Episode #3: Traditional Versus Roth

Today’s Prep:

IRA accounts are useful tools, but you need to know which type is best for you. David explains the differences between Roth and traditional IRAs.

(Click the featured times below to jump forward in the episode)

Equipping Points:

[1:51] – What’s The Difference Between Roth And Traditional IRAs?

  • Before you can know which type of account is best for you, you need to know the differences between them. The main difference between a Roth and traditional IRA is how they’re handled from a tax standpoint. And for the record, 401(k)s, IRAs, 403(b)s, and 457s are basically the same type of account. They’re discussed in different areas of the tax code, but they’re taxed the same. When you contribute to these types of accounts, you get a tax deduction. The IRS doesn’t tax the money you contribute. However, the money you invest in these accounts is going to grow over time, and when you go to withdraw that money, you can bet the government will be ready to tax the money you’ve made on your investments. Conversely, the IRS will tax the money you invest in a Roth IRA, but they won’t tax the money coming out later. In short, the difference is when Uncle Sam will come knocking at your doorstep to collect his share.

[5:02] – More Money Has Been Contributed To Traditional IRAs. 

  • You’ve probably invested more money in traditional IRAs than Roth IRAs, and there’s a reason for that. Most companies don’t offer the option for a Roth 401(k) or Roth IRA. Furthermore, most folks don’t like the delayed tax benefit. They’d rather get their tax break this year. This sentiment is exacerbated by our culture of instant gratification.

[7:30] – Why Does It Matter When You Get The Benefit? 

  • If your tax rate doesn’t change over the next 40 or 50 years, it really won’t matter. However, if it does, you’re going to be better off having invested in a Roth. Taxes are at historic lows, which probably means they’re going to rise in the future. It’s cheaper to pay now than it will be to pay at a higher rate later on. Furthermore, the money you invest will most likely multiply, and it’s a lot cheaper to pay the tax on the proverbial seed than it is the harvest.

Other Preparation:

  • [4:25] – Uncle Sam Is Going To Get His.
  • [13:25] – When Should You Invest In A Traditional IRA?
  • [15:47] – When Is It Appropriate To Consider Roth Versus Traditional IRAs?

Today’s Takeaway:

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More From David:

The host: David Dickens

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