Which one is better : Roth IRA or Traditional IRA ? Looks like traditional IRA contribution is tax deductible and you only pay taxes once you start taking out money. While, Roth IRA you pay the tax or something like that but you don't get tax credit. In some you tube video this guy was like if you don't make a lot invest in Roth IRA since you will not pay lot of taxes.
Contribution limit on Traditional and Roth IRA is 5.5K . Employers offer 401k or 403b not IRA.
Correct me if I am wrong
yeah its 5.5 K for both traditional and Roth ...after reading the articles online I still cannot decide which is good
https://www.fidelity.com/retirement-ira/ira-comparison?imm_pid=700000001009716&immid=100390&imm_eid=e21515400200&audience=aud-305172630862:kwd-303488308539&gclid=Cj0KCQjw1-fVBRC3ARIsAIifYOMS6dlEHVYl5nNftCZpgiuMYSDC2gSwfbRcj7iQ-nko1gbIi7UHRakaAt2rEALw_wcB&gclsrc=aw.ds
both seems to have its good and bad..but some where I heard ROTH IRA is good but getting money back from the IRS for Traditional IRA seems a win win for me..though Traditional IRA is taxed later, it will depend on the tax bracket on the time of retirement which is most cases would be low ...
If you are young and earning less and you think you can earn higher as your career progresses, invest in Roth IRA as you will be paying low tax. But if you think you are already in peak of your career and earning max of your career then invest in IRA otherwise you will be paying lot of taxes.
I had one on one meeting with an agent from Vanguard who was visiting our organization and I asked exactly the same question. He said that if you earn below 100K go with Roth (both IRA and 403b).
Last edited: 28-Mar-18 10:10 AM
Thanks for the info Sparty
Why do you need roth IRA if you can invest in funds like SPY, VOO, VOOG, QQQ etc? Pretty much same fees or less than IRA providers and these are historically proven indices.
These provide more flexibility than IRA accounts as you can trade these any time and have no early withdrawal penalty.
I was not aware of these options. I will look into it. Thx KKP
A response/correction to @kalikopoi
Why do you need roth IRA if you can invest in funds like SPY, VOO, VOOG, QQQ etc?
- To avoid paying tax on dividends and capital gains since Roth IRA is a tax-sheltered account. Plus you can trade individual stocks, bonds, ETFs and index fund within a Roth IRA account.
Pretty much same fees or less than IRA providers...
- Fees may be cheaper in a Roth IRA. By opening Roth IRA account through Vanguard, the transaction fee will be waived for trading any Vanguard funds like VOO, VTI, etc.
These provide more flexibility than IRA accounts as you can trade these any time and have no early withdrawal penalty
- There is a common misconception about withdrawal penalty. You do not pay any early withdrawal penalty on Roth IRA account.
- You can trade anytime and transfer funds back to your bank account without tax consequences.
TLDR; If you are eligible, you can stash $5,500 every year in a Roth IRA to trade as much as you want without any tax consequences (no dividend tax, no capital gain tax, and no early withdrawal penalty)
A layman deskription would be that a traditional IRA gives you a current tax deduction, meaning you will be able to reduce your taxable income right now. Say if you are currently on a 25% tax rate, by contributing 5500 (Maximum for age 50 or under), you save $1,375 right now. You pay tax when you distribute the principal and the growth. Also, If the contributions are with drawn before you are 59 and 1/2 year old, you pay early distribution penalty of 10%.
Roth is a post tax contribution, which means you pay tax right now but you do not pay tax on the distribution of principal and growth.
So the bottom line is if you want to save tax right now or in the future. Also, most of us don't think about retirement right now but its never too early to put aside some money for our future. Can't count on the kids to take care of us these days :)
Last edited: 30-Mar-18 03:55 PM
Last edited: 30-Mar-18 03:56 PM
Last edited: 30-Mar-18 03:56 PM
Both Roth and traditional have the same contribution limit of $5500. The difference is for Traditional, you fund with before tax money now and pay taxes when you take out. For Roth, you pay with after tax money now, and don't pay taxes when you take out. Both are intended for your retirement, so if you take any amount out before retirement age, you will have to pay penalty fee (10%) in addition to tax.
The benefit with both is you can save on your taxes, either now or later. Which one is best for you depends on your situation. The caveat is that your money is locked up for a long time. So if you think that your tax rate (or income) will be higher in the future (when you plan to withdraw the money- say during retirement) compared to now, Roth IRA is better. But if you think your tax rate will be lower, traditional IRA is better.
If you plan to retire early like me, you can max out on traditional IRA and 401k and later convert that to Roth IRA and avoid paying taxes now or later. If you are interested in how to do this, let me know and I can explain it to you.
FYI Backdoor Roth conversion is eliminated as of 2018 new tax law.Even when it was allowed, there are calculation involved to get the taxable amount if you are not converting every year. Millionaire bro might need a new CPA.
C 864916. “These provide more flexibility than IRA accounts as you can trade these any time and have no early withdrawal penalty
- There is a common misconception about withdrawal penalty. You do not pay any early withdrawal penalty on Roth IRA account.
- You can trade anytime and transfer funds back to your bank account without tax consequences.”
—-> above statement is not true .theres no early withdrawal penalty in your CONTRIBUTIONS but you’ll have to pay taxes and penalty (if you withdraw before 59 1/2 age ) in the EARNINGS ( profits ) .
You avoid penalty if you’re over 59 1/2 but still pay TAXES in ROTH IRA earnings .
Last edited: 01-Apr-18 06:40 AM
You don’t pay taxes on roth earnings once you are 59 1/2. Even before 59 1/2 there are several exceptions to avoid penalty like education, healthcare etc. whereas you do have to pay taxes on your earnings.
Yes , sorry forgot to mention that once you’ve the Roth account for more than 5 years and over 59 1/2 then you can withdraw earnings tax and penalty free .
Age 59 and under.
You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.
Withdrawals from a Roth IRA you've had less than five years.
If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:
You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
You use the withdrawal to pay for qualified education expenses.
You're at least age 59½.
You become disabled or pass away.
You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
The distribution is made in substantially equal periodic payments.1
Withdrawals from a Roth IRA you've had more than five years.
If you’re under age 59½ and your Roth IRA has been open five years or more,1 your earnings will not be subject to taxes if you meet one of the following conditions:
You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
You're at least age 59½.
You become disabled or pass away.
You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
The distribution is made in substantially equal periodic payments.1
Anon bro, Backdoor Roth conversion is still valid after the new tax law. Only thing they changed is now you cannot change your mind and reverse the conversion.
Backdoor roth conversion is non taxable only if ira contribution was non deductible to begin with. You also have to keep in account of what’s your total ira value and basis. It never is contribute as tax deductible and convert it and take it out and take double tax benefit. Backdoor roth conversion is only good for people who make too much money to contribute to roth.
Anon bro, You are correct that you will be taxed when doing the conversion. But what if your income is too low and the amount you convert is such that, your total tax liability is basically zero? You pay the tax but it is zero, so basically, you pay nothing. Of course, this is not for everyone, but it can work wonders for an early retiree.
Word of Caution: Things like this can be complicated and a misstep may cost you a fortune. So always take professional help.
Here is a link that explains how it can be done. http://www.mymoneydesign.com/personal-finance-2/retirement/backdoor-roth-ira-conversion/
Thank you all in engaging in this topic. This should help me and others in the future.
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