Ep 11: Traditional IRA or Roth IRA?

September 16, 2021

Should you invest in a Roth IRA or a traditional IRA? What difference does it make? Even people who have been investing for a while can get these two accounts confused. On today’s episode of the podcast, we talk through the definitions and purposes of these investment options.

The difference between a traditional IRA or a Roth IRA comes down to when you pay the taxes. With a Roth IRA, you pay the money before investing which means when you take the money out, it’s tax-free. With a traditional IRA, the taxes are deferred and get paid when you take the money out.

So, which one is better? Or which one should you contribute to? There are certain limits under the contribution side based on income. Some people consider a Roth conversion to move the money from a traditional IRA into a Roth IRA.

Alan and Troy explain what happens if your employer offers a Roth 401(k), including what happens if the employer also offers a match. What kind of things should you look out for in your plan and what kind of questions should you ask? Have you heard of the 5-year rule with the Roth 401(k)?

With so many benefits from a Roth IRA, why do so many people have so little invested into a Roth account? In the past, some advisors or CPAs have recommended taking the tax breaks now and planning on a lower tax bracket in the future. The reality is, many people are not in a lower tax bracket in retirement. You want to have a good tax plan alongside your income plan and entire retirement plan.

Who should contribute to a Roth? Probably anybody in their 30s and 40s. We’re at a low point when it comes to taxes, so the likelihood is that it’s going up in the future. If you’re in your 50s or 60s, consider a Roth conversion but be wise about how you pay those taxes. Talk to an advisor about proper Roth conversion strategies to ensure you do so in the right way and at the right time.

Listen to the entire episode or use on the timestamps below to skip ahead to a particular question.

1:06 – What’s the difference between a traditional vs. Roth IRA?

3:45 – You may have the option of a Roth 401(k) at work.

6:35 – Why don’t many people have much money in a Roth?

10:19 – Who should contribute to a Roth?

13:00 – Who should stick with the traditional IRA?

16:01 – What would happen during a visit about Roth conversions?

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