Am I completely mistaken? If you're under it's more complicated and depends on your tax situation. So why is everyone using Roth? I chose a Roth because I have a long ways to retirement (I'm 21). Whether you choose a traditional IRA, a Roth IRA or both, your retirement will be richer for it. 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. If you are high income, prioritize Trad. You You have have a a a retirement retirement retirement retirement. You can withdraw the principle whenever you want without tax or penalty. Rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA. But many of us can't, so Roth is next best. The two most common vehicles, outside of employer-sponsored programs, are Roth IRAs and Traditional IRAs. Roth conversions reduce the value of an estate by “pre-paying” income taxes on traditional IRAs. Thanks in advance for sharing, I really appreciate it. Plus, if you already have a 401k, having a Roth IRA gives you variety in retirement. If you do a traditional and invest all the tax savings, the end result comes out similar, but most people probably won't do that extra step. Am I missing something here? Plus, if you already have a 401k, having a Roth IRA gives you variety in retirement. Hey All, 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. Or are you saying backdoor Roth conversion? I would definitely take the Roth at 9% if my income dropped that low, and the tIRA at 22%. The 2021 combined annual contribution limit for Roth and traditional IRAs is $6,000 ($7,000 if you're age 50 or older)—unchanged from 2020. Traditional 401(k): Kate earns $100 which she contributes directly into her traditional 401(k) without paying any income taxes. Related: How to save for retirement without a 401(k) You should have a good amount -- maybe ~$400k, though the precise amount depends on situation and future tax rules -- in traditional savings or other sources of normal income when you retire or you're just wasting money on taxes (because a certain amount of normal income each year is tax-free). Financial Independence is closely related to the concept of Early Retirement/Retiring Early (RE) - quitting your job/career and pursuing other activities with your time. Converted a traditional IRA to the Roth IRA. I’m just looking for your personal opinions as to which one you’re going with and why. 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. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. And of course, that means which is better always depends on your specific situation )and guessing what your future will bring). You can withdraw the principle whenever you want without tax or penalty. IMO, as long as you're going to max it out, you're usually better off with a Roth. (this assumes the backdoor continues, which as of now it does -- the GOP tax bill does not kill either backdoor, or impose any additional limits), Unless you earn less then the tax cut off for a trad. The key difference between Roth and traditional IRAs lies in the timing of their tax advantages: With traditional IRAs, you deduct contributions now and … Thanks again! For many people they will be in a lower tax bracket when they retire so the money they take out of a traditional will be taxed lower in retirement then it would be going into a roth. You can have both, right? 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. If your top rate is 10% right now but expect to be in the 25% bracket later in life and the 15% bracket during retirement, Roth is a great choice for now, and you'll use future traditional savings to fill that $400k. My 401k is pre-tax dollars so the Roth IRA allows me to diversify for tax purposes. With traditional, most early withdrawals will trigger a 10% penalty. (71k ish I think) there's no reason not to Roth. I’m hoping that after hearing other’s various thoughts and opinions it may help me decide what I’d like to do. account, account. 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. Roth and Traditional IRAs are … Qualifying exceptions to the penalty tax. The Roth IRA conversion works this way: You take a distribution from your traditional IRA or 401(k) and contribute that money into a Roth IRA. This is an outright benefit for Roths, compared to the traditional IRA that slowly self-liquidates from RMDs, forcing money into taxable accou… Roth vs Traditional 401 (k) In a traditional 401 (k), employees make pre-tax contributions. Conventional wisdom suggests that inheriting a Roth IRA is always better than inheriting a traditional IRA. If you make more than 150k ish I would think traditional is the way to go. Well, That depends we're gonna find out today. One important distinction about Roth IRAs (although not Roth 401(k) accounts) is that they are not subject to required minimum distributions (RMDs) during the lifetime of the account owner, while traditional IRAs are. video from Vanguard; Notes: It is almost never a good idea to make a non-deductible contribution to a traditional IRA without then doing a Roth conversion, as doing so would mean that your earnings would be taxed. If you think taxes will be higher later, a Roth lets you take the current lower tax rate, same if you believe you will be in a higher tax bracket later (Such as from real estate income or business income) you can pay the taxes at the lower bracket now and not at your new higher bracket later. (I keep about 3 months expenses in savings. You essentially get more out of it because you're investing the same amount but not paying taxes on the withdrawals. Currently, the IRA contribution limit is $6,000 per year, $7,000 if you are over age 50. I have a very low income currently and it will be like that for some time for sure. If someone were to retire with $400k in either type of IRA, what kind of yearly "Income" could be expected? Because that changes the equation significantly for high income earners. 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. Not sure why you're getting downvoted, it's a good question and other can learn from. If you are in between, split it between both. The most important rule is to just start saving already. Mathematically, if they're taxed at the same rate, they are equivalent - this is proveable with a calculator. Traditional: Taxes. An issue related to the backdoor Roth IRA is that having traditional IRA contributions makes doing a backdoor Roth IRA much more complicated in the future, which is why I would prefer putting money in a traditional 401k rather than a traditional IRA in many cases. So that leaves a "backdoor" Roth (where you contribute to a tIRA, but can't deduct the contribution on your taxes, and then immediately convert it into a Roth) as the only way to put money into an IRA of any flavor. Later (ideally in retirement! The rules or arithmetic don't change after N years. So if you put 10k into a tIRA and eventually withdraw at a 22% overall/average tax rate, and instead put 10k x 0.78 into a roth because you're currently at 22% marginal rate, and let them grow, the amounts withdrawn are equal. With a Roth IRA, you contribute funds on which you’ve already paid income taxes, commonly referred to … 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. I don't understand. You can also use the money to help get yourself into a lower tax bracket (Lower taxes now AND later). These limits keep on changing, that’s why you should keep updated by visiting the IRS contribution limits page. With equal tax rates, tax-deferal (dudctible traditional IRA) and tax-free growth (Roth IRA) are mathematically equivalent. Using a Roth allows me to keep a little less in my emergency fund, since I could always pull it out of my Roth if absolutely necessary. Earnings can be withdrawn without taxes or penalties as long as they are eligible. which one one one is is is even even even even better. Go Roth unless it costs you an employer match. However, before thinking of walking through the “backdoor”(by moving from traditional IRA to Roth IRA), you should ensure that you are in the right income bracket. If you can actually get the deduction. Welcome back guys. This liquidity helps people who think they'll need the money later on. Press J to jump to the feed. As a general rule, I would say tIRA is best. There’s no one-size fits all solution to this question. 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. But it boils down to: Do I want to save money on taxes now, or do I want tax-free money when I retire? If I ever need to withdraw money for some reason, the Roth IRA allows me to do so without issue. Additionally, you're able to withdraw your contributions tax-free and penalty-free at any time, for any reason. Roth IRA Traditional IRA; Key tax benefits: Contributions are made with after-tax money and any potential earnings grow tax-free. My before tax income is $136,600. While this reduces your taxable income now, you'll pay regular income tax … Roth vs. If you make too much money to deduct traditional IRA contributions from your taxable income, a Roth IRA is the better option. By the time you earn out of Roth contributions, you'll have also earned out of traditional IRA tax deductions. Thank you for your comment. 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