Episode #33: Should You Contribute To A Roth or Traditional IRA?

Today’s Prep:

Are you trying to decide where you should contribute money toward retirement? Whether you are 20 or 60, David will talk through some of the things to consider before you decide between a Roth IRA or traditional IRA. The difference down the line is worth taking time to thoroughly consider now.

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

Equipping Points:

[1:25] Where do I contribute: Roth IRA or traditional IRA?

  • The main difference is taxes, which can be a massive difference. With a traditional IRA you get a tax deduction the year of the deposit, but when you take it out it is taxed as ordinary income. With a Roth IRA you do not get a tax deduction when you put it in but the money grows tax-free, so when you take the money out in retirement you don’t pay any taxes.
  • When you know the rules, you can make them work in your favor. For example, if you have a Roth 401(k) option offered at work, this is an important opportunity to consider.
  • Decide based on what your tax bracket is now compared to what you think it will be in the future. In retirement, you primarily have the standard deduction which means your tax bracket may be the same or slightly higher than when you were working.

[6:10] Constantly reevaluate both

  • New deficit is being added every year to the national budget and eventually we will have to pay them off.
  • A few years ago, the Congressional Budget Office sent a study to Paul Ryan that said tax rates will have to double. If your tax rate is double in retirement, that would be a big slice of your money if you did a traditional IRA instead of a Roth.
  • David talks about clients who are young workers who will earn a lot more money in 5-10 years from now, so the Roth IRA made more sense for them.
  • In another client example, a couple has more than 90% of retirement income in IRAs, which means it is taxed every time they take it out now in retirement. The IRS is your partner in a traditional IRA or 401(k), but they are not in a Roth.
  • Your personal situation may change every year, and that’s why you need to constantly reevaluate your contribution choices.

[12:31] Instant gratification vs. long-term benefit

  • Contributing to a traditional IRA gives you instant gratification of tax savings this year. A Roth IRA is a long-term benefit since you won’t realize the tax savings for years or maybe even decades.

BONUS RESOURCE: If you want to hear more information about traditional and Roth IRAs, you can listen to podcast #3.

Today’s Takeaway:


More From David:

The host: David Dickens

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