Traditional and Roth IRAs | Simple Steps for a Retirement Portfolio Course

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If you're saving for retirement, IRAs, or Individual Retirement Accounts, can offer
significant tax advantages.
This video focuses on how to choose between two common types of IRAs: traditional and
Roth.
Each provides different tax benefits.
In a taxable investment account, you have to pay annual taxes on any profits you earn,
which can slow the growth of the account.
A benefit of both traditional and Roth IRAs is that your profits aren't taxed while
they're in the account, which can help your investments compound.
Where traditional and Roth IRAs differ is in when you get tax breaks.
You essentially have a choice of paying taxes now or paying taxes later.
Let me explain.
With a traditional IRA, your contributions may be tax deductible.
This means you may get a tax break in the years you contribute to the account.
Savvy investors might take advantage of this tax break to make higher contributions.
But, you still have to pay taxes sometime.
With a traditional IRA you pay taxes on money you withdraw from the account during retirement.
Essentially, choosing a traditional IRA means choosing to pay taxes later.
Now, let's talk about Roth accounts.
With a Roth IRA, contributions are not tax deductible, meaning you don't get a tax
break when you make contributions.
Once you contribute money to a Roth IRA, you won't have to pay taxes on it when you make
withdrawals during retirement.
So choosing a Roth account means choosing to pay taxes now.
So which one is better?
It depends.
Based on your personal circumstances, it's possible that one type of account might be
better for you.
The biggest factor is whether you think your tax rate during retirement will be higher
or lower than your tax rate during the years you're contributing.
If you think your taxes are higher now than they'll be when you retire, a traditional
IRA might be better.
For example, by retirement, your mortgage may be paid off or maybe your kids will be
out of the house, so you'll need less income.
With this lowered income during retirement, your tax rate may be lower.
A traditional IRA would allow you to pay taxes later and take advantage of the lower rate
rather than paying a higher rate now.
On the other hand, a Roth IRA may be the best choice if you think your tax rate could be
higher during retirement.
For example, if you're a young investor who just started a career, you may expect
to pay higher taxes later in your career and into retirement.
By choosing to pay taxes now at a lower tax rate, you may benefit from paying less than
you would in retirement.
Plus, you'll have the comfort of knowing you'll be unburdened by taxes when you withdraw
from your Roth IRA during retirement.
However, there are a few things to remember.
First, it may be very difficult to predict future tax rates.
As a result, many experts recommend contributing to both traditional and Roth accounts as a
way to diversify your tax savings.
Second, there are limits on IRA eligibility and tax benefits.
For example, if you already have a 401(k) plan through your employer, traditional IRA
contributions may not be tax deductible.
Some investors may make too much money to contribute to a Roth IRA.
Be sure to check the IRS's income limits and consult a tax professional.
Now, a quick word about a similar type of account, 401(k)s, which are retirement accounts
sponsored by employers.
Like IRAs, 401(k) accounts may be traditional or Roth and provide many of the same types
of tax benefits.
But the contribution and eligibility requirements are a little different, so be sure to
refer to the current IRS regulations.
While it can be hard to predict your future tax rate, both traditional and Roth retirement
accounts can help you maximize your retirement savings with tax benefits.
The most important thing is to contribute early and often.

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Traditional and Roth IRAs | Simple Steps for a Retirement Portfolio Course

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