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:

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.

▶️ 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!

[caseybills]

Investing in Roth IRA can be a good choice since they are funded with after tax dollars, your contributions can grow tax-free over time. When you withdraw money from your Roth IRA in retirement, you won’t have to pay tax on it, which will help you keep more of your hard-earned money. I retired with 5 million dollars

[NicholasBall]

The most significant financial mistake I made was with my 401k. My company offered a Roth 401k when my kids were in college, but I didn't start contributing until the third year of the six years they were in school. Since I was helping them with expenses, I qualified for tax credits, resulting in an extremely low effective tax rate. That period was precisely when a Roth 401k would have been most beneficial! Despite this, I still retired with approximately $350k in my 401k.

[WilliamsJones-jxce]

The increasing tax rate is the reason I rolled over my 401k to a ROTH. I wouldn't want to be paying taxes on current income on withdrawals made from my retirement account. I have been maxing out my 401k, 457b and Roth IRA for the past decade. Two incomes doing the same. Grinding down hard in my 20s-30s to let it ride into my 40s and beyond.

[rickmcdonaldj]

I've been reconsidering my retirement strategy, questioning if my 401(k) and IRA are enough for a secure future. I’ve also invested $300K in the stock market, but the returns have been inconsistent and modest. I'm looking for an investment approach that better aligns with my risk tolerance and financial objectives.

[purplefan]

This is what should be taught at schools

[LilyBarnes-wkio]

Despite lacking the flexibility that most brokerage accounts provide, IRAs offer unique tax benefits that make them particularly useful. All the same, having such a retirement plan is advisable.

[berkeleybernie]

I appreciate the clear and to-the-point explanation. As good as it gets for this kind of instructional video. Thank you.

[doctorhorton]

Humphrey - “So you clicked this video”
Me - “How did he know?”

[mclovin_it]

Just started looking into an IRA im 26 and couldnt decide which i should choose between traditional or roth. And watching this video im leaning towards “roth” like you said life takes crazy turns an if you need the $$ then there shouldnt be a penalty when withdrawing.

[epauloconnor]

I was hoping this video would break down if you contributed the same amount, what they'd look like... Like, if you had $500 to contribute (per month or per check), what it would look like in 30 years. How much the accounts would grow over that period vs how much you would have overall.

Like... if you contribute $500 every check with a traditional (pre-tax) based on a $50, 000 or $75, 000 or $100, 000 income, it would lower your tax basis when filing your income taxes. But you'd have $500 in the market as opposed to only having $350 in the market (every Roth deposit after 30% tax)...

That's the breakdown that I was looking for.

[CadedraForReal]

Thank you so much! This is the ONLY vid I’ve found that is giving me FACTS only!!! Plus it’s simple. No rambling etc.❤️

[anthonywatson]

Thank you for your video and information ❤😊

[bethalunerstar]

Yes please do a follow up Roth IRA video!

[jeany]

Brilliant!!! Thank you for making this video for newbies!

[robertnickerson]

Would love to see more information on where to invest, i.e Vanguard, Fidelity, etc. As always, thanks for the great info!

[viclucy-personalfinanceinv]

You summed up the extensive research i've done for hours! I really wish I had opened a roth when I first started working at 16 but i didnt open one until I was 18-19 years old. Must make use of the time now. Great video Humphrey! :) im also a yang! haha

[thesolojourney]

Might as well do both if we want to keep it diverse and expand in all ways.

[alishabanskota]

I have been trying to understand this for hours and you did it in less than 10 minutes! Thank you!

[joshsolso]

Best personal finance advisor on the Internet🤙🏼

[cici-lxnp]

You make this so clear and simple. Thank you!