max 403b, and should get 2 max Roth IRAs by next April. Saving some cash for a new roof and possibly another car. My job just added a 457 as well so next year after wife and I get raises and we pay our house off we may try to max 457, 403b, 401k, 2 HSAs, 2 Roth IRAs, and an ESA. Gonna be tough. We will be earning 210-215k and own our home.
Does anyone know if this limit is applied to Roth 401k/403b? Also, if you have more than one Roth IRA account, does the 7k limit apply to ALL of them combined?
If you have multiple Roth IRA or traditional IRA accounts, yes the total annual $7,000 limit applies to them all on a combined basis. It does not apply to The Roth 401k/403b - you can fully max out your Roth IRA and Roth 401k to their full allowed limits within the same year :-)
Traditional is better if you need a tax write off. If I had a Roth put in less money than a Traditional to save money. Roth tax you up front like getting pick pocket and can't get the money until retirement
@@ErinTalksMoney yes I am currently maxing it out, at least for as long as I can stand it, but I’m living on a tight budget as that is nearly half of my salary, but even if I give it the boost for a couple years. I am 50 years old so that’s why I can do the catch up up to 30,000.
@@ErinTalksMoney Maxing mine out as well. Very happy with it since I cannot contribute to a ROTH and get no pre-tax benefit from a traditional 401k/IRA. ROTH 401k for the win!
keep in mind if your plan allows Roth 401k match, that you are gonna have to account for taxes each year. only about 15% plans currently offer Roth 401k match since SECURE 2.0 allowed it, but more employers are moving toward the option.
Another excellent video Erin. I agree with you completely about the benefits of a Roth IRA. Unfortunately, we could never qualify for one as our income always exceeded the limits. As for a back door conversion, the numbers just never worked for that either. Also, I have no heirs so there was no estate planning benefit to me either. I would have definitely used this tool had it been available to me.
IRA distributions are taxed as income, not capital gains. I really can't see income tax increases on seniors happening any time even in the distant future. Most middle and upper income people are going to pay much lower tax rates in retirement than while working.
presumably you aren't investing and saving for retirement to lose money. Pesky thing about returns on investments, is that they grow. If you are middle and upper income seeking to maintain your standard of living in retirement, then you are going to be investing toward that goal.
@@hanwagu9967 not me means that my tax rate will not be lower and that’s good for me because I have continued to grow my financial assets consistently… so I agree with you … my tax rate will not be lower, but I’ll have more money
@@g.t.richardson6311 considering tax brackets are going back up next year without Congress intervention, I highly doubt that your tax rate will be lower. Pesky thing about dividends once your portfolio grows too. if you are married, then surviving spouse's tax rate as single filer. Overall, given the tax bracket ranges, it is more probable you'll be in at least the same tax bracket, but given the national debt, you'll more probably be in a higher one.
I made the mistake of opening a traditional IRA a few yrs ago instead of a Roth. I started investing late in life. I'm 54 and have around 34000 in a traditional. I don't know if I should convert to a Roth now
What is your marginal tax rate added across federal, state, and local taxes? Given your age, I am guessing that you are at or near the maximum of your earning, which means that your taxes are also maximized. I do not know how much else you have saved for retirement nor what you need in order to live in retirement, but it easily could be the case that you would have a reduced income and thus tax rate, meaning that you can convert for cheaper. The only issue is that you might want to pay the taxes with income which you are still earning, rather than paying them out of the fixed pot that you have remaining.
You can also open a, switch to investing in, a Roth IRA now, without converting yet (or maybe ever). You still have time in your career and the two buckets will provide flexibility to you. Your current situation may or may not be optimal. But the important thing is just to invest. Having invested slightly sub-optimally is a good problem to have compared to having not invested at all. And, as you said, you can correct it if it is the right choice for you (or even if it is not - but Idk why you would do that).
My plan is to spend-down my Traditional retirement money (ideally to $0 by the time I have to make RMDs) and let my Roth accounts grow and grow while this is happening. Roth conversions might happen during that time if it makes sense in terms of taxes and other retirement considerations. It might make sense for you to open a Roth IRA now and put your money into it going forward. You can spend-down your Traditional IRA money in retirement or do Roth conversions at that time if it makes sense financially.
75% of my retirement funds are in Roths. Retiring early has also allowed me to continue converting from an IRA to a Roth 100% TAX FREE. Tax free is awesome IMO. I turn 59 1/2 this year where I can finally withdraw from them 100% TAX FREE. Tax free is part of my retirement plan.
@@papasquat355 One needs to understand income taxes. Do you? If yes, then one can convert up to their standard deduction tax free. If you don't understand that then I recommend looking at the tax returns and see what I am talking about.
@@joethecomputerguy1 Got it. As long as you have zero taxable income you can convert up to the amount of your standard deduction and get that benefit. No need to be snooty about it. It was an honest question.
@@papasquat355it wasn’t snooty. Many people say it cant be done and have no clue about taxes and why i clarified it. I retired early and only have interest as income and that is not enough to reach the std deduction. So the balance is all converted ira to roth money. Glad you understand it.
I love the ROTH acct... but I am hesitant to view it as a replacement for a traditional 401k. 3 Scenarios to consider. You are taking $1000 to invest for 30 years at an average 8%. Scenario 1) A Traditional IRA or normal 401k w/o match. You invest a full $1000, and after 30 years it turns into $9317. Assuming a 20% tax bracket in retirement, that leaves you with $7453.82 available for use in retirement. But lets also remember that this reduces your tax burden while working, giving you an extra ~$2-300 of usable income during your working years, which can't be discounted! Scenario 2) A 401k w/ employer match. You put in $1000, and your employer puts in an extra $300 (30% match up to a limit isn't uncommon). After 30 years at 8% growth you have $12,112.46, and assuming a similar 20% retirement tax bracket that leaves you with $9,689.97 of usable income in retirement. That is +$2200 from the $300 match! pretty sweet! And like scenario 1, you save on taxes, freeing up more cash during the messy middle of life. Scenario 3) A Roth contribution. Because taxes are coming out and to keep the numbers fair, we are going to assume a 25% effective tax bracket during your working years, meaning that of your $1,000, only $750 is actually getting invested (You may put in $1000, but then you are paying additional taxes on top which isn't an honest comparison to the 401k). Over the same 30 years, and the same 8% average investment, this leaves you with $6987.96. So you end up with a smaller overall usable income during retirement, AND you don't free up any tax money during your working years when life is generally going to be the most expensive. But thankfully retirement investing isn't an either/or situation. In a vacuum and direct comparison to a Traditional IRA or 401k, the Roth actually isn't that great in all except the highest income and super-saver situations. But most people aren't starting their retirement journey at age 16 where maxing out their Roth acct each and every year until age 67-70 is going to give them a stupidly large account and a massive income boost walking into retirement. Most people are starting their retirement savings in their 30s-40s where contributing to other retirement account types will have advantages over a traditional non-retirement brokerage account... and that is where the Roth really shines! If you have a 401k anyway either to meet your retirement savings goals, or get your employer match, then saving your Roth as an 'account of last resort' will allow you to keep it invested an extra 10 years. Being able to give it that additional time compared to a 401k with its RMDs means that it could grow that $750 to $15k+ of tax-free income. If you still like your kids at the end of your life, there are a lot less taxes and considerations when inheriting a Roth account, which again makes it ideal as an 'account of last resort'. Roth alone for most people, especially people starting their retirement plans late, likely isn't the best tool for the job. But where it really shines is in combination with other accounts to give you options and flexibility. When part of a mix of account types... oh boy! A Roth starts to look incredibly broken! Surely a must-have in your retirement mix! But just not so great if it is your only retirement account type unless you start extremely early or have an insane retirement income.
Suppose you end up with 600k invested for retirement. Are still married. Would it matter much if Roth or 401k tradiional? Standard tax deduction and all?
Two more reasons to utilize a Roth: Medicare premiums and taxes on Social Security benefits are based off of…your taxable income! Using a Roth to bring your taxable income below certain levels will save a retiree a ton of money in Medicare premiums and Social Security taxes. 😊
Right on and after RMD’s kick in you might be pushed into higher withdrawals, taxes and Medicare premiums. Tough to beat the taxman!
Thank you. This is extremely useful to know.
Hi Erin! I am a fan of your channel and appreciate how each video is packed with insights. This video in particular helped me understand a blind spot I had around Roth IRAs (that contributions can be taken out without penalty). Thank you for what you do!
I retired in October 2021 and 59 1/2. Before I retired, I did Backdoor Roth IRA, and maxed out the 401K Roth. I know I took the tax hit, but all of the money I contributed was in the Roth. Since I had so many years before the 401K Roth was an option and even then I didn't take the opportunity to use it, it was nice to build up different buckets of money. Now that I am retired on a lower annual amount, I am converting as much as I can without exceeding my tax bracket. Next year, I will do my last 'big' conversion to not get hit by IRMAA at 65. At 64, I will probably have about 60% in Roth and 40% in traditional. That significantly will reduce my RMDs at 75. Even with modest conversions after 65, I should be able to have all IRAs as Roth without changing tax brackets. Tax free for me and ultimately for the kids.
Max it out while you can!! I can no longer contribute. I am 42 and should be continuing to contribute to a retirement account (IMO). My annual taxable income is under $50K, but it’s not EARNED income because I was diagnosed with a neuromuscular disease and became disabled, out of the nowhere. Was a healthy athlete growing up, healthy adult lifestyle, steady job. I am not allowed to contribute to any IRA because my income is from SSDI. My illness is disabling, but not terminal, so life expectancy is the same. MAX OUT YOUR ROTH WHILE YOU CAN!!
You can withdrawal contributions any time too tax free and penalty free
I max both my roth IRA and 401k. The only downside is i dont have much left in the end of the month, my cash flow is low
I did that for a few years then realized I was not on track to save up a house down payment while I was far ahead of my goals for retirement savings. I decreased the 401k contributions to get my match and am back on track for my near and long term goals
@@pprb123 true, sometime we over invest on retirement. But one good thing with Roth is we can take our contributions anytime like house down payment. And if you have big money in 401k you can take loans against balances in special circumstances like first house down payment. So don’t worry.
I'm just 31 I wouldn't dare max out my 401k until later years in my 50s...
I put like 12k towards a brokerage account instead and about 12k to the 401K.
Tying up that substantial amount of money in a 401k for that long of a time period just seems like a bad idea.. Who cares if you have 3m+ in your 401k if you can't do anything without incurring a really bad tax penalty on the initial contribution or waiting 10-20 years to withdrawal it.
@Lolatyou332 I would agree with this. Thankfully, I have a 457B plan to contribute to, which does not have an early withdrawal penalty. Best of both worlds! Yes, planning for early retirement here.
Really storing your eggcorns for winter huh?
I wish I didn't wait to start my ROTH until last year but it's already taking off like crazy, I max it out as early as possible to allow compounding to take its course.
You never mentioned 5 year rule.
Thanks, that helps me further decide to take advantage of the 403b Roth I have access to - no need to do a backdoor roth anymore, or annual limits. The points you make about future tax changes and rule changes are really valid to consider.
Wow, I watch to financial youtubes all the time. This is one the best ones I've seen. You are very practical and spell things out in an easy to understand fashion. Also, your delivery is great. Great voice, great appearance... please keep it up! Mark
Thank you Mark!! 🙏
Listen to 1:45, it states “$176k to $161k”, I think it was intended to state “$147 to $161k”.
If you're only over the earnings limit by a little, add more to your 401k to make yourself eligible for the Roth IRA. It's hard to pass up the benefits of the Roth IRA each year, as you can't make retroactive contributions. I really wish you could though.
I opened my first Roth I.R.A in 2010 and I have all my 5498s. Lol. I have been mixing out my Roth for a few yrs. This year I am insane to max out my Roth 401k and Roth IRA. Yay🎉🎉
Hi Erin. My wife and I really enjoy your videos. We find them very informative. As I get closer to retirement I'm doing more research on my retirement account, how much should I have in order to comfortably retire, etc. Of all the videos I see about that, none of them take into account pensions. I'm a federal employee so I an annuity in addition to my retirement (TSP) and my social security. I know pensions are a rare thing but I'm hoping that you would do a video on calculating how much a pension would be worth when determining one's financial strength in addition to the retirement (TSP, 401K, etc.) account and expected social security benefits. Thanks.
My only 'add' is that if you have an investment idea / concept which might pay 'outsized' gains, then a Roth is a perfect place to park your funds.
Peter Thiel placed $2,000 of Paypal to become $5B from Paypal. It will never be taxed.
Maybe you loved Apple or Tesla and were mostly certain it would triple. $10,000 would become $30,000 and no capital gains and no future tax from a traditional IRA.
Tax code changes taught me to build resilience into my portfolio. Diversification is key! My set manager helped me spread my investments across different asset classes like stocks, bonds, and real estate so that a positive tax code cha age here can help minimize the impact of aa negative tax code change there adjustments.
Focus on two key objectives. First, stay protected by learning when to sell stocks to cut losses and capture profits. Second, prepare to profit when the market turns around.I recommend you seek the guidance a broker or financial advisor.
There's one instance where I disagree with most financial content creators and you said it. The "don't use the Roth IRA as an emergency fund" line. I feel like it's totally okay to start an emergency fund in a Roth IRA IF: you can't max it out. You could put it into a safe vehicle like a money market account inside the IRA. If you need it, it's easy enough to get out in emergencies. If you don't, well guess what, you just started funding a Roth IRA.
Of course if you can max out the Roth IRA, then it's a different situation, but that's how I see it anyway. Any thoughts?
@@pprb123 You can always withdraw your contributions with no penalty though. She even mentioned that in the video.
@@JonMcMaken You're right, my bad
I think your point 8s valid, the only reason I don't entertain it is because I feel like the type of people I talk to aren't disciplined enough to treat an emergency fund like an actual emergency fund, so telling them not to touch retirement get me the results I want for them.
If someone is financially savy enough to Google the rules, then they don't need to be talking to me, lol so it doesn't come up
@@JonMcMaken just because you can do something doesn't mean you should. An emergency fund and a Roth have two different purposes.
You use a Roth to accumulate wealth for retirement, not to buy a house, not to fund an emergency, not to get your hair died purple. You lose the benefit of Roth by being a forced seller in a down market to fund an emergency, removing principal to fund an emergency, or holding cash and cash equivalent to ensure safety to fund an emergency. An emergency fund isn't for investing or wealth accumulation. Yes, there are opportunity costs having an emergency fund, but those are offset for all the reasons why you don't use a Roth to hold an emergency fund.
Roths are great if you have 'earned' income and can wait to access gains until you're freaking 60. Been retired a while with years and years to go. Whoopee!
Since the 2017 TRUMP Tax Cuts my Wife and I have been Back Door Rothing $50,000 a year and still staying in our 24% Tax Bracket. Tax time has been a blast :( Next year is our last year and then we are done. At 60 we will have 1/4 of our Portfolio in Roth, 1/4 in Taxable Brokage and 1/2 in the Bad Tax Deffered.
Love your content…not so much the term …your ‘golden years’!
I don't think I've asked this before but one thing I haven't seen anyone talk about is when during the year to take withdrawals. Most people talk about what you can take on a yearly basis but from a budgeting standpoint that seems like a nightmare. We're big budgeters in my home and taking a lump some once a year seems contrary to that - and, truly, anyone else that isn't rolling in it. We can put it in an account and draw on it but it would make more sense to at least do it quarterly. I wonder however if that would only increase transaction fees.
Long story short, like the channel and common sense you promote.
Next week (Friday) 😊 I have a video coming out about this!
Thanks
What if I start a Roth IRA when my salary is $100,000 but after several years the salary rises above the $160,000 limit? I can no longer contribute?
Humphrey Yang sent me here. I listened to him and I subbed.
:)
That makes me so happy to hear! Welcome to the channel! 😊
Suppose you end up with 600k invested for retirement. Are still married. Would it matter much if Roth or 401k tradiional?
Standard tax deduction and all?
Great video and really good point you made near the end about high earners. If you think your tax rate will be lower in retirement than it is now, then a Traditional IRA/401k may be better.
There's an interesting experiment you can try in a spreadsheet: Compare the ending income from a Roth Vs Traditional when you have the same income to invest, you get the same appreciation over time and your tax rate is the same at the start & end dates. You end up with exactly the same $$.
That's exactly right I won a steak dinner on that fact.😅
That's the thing though right? It doesn't actually end up the same if you calculate the taxes properly. The traditional comes out ahead because you pay the effective tax rate on traditional withdrawals but the full marginal rate for the Roth. People like to say 24% vs 24% but it ends up closer to 24% vs 12% taxation
One needs to define "high earner"
One thing though. If you want to buy something in retirement like a motorhome or property or whatever, you could yank out a large chunk in that tax year without getting dinged.
@@jeffwhite3021 Yep, it's a balance of what tax you paid to get the money into the Roth vs the potential tax you'll pay getting money out of a Traditional IRA.
What about the 5 year rule on using gains fromRoth?
If you have the money up front do you suggest maxing out the Roth every January or dollar cost averaging?
lump sum investing with its increased time in the market has always been shown to have an advantage over longer time frames
january. AsaP. time in the market beats timing the market.
It's only 7,000$ so I don't see a huge risk in just throwing it in there when most of the time lump sum is better anyway.
I just max it out Jan 1st and forget about it until next year when I do estimated taxes.
Max out a 401k & a Roth each year if possible.
I wish brokerage accounts taxable where Roth IRA lol
Excellent video! I love the Roth flexibility. Some financial planners in my area believe that collectively there is so much money in Roth accounts that Congress in the future will tax withdrawals being unable to ignore a potential revenue stream.
Social security income used to be untaxed... just sayin'
Well they would have to distinguish that money from pre tax contributions or people would be taxed twice since the contributions were already taxed.
@@rayzerot social security was never designated not to be taxed. Roth is.
find new financial planners, then. Roth is by statute not taxable. end of story. What Congress could do is impose stealth taxes that wouldn't directly tax Roth in the form of unrealized wealth taxes; however, those would immediately be challenged. Given recent SCOTUS rulings around takings clause, the probability of unrealized wealth tax appears to have decreased. Plus that would be politcially suicidal. A more probable route would be to sunset, impose lower income phase out, or eliminate at a certain income level. Congress can do anything with deferred, which is the lower hanging fruit.
I fully expect that RMD's will also apply to Roth accounts in the not too distant future. I would not count on this account type being able to shelter your money tax free for life. I'm actually surprised this hasn't already been done.
I overcontributed so I’m seeing the tax man Thursday oops 🙊
I have an older underfunded Roth. Can I contribute into that Roth now up to my limits? Do I have to wait 5 years to withdraw profits from that fund?
you can only contribute up to the current annual IRA limit. You cannot contribute previous underfunded years.
Thanks that....If I contribute into that Roth, do I have to wait 5 years to take out ongoing proffits?
@@jorgevelasquez9955 If your older Roth IRA or Regular IRA (any IRA) passed the 5 years. You also have to wait to be 59 1/2 to withdraw any gain without a 10% penalty. For a Roth IRA, you can withdraw your contribution at any time without penalty.
Thanks for all your great info Erin off topic if I roll over a t bill say $1000 Dollars does the profit money get rolled over also or do they send that to your bank account . If that makes any sense . Thank you ..
Sent to,your bank account
I got 5000s rolling weekly
Roth 401k or pretax and why?
Can do either.
Roth 401k is a great option. The IRS has allowed it to function almost exactly like a Roth as of 2024. You do not have required minimum distributions like a 401k or Traditional IRA anymore. Your contributions are made with post-tax dollars, and the growth and withdrawals are all tax free. I currently do Roth 401k at work.
One negative of the traditional IRA is the deduction limit in addition to contribution limit. There's an income range where contributing is allowed but does not grant any tax benefits
Depends on your age. I personally just max out the Roth IRA and then contribute to a normal 401k and then a brokerage account.
Roth 401K has had differences in the past so I suspect that it's possible they may have different restrictions on the account in the future.
Regardless I'd recommend maxing out your Roth IRA before the Roth 401K. If your younger
@Lolatyou332 I'm asking simply because the contribution limit on a roth is 7000 per year but within a roth 401k its 23,500 per year. If roth is generally better, then obviously the roth 401k is the best choice.
Better to pay taxes when you have a paycheck coming in.
Is there any guarantee that roth accounts wont get taxed in the future? Laws change all the time. Maybe better to save on tax today, while you can?
Hey Erin , very good video . I can do better editing in your videos which can help you to get more engagement in your videos . Pls lmk what do you think ?
Um no
i spewed coke out of my nose.
Don't sleep on the taxable brokerage. 0% tax up to 90k of capital gains if you are married is huge IMO. Full flexibility of when to use it and how to use it. If you die with money in it, the step up law allows your heirs to take it tax free. I'm dropping out of tax deferred accounts entirely: Roth or taxable. Deferred is dumb (for someone in my tax bracket at least).
And that is before standard deductible Add that and it is almost $120k
Yup 💯
The real winner for people with families… I have a certain yearly amount for the 401k, the IRA, the HSA…. Everything else in the brokerage: education funds are a few etfs, savings are there, dividend portfolio for fun is in there.
Yeah, that seems correct to me for anyone with the 0% tax rate on long-term capital gains (supposing that they stay in that bracket and that the tax rate in that bracket never increases). The major loss to me is that one needs to enforce discipline on themself even better; do not withdraw until you is 𝘤𝘦𝘳𝘵𝘢𝘪𝘯 that you want to do so. Pretend like it is an IRA, with all of the same penalties and rules. There are some other details of difference between the options, but I opine that they matter less.
@@jdeang3531 only thru next year. After that the standard deduction returns to pre-Trump amounts.
Thank you. I have been commenting stuff like this for years and I never see anyone else acknowledge it. Do deferred tax up to any company match you can get but after that I’m done. I do use Roth but put a healthy amount in taxable.
I love your videos! I am 51 and find the information you present very timely!
Glad you like them! Thank you so much!
I was pretty into the Roth IRA, but then I realized that my wife and I could withdraw up to almost $100k a year from a taxable brokerage account tax free, and I don't imagine we'll ever be much richer than that. So I'm not really sure what the advantage is for the Roth in that case.
Wont pay tax on dividends, interest and capital gains when inside the Roth
It's better to have it in a Roth IRA.. My brokerage account is my largest portfolio just because I'm going to retire early in my 50s, your Roth IRA isn't for the early years, it's for the latest years as it gets the most time to grow.
There just isn't any reason to not contribute to a Roth IRA unless you plan on retiring VERY early.. Hell even when I'm in my 50s and retired I'll probably still contribute money to the Roth IRA just to take advantage of it while I can before I start taking SS.
@@Lolatyou332 you’ll still need earned income to continue to contribute after you “retire”
I still coach high school sports and that gives me enough “earned income” to fund my Roth
Thanks for doing a great job explaining how these accounts work and their limitations.
What's the point of having income limits if you can simply do a backdoor roth anyway?
It's a loop hole
I'm just surprised not everyone under 50 maxes out their Roth IRA... You're limited to 10k married and 7k single... It's easy to hit for almost every income range above 40-50k.
There are many things to like about the Roth IRA but if I had to pick one, I would say that Roth withdrawals do not cause many of the problems that Traditional withdrawals do. For example, Roth withdrawals do not count as income when it comes to the IRMAA surcharge. Roth withdrawals do not impact the taxation of Social Security benefits, either. Roth withdrawals do not count when applying for a Marketplace healthcare plan. Traditional IRA withdrawals do impact all of the above and cause even more headaches. The Roth IRA can save you from a lot of complications and nasty surprises in your retirement.
All correct and important, but you still generally want some “pretax” if you can save a lot on the front end, and will have opportunities for low taxes in retirement due to lower income and standard deductions. It is a balance. An all Roth portfolio, means you paid too many taxes up front. The trick is figuring out the correct ratio.
Another great video and discussion on this very important topic. I'm certain it will help many people and encourage you to continue putting out this great content. Have a great week Erin! Larry, Central Valley, Ca.
Thank you so much Larry! 😊 And thanks for spending an early Cali morning tuning in! 🙏
Another great video. Absolutely the flexibility with Roth. Also consider it a form of "tax insurance" against SS taxability, potentially punitive RMDs, increased rates coupled w/ bracket compression, Medicare surcharges, etc. While we don't love paying 22%/24% today, it is KNOWN and tolerable.
Roth emergency fund… Erin, your advice doesn’t hold up to the math.
Why would anyone put after-tax money into a taxable account when they could put it into Roth and access the principal anytime penalty-free? It’s the best of both - until (and after) the emergency funds are needed, the gains compound tax-free forever. Roth should be the first savings account to be filled up, and taxable accounts should be the last.
she explained why. Roth is a retirement vehicle and you lose the benefit of compounding taking the money out for an emergency. emergency fund isn't for investing, it's to fund an emergency like income disruption. Yes, it's in a taxable account, but it shouldn't be in equities or riskier assets. Because of Roth benefits, you should be taking more risk in terms of asset class in a Roth compared to an emergency fund where you want essentially no risk. You don't want to be a forced seller in a down market when you need your emergency fund trying to tap your Roth to fund an emergency. Keep your money in vehicles for which the vehicle is intended. Granted, if there is a black swan emergency, of course you will tap whatever assets you have.
Thanks, but I understand the nuances well.
If you had $7k and had to decide whether to put it into Roth or into a taxable savings account, there is no scenario where you should not fill the Roth first. There is no ‘catching up’ if you don’t exercise your Roth allowance each year.
Being in Roth doesn’t mean it has to be invested any more risky than you would in a taxable account. Worst-case, you withdraw some principal with no penalty, and if you “re-pay” your emergency fund that’s when it goes into a taxable account. But if you never need to drain your emergency fund, you’ve made good progress toward a Roth nest egg.
@@hornbaker you are continuing to compare an emergency fund, which is not for investing, with retirement fund. Correct, there's no catching up, but there is no regaining and catching up when you take out. I didn't say difference in risk between roth and taxable. I said your emergency fund in a taxble shouldn't be in riskier assets, it should be in cash and cash equivalents, so you aren't a forced seller in a down market, you aren't jeopardizing future tax free gains in your Roth, and you are preserving cash in liquid form to fund an emergency. The presumption with Roth is to maximize the tax benefits, which means your riskier positions (e.g. equities) are going into a Roth because you expect them to grow more appreciably over time. In contrast, your less riskier positions in your allocation (e.g. bonds) are going into tax deferred. Again, you are conflating investing with an emergency fund which isn't for investing. Yes, you take an opportunity cost with holding emergency fund in cash and cash equivalent, so you aren't taking a bigger cost loss tapping into other things like Roth IRA. But, hey, if you want to put your emergency fund in a Roth IRA, then have at it.
The concept of an ‘emergency fund’ doesn’t dictate where money is stored, just that it is kept accessible. Separately, there is no scenario where it’s better to put money into a taxable account and leave Roth empty. So, fill Roth first.
A Roth account can do anything a taxable account can, including hold cash, but if you don’t fund it each year that’s a permanently lost opportunity. In the future, you‘ll have the choice of investing the Roth differently, but not if the funds didn’t get deposited.
The message here should be two-fold: 1) Always put savings into Roth before taxable, and 2) Invest $X conservatively as an emergency fund. These two points are not mutually exclusive; they complement each other.
@@hornbaker the concept of emergency fund does dictate where money is stored, becuase it has to be liquid when you need it and has to be available in the amount you need it. Again, Roth is for retirement, emergency fund is not. If you are holding cash and cash equivalent in a Roth, you are literally contradicting your maximization point. you hold cash and cash equivalent for your emergency fund, to ensure you have the amount of money you need and aren't a forced seller in a down market, when you need it without penalty. An emergency fund isn't for investing. Taking out principal from your Roth to fund an emergency defeats the whole point of using Roth to accumulate for retirement. You obviously do not understand the concept.
Say you just make slightly over the MAGI amount. Could you put more money into a traditional 401k to lower your MAGI which would then let you contribute the full amount again into your Roth IRA? I'm guessing yes because I think that's what the M stands for, modified right? I'm still far from reaching that amount, but hoping the future I will make that amount so I'm curious. Thanks!
I was thinking the exact same thing. The MAGI should be lower when you do the traditional 401k route. Backdoor ROTH IRA is slightly more complicated to do. The question is if you reach this level, you're already half way into the current 24% nominal/marginal tax bracket, which will expire and revert back to 28% after Dec 2025. Is it worth it to stick with 24%-28% or switch to hybrid traditional/ROTH 401k to readjust below the threshold. Unless you make so much even with max traditional 401k deferral, then Backdoor ROTH IRA may be your only option.
We're doing an ESA, 2 HSAs, max 401k, max 403b, and should get 2 max Roth IRAs by next April. Saving some cash for a new roof and possibly another car. My job just added a 457 as well so next year after wife and I get raises and we pay our house off we may try to max 457, 403b, 401k, 2 HSAs, 2 Roth IRAs, and an ESA. Gonna be tough. We will be earning 210-215k and own our home.
Does anyone know if this limit is applied to Roth 401k/403b? Also, if you have more than one Roth IRA account, does the 7k limit apply to ALL of them combined?
If you have multiple Roth IRA or traditional IRA accounts, yes the total annual $7,000 limit applies to them all on a combined basis. It does not apply to The Roth 401k/403b - you can fully max out your Roth IRA and Roth 401k to their full allowed limits within the same year :-)
@@ErinTalksMoney Thanks!
I do Roth IRA and deferred 457 and After dollars . 3 buckets
Traditional is better if you need a tax write off. If I had a Roth put in less money than a Traditional to save money. Roth tax you up front like getting pick pocket and can't get the money until retirement
I have a Roth 401k and can put 30k per year in… 😱
Put majority of that 30k in physical Gold and Silver... you'll be much happier when it's said and done!
Nice! Are you going to try and max it out?!?!?
@@ErinTalksMoney yes I am currently maxing it out, at least for as long as I can stand it, but I’m living on a tight budget as that is nearly half of my salary, but even if I give it the boost for a couple years. I am 50 years old so that’s why I can do the catch up up to 30,000.
@@ErinTalksMoney Maxing mine out as well. Very happy with it since I cannot contribute to a ROTH and get no pre-tax benefit from a traditional 401k/IRA. ROTH 401k for the win!
keep in mind if your plan allows Roth 401k match, that you are gonna have to account for taxes each year. only about 15% plans currently offer Roth 401k match since SECURE 2.0 allowed it, but more employers are moving toward the option.
Best video on the Roth IRA!
wow! Thank you so much!
Another excellent video Erin. I agree with you completely about the benefits of a Roth IRA. Unfortunately, we could never qualify for one as our income always exceeded the limits. As for a back door conversion, the numbers just never worked for that either. Also, I have no heirs so there was no estate planning benefit to me either. I would have definitely used this tool had it been available to me.
when you write "we" I presume you and your spouse, which means you have to consider the tax consequences of surviving spouse filing single.
IRA distributions are taxed as income, not capital gains. I really can't see income tax increases on seniors happening any time even in the distant future. Most middle and upper income people are going to pay much lower tax rates in retirement than while working.
Not me
presumably you aren't investing and saving for retirement to lose money. Pesky thing about returns on investments, is that they grow. If you are middle and upper income seeking to maintain your standard of living in retirement, then you are going to be investing toward that goal.
@@hanwagu9967 not me means that my tax rate will not be lower and that’s good for me because I have continued to grow my financial assets consistently… so I agree with you … my tax rate will not be lower, but I’ll have more money
@@g.t.richardson6311 considering tax brackets are going back up next year without Congress intervention, I highly doubt that your tax rate will be lower. Pesky thing about dividends once your portfolio grows too. if you are married, then surviving spouse's tax rate as single filer. Overall, given the tax bracket ranges, it is more probable you'll be in at least the same tax bracket, but given the national debt, you'll more probably be in a higher one.
@@hanwagu9967 no kidding that’s what I said clown
Notice I said “NOT be lower”
I know it won’t be lower
My captial gains taxes come out of my tax refund. I never feel it. Works for me.
I'm approaching the income cap for Roth IRA and am regretting those previous years that I didn't max it out 😢
As a person who is approaching retirement age I can tell you that time is very valuable. Start investing as soon as you can.
The best feature of a roth is leaving it to your child tax-free.
🥇🥇🥇
I made the mistake of opening a traditional IRA a few yrs ago instead of a Roth. I started investing late in life. I'm 54 and have around 34000 in a traditional. I don't know if I should convert to a Roth now
What is your marginal tax rate added across federal, state, and local taxes? Given your age, I am guessing that you are at or near the maximum of your earning, which means that your taxes are also maximized. I do not know how much else you have saved for retirement nor what you need in order to live in retirement, but it easily could be the case that you would have a reduced income and thus tax rate, meaning that you can convert for cheaper. The only issue is that you might want to pay the taxes with income which you are still earning, rather than paying them out of the fixed pot that you have remaining.
You don't expect your taxes to be lower in retirement? A traditional IRA is never a mistake.
You can also open a, switch to investing in, a Roth IRA now, without converting yet (or maybe ever). You still have time in your career and the two buckets will provide flexibility to you.
Your current situation may or may not be optimal. But the important thing is just to invest. Having invested slightly sub-optimally is a good problem to have compared to having not invested at all. And, as you said, you can correct it if it is the right choice for you (or even if it is not - but Idk why you would do that).
Saving for your retirement is never a mistake.
My plan is to spend-down my Traditional retirement money (ideally to $0 by the time I have to make RMDs) and let my Roth accounts grow and grow while this is happening. Roth conversions might happen during that time if it makes sense in terms of taxes and other retirement considerations. It might make sense for you to open a Roth IRA now and put your money into it going forward. You can spend-down your Traditional IRA money in retirement or do Roth conversions at that time if it makes sense financially.
😂😂😊
Compound interest is like having two bunny rabbits without cable television. 🙂 They multiply.
😂😂😂
75% of my retirement funds are in Roths. Retiring early has also allowed me to continue converting from an IRA to a Roth 100% TAX FREE. Tax free is awesome IMO. I turn 59 1/2 this year where I can finally withdraw from them 100% TAX FREE. Tax free is part of my retirement plan.
How are you converting from traditional to Roth "tax free"?
@@papasquat355 One needs to understand income taxes. Do you? If yes, then one can convert up to their standard deduction tax free. If you don't understand that then I recommend looking at the tax returns and see what I am talking about.
@@joethecomputerguy1 Got it. As long as you have zero taxable income you can convert up to the amount of your standard deduction and get that benefit. No need to be snooty about it. It was an honest question.
@@papasquat355it wasn’t snooty. Many people say it cant be done and have no clue about taxes and why i clarified it. I retired early and only have interest as income and that is not enough to reach the std deduction. So the balance is all converted ira to roth money. Glad you understand it.
I love the ROTH acct... but I am hesitant to view it as a replacement for a traditional 401k.
3 Scenarios to consider. You are taking $1000 to invest for 30 years at an average 8%.
Scenario 1) A Traditional IRA or normal 401k w/o match. You invest a full $1000, and after 30 years it turns into $9317. Assuming a 20% tax bracket in retirement, that leaves you with $7453.82 available for use in retirement. But lets also remember that this reduces your tax burden while working, giving you an extra ~$2-300 of usable income during your working years, which can't be discounted!
Scenario 2) A 401k w/ employer match. You put in $1000, and your employer puts in an extra $300 (30% match up to a limit isn't uncommon). After 30 years at 8% growth you have $12,112.46, and assuming a similar 20% retirement tax bracket that leaves you with $9,689.97 of usable income in retirement. That is +$2200 from the $300 match! pretty sweet! And like scenario 1, you save on taxes, freeing up more cash during the messy middle of life.
Scenario 3) A Roth contribution. Because taxes are coming out and to keep the numbers fair, we are going to assume a 25% effective tax bracket during your working years, meaning that of your $1,000, only $750 is actually getting invested (You may put in $1000, but then you are paying additional taxes on top which isn't an honest comparison to the 401k). Over the same 30 years, and the same 8% average investment, this leaves you with $6987.96. So you end up with a smaller overall usable income during retirement, AND you don't free up any tax money during your working years when life is generally going to be the most expensive.
But thankfully retirement investing isn't an either/or situation. In a vacuum and direct comparison to a Traditional IRA or 401k, the Roth actually isn't that great in all except the highest income and super-saver situations.
But most people aren't starting their retirement journey at age 16 where maxing out their Roth acct each and every year until age 67-70 is going to give them a stupidly large account and a massive income boost walking into retirement. Most people are starting their retirement savings in their 30s-40s where contributing to other retirement account types will have advantages over a traditional non-retirement brokerage account... and that is where the Roth really shines!
If you have a 401k anyway either to meet your retirement savings goals, or get your employer match, then saving your Roth as an 'account of last resort' will allow you to keep it invested an extra 10 years. Being able to give it that additional time compared to a 401k with its RMDs means that it could grow that $750 to $15k+ of tax-free income. If you still like your kids at the end of your life, there are a lot less taxes and considerations when inheriting a Roth account, which again makes it ideal as an 'account of last resort'.
Roth alone for most people, especially people starting their retirement plans late, likely isn't the best tool for the job. But where it really shines is in combination with other accounts to give you options and flexibility. When part of a mix of account types... oh boy! A Roth starts to look incredibly broken! Surely a must-have in your retirement mix! But just not so great if it is your only retirement account type unless you start extremely early or have an insane retirement income.
8. Because you want to pay more income taxes than you have to pay.
Tax brackets are a thing. Contribute traditional, convert Roth.
they day my income exceeded phase out, I cried.
haha! 😂 Congrats on surpassing that mark!
I have to max it out to make up for my wife's yoga instructor!
🎉
Suppose you end up with 600k invested for retirement. Are still married. Would it matter much if Roth or 401k tradiional?
Standard tax deduction and all?