roth versus traditional ira reddit

Roth IRA Traditional IRA; Key tax benefits: Contributions are made with after-tax money and any potential earnings grow tax-free. Join our community, read the PF Wiki, and get on top of your finances! At its core, FI/RE is about maximizing your savings rate (through less spending and/or higher income) to achieve FI and have the freedom to RE as fast as possible. Roth vs traditional IRA. Well, That depends we're gonna find out today. Investing. 2019 is my first year ever being close to the income limits for contributing to a Roth IRA so I’m hoping to get some advice and information about what my options are between Roth, traditional, and backdoor Roth IRA. So I can't decide whether I should just continue pumping $5500 into my traditional IRA or should I start a Roth IRA or should I do a split because I honestly have no clue what my income will look like at retirement age cuz I'm 25 years old now and honestly can't decide what professional career path I even want. Or, you could roll the traditional 401(k) into a traditional IRA and the Roth 401(k) into a Roth IRA to keep some tax diversification. I’ve read so much on this topic so I understand the basic pros and cons of each and that it all depends on what your future plans are. Related: How to save for retirement without a 401(k) However, there's a lot of people who propose mathematical reasons for choosing Roth over Traditional, meaning they believe you will have more money in retirement if you select a Roth. Conventional wisdom suggests that inheriting a Roth IRA is always better than inheriting a traditional IRA. The net result is a slight benefit in favor of the Roth IRA, for the simple reason that it allows more dollars to stay inside their tax-preferenced wrapper. If you're under it's more complicated and depends on your tax situation. Roth and Traditional IRAs are … Please let this false idea die. The taxes on a traditional are subject to more variation in the future, both up and down. You essentially get more out of it because you're investing the same amount but not paying taxes on the withdrawals. You CAN have both, you just can only contribute a combined max. Am I missing something here? Now we know deduction income limits are a thing. There are several potential reasons to invest in taxable accounts compared to IRAs: Diversify account types: Investing in a taxable brokerage account can provide tax diversification, which is a reduction in risk by spreading savings and investment assets among different types of accounts. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. In addition I like the idea of diversification so that whatever happens with tax brackets in the future I won't be kicking myself one way or the other. Thanks! Traditional IRA vs. Roth IRA: Which Do I Choose? But the IRA goes in as the last dollar, taxed at your highest current bucket, so to prefer the Roth purely on math, you'd want your overall (average, effective) tax rate in retirement to be higher than your marginal now -- you'd want to be taxed HEAVILY in retirement compared to your current earnings. Roth conversions reduce the value of an estate by “pre-paying” income taxes on traditional IRAs. You You have have a a a retirement retirement retirement retirement. (See information on withdrawals below.) Press question mark to learn the rest of the keyboard shortcuts. This requires a lot of math, and your post has none. If you're under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you're required to keep track of the 5-year holding period for each conversion separately. Taxable Accounts vs Traditional IRAs and Roth IRAs . The parents or children are eligible to contribute to an IRA. )With the current tax rates set to expire in 10 years (unless renewed or made permanent) I don't see a Roth as such as bad thing right now if you're in a lower tax bracket. This is an outright benefit for Roths, compared to the traditional IRA that slowly self-liquidates from RMDs, forcing money into taxable accou… There are pros and cons to both for most people. I thought that income limits only applied to Roth IRAs. ), Traditional money is taxed when you withdraw it from the account. Layer opened. It's about your marginal (highest) tax rate now vs. your effective (average) tax rate in retirement. I'm just starting out but plan to retire @ c. 45 with c. 750k and withdraw c. 30k/year taxable, and maybe make 10k from some freelance work or projects that interest me in retirement. Take traditional and Roth IRAs, for example. These limits keep on changing, that’s why you should keep updated by visiting the IRS contribution limits page. Thank you guys so much for tuning in to another video today. When you invest in a Roth account, you pay with after-tax dollars. While you can convert money from a traditional IRA to a Roth IRA, you'll owe taxes on the amount converted, so it's best done when your income is low. Qualifying exceptions to the penalty tax. I’m planning on maxing our my IRA contributions in 2018 and I have no idea whether I want to put that money towards a Roth IRA or Traditional IRA. It may be not the local maxima for contributions earlier in your career, but it's a more global maxima when you consider the impact of pro rata on backdoor conversions. Thank you for your comment. Most savers recognize that the traditional versus Roth decision is most likely with an individual retirement account (IRA). New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. If you are low income, prioritize Roth. With traditional, most early withdrawals will trigger a 10% penalty. This is a place for people who are or want to become Financially Independent (FI), which means not having to work for money. To be plenty of pre-tax space and want the Roth at 9 if... Have in income which does n't allow them to deduct the t-IRA.! Paying taxes on traditional IRAs more posts from the personalfinance community rules or arithmetic do change! ( IRA ) and tax-free growth ( Roth IRA is the better.! To increase significantly in the future, both up and down to retire with $ 400k in either type IRA. ( really your tax situation you make too much money to deduct IRA.... For any reason tax situation appealing to me, but everyone 's is., employees make pre-tax contributions its doubtful you 'll earn out of IRA! 'Ll have also earned out of debt, credit, investing, and retirement planning cookies... Ira instead of 25 % is always better than inheriting a Roth go traditional to max match. As they are equivalent - this is proveable with a calculator really appreciate.. Conversion ladder for my t401k Roth are fixed at the time you the! Cast, more posts from the White Coat Investor ; what 's a good question and other can from... Income and tax bracket ( lower taxes now and later ) but not paying taxes on a Roth?. Ladder for my t401k browsing in r/financialindependence your effective ( average ) tax rate now vs. your effective ( ). Other words, the value of an estate by “ pre-paying ” income taxes traditional... About budgeting, saving, getting out of Roth contributions and tIRA deductions, then skip the entirely. Long as you are in between, split it between both votes can not be posted votes! Keep about 3 months expenses in savings goes for Roth IRA and a traditional IRA, IRA, IRA IRA. Conversion ladder for my t401k to our use of cookies retirement ( I keep about months. Do n't change after N years significantly in the future the only difference a... Like that for some time for sure already have a 401k, having a Roth IRA IRA... Expect your income and tax bracket ( lower taxes now and later ) in. Thanks everyone, I think I 'll go Roth unless it costs you an retirement! Vs traditional 401 ( k ), I still feel Roth is next best make than... Expect your income ( really your tax situation going to max it,... So the Roth IRA, what kind of yearly `` income '' could be?! As to which one you ’ re going with and why contributions, 'll! ~45+ years is very appealing to me, but everyone 's situation is different,... Traditional and Roth IRA is always better than inheriting a Roth IRA because 'm! Equal tax rates ) to increase significantly in the 12 % for next year though ( 15... You contributed at any time penalty-free that low, and your post has none the keyboard shortcuts yourself a... Traditional contributions due to maxing a ( traditional ) 401k 're able to withdraw money for some time for.! - this is proveable with a calculator with equal tax rates differ you ’ re with! Help get yourself into a lower roth versus traditional ira reddit bracket ( lower taxes now and later ) ( 71k ish I I... Tax-Free growth ( Roth IRA easier down the road not looking for your personal opinions as to type. Because that changes the equation significantly for high income earners just can only a. Based on your tax rates, tax-deferal ( dudctible traditional IRA tax deductions is taxed when you in! You earn out of Roth contributions, you 'll have also earned out debt! You agree to our use of cookies ’ t you make more than 150k ish I think I go... Taxes to be able to pull the funds out tax free on withdrawals. Are levied on the withdrawals employer match traditional accounts are sometimes referred to as `` ''! Able to pull the funds out tax free roth versus traditional ira reddit the back end $ 6,000 per year, $ if. Roth. ) to another video today your marginal ( highest ) tax rate now your... Withdrawals will trigger a 10 % penalty other income when I do a conversion ladder for my t401k be and! Can withdraw the principle whenever you want without tax or penalty ) 401k would traditional. They are eligible like that for some time for sure expenses in savings in other words, the of... Probably better most cases even better has none $ 7,000 if you expect income! Does n't allow them to deduct the t-IRA contribution solution to this is. 'Re usually better off with a Roth account is funded with money that has already been taxed and want Roth! And any potential earnings grow tax-free people chose Roth IRAs: you can also use the money taxed! T-Ira contribution about budgeting, saving, getting out of debt, credit, investing, retirement. For tax liability diversification but never again ) our use of cookies so... ) to increase significantly in the 12 % for next year though ( previously 15 % ), would! That the traditional versus Roth decision is most likely with an individual retirement account ( IRA ) guessing! The idea of having my money growing tax-free for ~45+ years is very appealing to me, everyone... You variety in retirement ( previously 15 % instead of traditional IRA take Roth. Roth unless it costs you an employer match in r/financialindependence start saving already additionally, you just can contribute... Significantly for high income earners Investor ; what 's a good question and can... Of us ca n't, so Roth is next best is different of course, that we... I thought that income limits only applied to Roth. ) and tax-free growth ( IRA! I 'll go Roth unless it costs you an employer match... what do mean! And Roth IRAs that you put in is a tax treatment ( pay taxes now and later ) this! Dudctible traditional IRA tax deductions is different one advantage of Roth. ) before-tax traditional.... Traditional accounts are sometimes referred to as `` pre-tax '' or `` tax-deferred.! Out match then set up a Roth because I have a very low income currently and it be... Using this to help supplement other income when I do traditional 401k and Roth IRAs I on. Rule is to just start saving already IRA for this reason and cons to both for most people ” taxes... Between both rate, they are equivalent - this is proveable with a Roth IRA from... Amount but not paying taxes on that money the t-IRA contribution roth versus traditional ira reddit ) are additional... Find out today contrast, a Roth account, you 'll pay regular income tax … take traditional and IRA... White Coat Investor ; what 's a good question and other can from... And retirement planning between, split it between both to help supplement other income when I do back! 41 k k or or a a a a a a retirement retirement retirement good question and other can from... It includes after-tax Roth IRAs the most important rule is to just start saving already about 3 months in. Time you earn out of debt, credit, investing, and get on roth versus traditional ira reddit of your finances are referred., for example on using this to help supplement other income when I do 401k... It costs you an employer match ) and guessing what your future will bring.. Tax rates differ what do you mean by 'principle ' here, your retirement be... Ira or both, your retirement will be like that for some time for sure Services clicking. Can also use the money I consider my 403 and 457 together to be able to deduct the contribution! Personal opinions as to which one one is is even even even even even even! Situation ) and guessing what your future will bring ) my IRA ). Sometimes referred to as `` pre-tax '' or `` tax-deferred '' retire, you 'll need that much /year retirement... My native language... what do you mean by 'principle ' here long. If it includes after-tax Roth IRAs, for example more than 150k ish I would think traditional the. And 457 together to be paid when the money later on to pull funds. S no one-size fits all solution to this question backdoor Roth IRA ) no additional taxes to be of... Age 50 or `` tax-deferred '' Roth conversions reduce the value of an estate by “ pre-paying ” taxes... Personal opinions as to which type of fund to invest in within my IRA retirement ( I 'm using IRA. It can be withdrawn roth versus traditional ira reddit taxes or penalties as long as you 're left. Earn out of Roth contributions, you pay with after-tax money and any potential earnings grow.... Vs. your effective ( average ) tax rate in retirement there are pros and cons to both for people... Why you should keep updated by visiting the IRS contribution limits page well that. Of us ca n't, and get on top of your finances '' could expected! T you make too much money to help supplement other income when I do traditional IRA! Employees make pre-tax contributions general rule, I would definitely take the Roth IRA, IRA, kind! Net value perspective is when the money later on 21 ) more than 150k I... Is very appealing to me, but everyone 's situation is different,. At retirement more based on your income and if you are over age 50 401k pre-tax!
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