Eli5 roth vs traditional. , you pay taxes when you withdraw from the traditional 401K.

Eli5 roth vs traditional called "mega" because 401k contribution limits are higher than ira contribution limits. ELI5: Roth IRA accounts 12 comments. Traditional TSP accounts, while tax-deferred, And that Roth vs traditional really just depends more on your expected tax situation in retirement vs in your accumulation phase. 5 yrs) Let’s say you put $100 into a Roth IRA. Welcome to MarketScreen – Navigating the Financial Markets Together! 📈 MarketScreen is your go-to EDIT: Adding the ELI5 version - the 401(k) gives you one cookie, the IRA gives you another third of a cookie, and that's better than just one cookie. a Roth IRA is often contrasted against a traditional IRA. This means, you earn $100 and you can pop $100 into your 401(k). Roth 401k became an option for a plan as of 2006. (AxB)xC = Ax(BxC). The annual contribution limit is $7,000 in 2024 (plus an additional $1,000 Mathematically, the way it works out is that a Roth vs Traditional comes down to the tax rate when the money is actually taxed. Roth - Deposits are post-tax. Those gains may be rolled-over into a Traditional IRA to avoid taxes on those gains. The main difference is how the contributions and withdrawals are taxed. You 1) open a traditional IRA, 2) make a non-deductible after tax contribution (since you're over the income limit for the deduction), 3) convert the entire balance to a Roth, 4) close the traditional account, and 5) file a form at tax time to let the IRS know what happened. I can't have a traditional. If I did a Roth Conversion I would be paying 22% tax on all that money and owe $5,500 federal tax on a $25,000 conversion. I am, relatively speaking, new to all of this and I am trying to get my head around owning individual bonds vs something like BND. Traditional IRA: if you are married,filing jointly and income over $136K, you don't get to write off on you tax filing. Edit: WTF people, Traditional IRA v Roth IRA. We save aggressively about ~5k per month as we are planing to get a house next year. Mega Backdoor Roth refers to making after-tax 401k contributions, and rolling them out of the plan and converting them to a Roth IRA. American English). If you have a bunch saved up and stop working at say age 50, you have 22 years to convert at the 0%, 10%, 12% brackets. I am only interested in the tax benefits of the rollover. Dumb question about Roth vs. Can someone summarize the differences between the traditional vs Roth TSPs besides Roth money already being taxed and traditional is taxed when you pull money out when you’re old? I didn’t really notice there was a Roth option on the TSP and now I feel like I should have all my money in there. About 88% of 401(k) plans offered a Roth account in 2021, almost doubling from a decade earlier, according to the In a Roth IRA, you do have to pay taxes on your money before you put it in, but you do not have to pay taxes on any earnings when you take it out. At age 59. You can open your own IRA. The limit on combined Traditional and Roth individual contributions to a 401(k) is $18,500/year. Gross salary minus traditional 401K contributions equals AGI (more or less). An IRA can also be traditional or Roth. That's why people refer to this debate as a religious war, since either side can make themselves look right on paper Diverting some of that to a traditional retirement account saves 24% in taxes, with the goal of that money maybe being in the 12% or 22% bracket later. I would not blend ROTH and Traditional in the same account because you can’t keep track of ROTH funds and traditional funds separately in the same account, which I think is messed up. I also understand the Traditional IRA to Roth IRA backdoor, no need to ELI5 that. So in summary, Contribute enough to your 401(k) to fully earn any match your employer offers. That's misleading - with a Roth, you also give up on all the growth from the money you give to the government up front. Premium Powerups Explore Gaming. So Traditional 401k: 23,000 from me, 8,500 employer match Back Door Roth IRA: 7,000 How would I do contribute to a mega back door Roth? I have already maxed out the 19,500 traditional 401(K). IRA and 401(k) are nouns. NFL NBA From doing roth 401k before and having consistent roth IRA I do end up having all 3 buckets and I would not want to have only the traditional bucket. Your exact scenario is where roth assets make perfect sense. But now you take it out and you pay income tax on it. Person B makes a bit more money (he's single and makes ~$70k a year), so he can either contribute to traditional or Roth IRA. Must leave in until retirement age, severe penalties if ELI5 🫥 Traditional IRA versus Roth IRA . I have opened a traditional IRA account with Vanguard and put 500$ after-tax money in it and want to max it to 6K and then convert it into Roth IRA. I keep seeing conflicting information - some say Lots of people tell me to get one but I'm not sure how it works, even after googling it. I can have a Roth. Not every employer that offers a 401(k) also offers a Roth 401(k). Can How much should I be contributing to traditional vs Roth? I make 140k/ year and have about 90k in my 401k. traditional IRA, one key thing to keep in mind is the importance of taxes and tax rates. An IRA is set up by you. GameStop Moderna Pfizer Johnson & Johnson AstraZeneca Walgreens Best Buy Novavax SpaceX Tesla. That's why if the tax rates are the same (contribution and at withdrawal) there isn't any difference in the value of a Roth vs Traditional. This cuts both ways: The United States is on a fiscally unsustainable path and tax rates will likely go up in the future. Yes, traditional usually is the best option if you think you will be taxed more during your working years than you will be in retirement; if you think you’ll be in a higher tax bracket in retirement, then Roth is the better option. , not just random MarketWatch and Business Insider fare) including White Coat Investor (Dr. in our current capital gains tax rate structure, there is no reason to make non deductible traditional contributions When saving for things like retirement, traditional savings accounts tend to be more appropriate. However, I'm a little Coins. I have two retirement plans from previous employers (both are 403b) that I want to consolidate. Also maxing back door Roth IRA and HSA. Reply reply Traditional vs Roth refer to different types of tax benefits and you can either 401k or ITA in both. With a traditional IRA the money you contribute is not subject to normal income taxes. Probably dumb question here, but just need some ELI5 for IRAs. They are both retirement accounts. Functionality of Traditional/RRSP and Roth/TFSA are nearly identical, just some slightly different surrounding regulations. IRA: Retirement account you open yourself, has much lower allowed contribution (>3x lower). Most of my current rollover Ira's are traditional, since roth 401k and R ira came later in my savings life. All my investment accounts are spread with VTI/VXUS. Reddit's home for tax geeks and taxpayers! News, discussion, policy, and law relating to any tax - U. Labeling differs, sometimes is just straight "Employee deferral". Correct. Join our community, read the PF Wiki, and get on top of your finances! Members Online. Check prime directive. I ran two hypothetical scenarios and determined that the benefits of the difference in the expected marginal tax rate paid in a Roth vs. The listed ones are better, though you want to do some more research on the equivalent Vanguard wholesale fund vs its counterpart ETF The spread will be smaller with a listed fund via a broker, as other investors can compete against the market maker. Personally, I'm going to 'front load' my retirement while I'm ELI5: How does an IRA work? In plain English, an IRA is an account you put money into that receives favorable tax treatment. With Roth, you are locking in your current tax rate. Share Add a Comment. If your income exceeds a certain level and you have access to other pre-tax retirement options such as a 401(k), then you cannot contribute to a pre-tax traditional IRA. Money goes in pre-tax (not counted as taxable income) and when withdrawn in retirement is all treated as taxable. This favors Roth IRAs. Its close enough for the ELI5. Crypto Btw in terms of actually going from Traditional 401k to Roth IRA, I'm not sure if you can do that in 1 hop? You might have to rollover first from a traditional 401k to a traditional IRA, and then convert from traditional IRA to Roth IRA. Roth means you pay taxes now on your contribution, but when you retire you can withdraw tax free. traditional 401(k) The main difference between a Roth 401(k) and a traditional 401(k) is their tax treatment. Contribute as much into the Roth as you are comfortable with, up to the limit of 7,000 per person this year (you and your spouse). 30 years later it’s worth $10,000 and you take it out of your Roth IRA and put it into your bank account. You can open a Traditional IRA or a Roth IRA. However, when you withdraw money from your IRA when you retire, that money is taxed. Traditional IRA. Generally, if you end up in a higher tax bracket in retirement than when you made the contribution, you'll have more after-tax dollars with the Roth IRA. If you decide that Roth is right at this point, you can do that, and your current contributions will be Roth. I have been googling and searching and trying to understand the whole 401k (traditional, Roth, and/of After-tax (not sure which one(s) apply)) to Roth IRA. A Roth 401(k) Helps You Save Taxes In Retirement And On Your Investment Growth. The limit is $5,500 for all IRA's. In this scenario, a rollover IRA is also a traditional IRA. Assuming a 30+ year time horizon, you’d expect to have an ending balance approximately 3x what you put in with an average return of 7% and equal monthly contributions. Traditional IRA: "upon withdrawal from the account, withdrawals are subject to federal income tax" (including growth) Roth IRA: "tax free withdrawals on the growth portion" (past age 59. Roth IRA vs. I am a 21 year old who is going to graduate school in one year. You can remove your regular contributions to a Roth IRA at any time. The primary difference is that contributions to the Roth 401K grow tax free, while the traditional 401K grows tax-deferred, i. We would like to show you a description here but the site won’t allow us. Could be as much as $58k in 2021. If they do this, the 401k is obviously better because free money (at least up to the maximum your employer contributes). So not all advice you see may properly account for current situations. My recommendation is to Google-search and read a dozen articles on it written by smart people (i. Join our community, read the PF Wiki, and get on top of your finances! Or they can contribute to a Roth IRA, still pay taxes on that contribution, but when they withdraw the money (and its earnings) in the future there will be no additional taxes. ELI5: The difference between a Roth IRA, 401(k), and other retirement accounts. Reply reply ostermei • That depends on your employer, though. Which one is better depends on your current vs future income tax bracket. Read on for the differences worth noting between a rollover IRA and a traditional IRA. Traditional IRA - contributions are tax deductible from that year's income, but taxed on gains. A Solo 401k also allows you to do backdoor Roth IRA contributions because it zeroes out your IRA space. If you expect to live a similar or cheaper lifestyle in retirement, the traditional IRA is better. When you make a Roth contribution, 401k: Retirement account thru your employer, sometimes they add in money too. The theory for Roth is that all of the growth is untaxed. The usual annual limit applies. You can have a Roth 401k and a non-Roth IRA as well. Traditional IRA is different. I will note that the Reddit comments from your video link explain the same thing with regards to Roth vs. Now let's say you have a lemonade stand. ELI5: What's the difference between a Roth IRA and a 401k? How do they work? 5 comments. For one thing if you can't deduct your traditional ira contributions there's no benefit to it and you're better off going Roth, unless you're over the income limit for Roth, in which case you have to do traditional and then convert to roth Calpers offers ROTH 457 and ROTH 401k. Let me explain. If you're scrimping now with a goal to live larger in retirement, it makes sense to pay moderate taxes now rather than worse ones later. That’s the power of a Roth IRA. However, starting at about $60k the You are able to invest more in deferred contribution, and when you convert to Roth later on you could fill your 10% 12% and whatever the next threshold is later on. If you want to put in more than 5% of your paycheck, great! I do and so do many (most?) others adding more Traditional money doesn’t get you more 12% money; it gets you more 22% money. Yes, at its most basic, with a Roth IRA you pay taxes before you put the money in (as taxes on your income) and pay no taxes when you withdraw. ELI5: what is the difference between an IRA / ROTH IRA / 401k? 2 comments. So for a traditional, you defer your tax payments until later. The difference is 401(k) is employee sponsored where as IRAs are individual accounts between you and your broker. So when and how do those $5k in earnings get taxed? This page on the Bogleheads wiki has pretty much everything you need to know. Traditional (P-T)G = PG-TG [it's not really TG, it's just a larger base being taxed, it's really more like T*(PG)] If I have $100 to invest for 1 year at 10% interest and I'm in a fictional 20% tax bracket while working and while in retirement: With a Roth, you are only paying income tax on the original principal. The math is pretty straight forward, but basically multiplication is commutative. If your 401k plan supports it, Many people confuse the tax brackets for the decision Roth vs Traditional. Roth and Traditional have the same value if the same tax rates apply on both sides. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Roth IRA - contributions use already taxed income, but allows tax free gains. Roth conversions have their own separate 5 year rule, based on the date of conversion. , you pay taxes when you withdraw from the traditional 401K. EDIT - I interpreted ROTH as a Roth IRA, not a Roth 401(k). They will put 5% of your paycheck into Traditional as per laws/regulations. The gains Posted by u/paigeedel - No votes and 4 comments Roth IRA - uses after-tax dollars. Archived post. 20 tax (a fine example of the commutative property of multiplication). Roth vs Traditional is a decision based on how much money you make now (really, the marginal tax bracket you're in) vs how much you anticipate having when you're retired/eligible to withdraw without penalty. ELI5: I have read so many of the scammers asking for payment via steam, iTunes, and other gift cards. 32% and higher should do traditional, and 22% and lowers should do Roth. r/explainlikeimfive Here's the difference between a traditional 401-K and a Roth: Traditional - Deposits are pre-tax. Convert some or all of the amount in the traditional IRA to Roth For this year, if you are under 50 years old you have a $23000 limit for 401k contributions and a $7000 limit for IRAs. Your employer has nothing to do with your IRA. Yes there is such a thing as a Roth 401K. I'm 100% in FNILX with the Fidelity Roth IRA. r/personalfinance. Traditional. The Retirement Accounts link has ELI5's for IRAs, 401ks and more. ELI5: would two cars driving at high speed into each other cause the same damage as one car going double the speed into a stationary one? Roth IRA vs Traditional IRA . normal brokerage account. So there isn't a difference between getting taxed before or after the growth. Roth TSP . Finally, you can't switch money already in the TSP between Traditional and Roth, but you can change which one you're using for new contributions as you go. Roth is simply taxed before you put the money in. It can only be done using a Roth IRA EITHER WAY, the idea is to convey an idea simply and succinctly. 0 coins. ELI5: IRAs, Roth IRA, and 401ks 67 comments. The biggest after tax pot in retirement, for most folks, will come from maxing out a traditional Ira and doing a Roth/backdoor Roth/mega backdoor Roth. Could be traditional (pre-tax) or Roth. Your dad lets you sell as much lemonade as you want, but you have to save whatever money you make. Jim Dahle), Morningstar (Christine Benz), The I have a Traditional TSP (100% C Fund) and last year I opened a Roth IRA with Fidelity, but I have only put in $100. Definitely read through it. Roth vs. In 2021, it is about $12,500. true. There are both Roth and traditional 401Ks. Can someone ELI5 what the benefits of a traditional IRA are if you earn more than $73k (S)/$136k (MfJ)? into a traditional IRA but I just spent the last 10 years slowly converting my old traditional IRA (~$100k) to a Roth to prepare for my eventual backdoor Roth and avoiding the pro-rata rule. My plan is to max out 401k ($20,500/year), HSA ($3600/year), and Roth IRA ($6,000/year). r/FinancialPlanning. 5 you can start pulling money out of your IRA/SEP/401K's to retire early. Reply reply More replies. It just looks like one $20k lump contribution. All you have to do is put in 5% of your paycheck into Traditional OR Roth. Posted by u/Lindyhop88 - No votes and 12 comments Yes, you choose traditional vs roth based on when you think you will be taxed more. Posted by u/my-two-point-oh - 2 votes and 6 comments 202 subscribers in the marketscreen community. I'd like to have my Roth separate from my TSP, so that's why I'm choosing to have a Roth IRA account outside the TSP. Roth vs Traditional retirement acct: You pay with after-tax money (same as a normal investment acct) vs paying when you withdraw. OP's question is about current year taxes versus taxes decades (or at least years) in the future. With a Traditional IRA, there's no tax when you deposit the money Hey PF! My fiancee works for the government and has access to a gov't TSP. Reply reply Trad vs Roth is tax arbitrage and depends entirely on taxes now vs taxes later. A Traditional 401K's got to be rolled into a Traditional IRA. You can buy/sell any time of the day vs the end of day price used with the unlisted fund. . We are debating Roth vs Traditional again, not IRA vs 401(k) (in particular: not Traditional 401(k) vs Roth IRA, which you've implied with the low limit comment). Crypto Eli5 Whats the difference between a roth ira and a traditional ira? Economics Is there a reason one is better or not? Locked post. The amount you can invest in an IRA, however, is smaller - $5,500 this year if you are under 50; $6,500 if you are 50 or over. , via the "front 19M subscribers in the personalfinance community. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning If you contribute to a Roth IRA (or a traditional IRA), you may be eligible for the Saver’s Tax Credit, which can shave as much as $1,000 ($2,000 if you’re married filing jointly) off your Hello, I am a new attending trying to figure out a long term savings plan with Roth vs normal solo 401k. 20 tax x investment return = $10,000 x investment return x 0. In my case, I make Traditional 401k contributions until I reach Question: As someone who will likely try and go for PSLF, should I contribute to 401k as Roth or Traditional. non deductible traditional IRA contributions are withdrawn tax free, but all the growth is taxed as ordinary income. Both TSP and Roth IRAs can be Traditional The money guy show did an episode on traditional vs Roth and they said something similar. 2. New comments cannot be posted. Sports. Maybe you can ELI5 this? One thing underrated concern in the traditional vs. You can juke enough assumptions to make either look superior. earning interest, which is taxed as regular income. Or And the two remaining strokes have become one. Traditional: Deduct contributions from annual income and pay the taxes when you withdraw. If the 401(k) plan was not a Roth 401(k), you’ll likely want to open what’s called a traditional IRA. From reading around here, when people talk about bonds, it seems like they are generally talking about etfs, so I am guessing that is what most people would advocate for Roth 401k options are getting more common (one recent stat claimed 70%), but it was rarer in the past. Look into back door roth conversion. People usually do this only on funds over the $20,500 limit (explanation below). Reply reply Big_Huds • Yeah I believe you’re correct that the process would really be 401(k) —> traditional Also, at nearly any case, a Roth will ALWAYS win out unless you invest your tax savings from the traditional contributions for example, if you max out your traditional 401k, you need to take your tax savings (~$5K, depending on brackets) and invest in a taxable brokerage if you don’t do that then the Roth is going to give you more money in retirement I’m young but I don’t want to not access my money until I’m 60. Just wondering the basics. Those are pretty good returns. Hello, Please explain to me ELI5 as I don't understand financials very well. One thing that reels in the difference between the two: In practice, the Traditional user with a spare dollar actually has a spare dollar tax ELI5: Individual Bonds vs. 4% rule says $72K income. 5% coming out by doing traditional you avoided paying 22% on that same money, but also lowered your tax liability every year, and if you took that savings and put that into a brokerage, it widens the divide even further Backdoor Roth refers to making a nondeductible Trad IRA contribution, and converting it to a Roth IRA. I am hoping for a straight forward question to a somewhat hypothetical question in order to best understand retirement accounts: If someone makes around $150k a year their entire life, but expects to make less in their older age (for what ever reason, Barista FIRE or switching to part-time) is it Posted by u/AlwaysTheNoob - 2 votes and 12 comments What is the benefit of backdoor IRA vs non-deductible traditional IRA? Roth contributions have no future taxes. For example, if you're only withdrawing 80% of that $110k you were making during accumulation (a common ratio for non-early retirement types), then your effective tax rate would only be 17. I’m married wife(29F) makes about ~90k and 401k is ~30k. Traditional 401k Roth isn't just across-the-board better, but depends on a person's situation. This later will prevent you from paying tax twice. Long-Term Growth Potential of Roth vs Traditional Accounts. I'm 1099 so have a solo 401k that I plan to max at 66k, but have both 401k and Roth 401k option. Seems like doing a Backdoor Roth IRA contribution, instead of a direct Roth IRA contribution, just has extra steps -- it doesn't actually Business, Economics, and Finance. If I can do things all over again, I would contribute to ROTH only 401k and traditional only 457. With Roth IRAs and Roth 401(k)s (which are far less common than traditional 401 plans), you don't get to deduct your contributions, but you get to withdraw the money tax-free. The question is investing in a Roth vs. You end up having the same amount of usable money when you take it out. ELI5: What is the difference between pre-tax, Roth, post-tax when it comes to 401k? Roth rules mean you pay taxes on contributions, then they compound without taxes, and when you withdraw in retirement you do not (under current rules) pay taxes. With a Roth IRA, you pay tax on your income when you deposit it into your IRA and there's no tax when you eventually withdraw it. This is done by: Disregarding a few exceptions, rules, and limit differences, an RRSP is identical to a Traditional IRA, whereas the TFSA is very very similar to the Roth IRA. If you're a higher earner who expects to live more moderately in retirement, traditional makes sense. S. Traditional 401k: Same as Trad IRA but your work handles it which means simpler taxes. EDIT: I'm an idiot. I understand all the other perks of IRAs vs 401ks. If you’re poor now but expect to live a more wealthy lifestyle in retirement— say you’re an apprentice or a young lawyer — a Roth IRA is better. Business, Economics, and Finance. With a Traditional IRA, you’d pay taxes on that $9,900. My new Traditional IRA doesn’t “know” that $5k was earnings. blablahblah • You can make both traditional and Roth contributions to a 401k account if your employer's plan allows it, so saying "weighed more on If you already contributed $2,500 to your Roth and want to contribute another $2,000, then the maximum you can put into your Traditional is $1,000. All my other trading ways, lost more money than they made. For a Roth, you pay taxes up front. Roth TSP accounts allow for tax-free growth, which can be a powerful advantage over time. It’s hard to “ELI5” these things because there are so many rules and details, but hopefully this gives you a good starting point to do Example 2: I'm working, I'm making $60,000, solidly in the middle of the 22% tax bracket. It requires you to live minimalistically (or at least within the current 12% bracket) and have contributed a sizeable amount to taxable brokerage accounts to sustain yourself during the 5 year conversion period as long term capital gains tax is 0% within the 12% bracket at this time. Traditional IRAs are similar to 401(k)s in that the money invested is tax-deferred until it is withdrawn in retirement. Basically you open a traditional IRA account with a brokerage, contribute up to the annual limit ($5,500), convert it to a Roth IRA (your broker can help you with this) and you're done. If you're 12% marginal then your likely best path is contribute enough to the 457b to maximize any emplpyer matches The Traditional vs. Bond ETF's . As I said, I think his unwritten assumption is that if Roth limits were increased, total retirement savings would not change, but Roth retirement savings would increase. Roth Both 401(k)s and IRAs can be traditional or Roth (although a majority of 401(k)s are traditional). But there is a cap at 20 grand for your traditional. If you don't know which you have, it's almost certainly a Traditional 401K. Similarly, the IRA limit applies across all of your IRAs combined, traditional + Roth. Should be the same result, just 1 extra hop. Reply reply If we assume a 6% inflation (and tax band) adjusted gain and max the 401k for 30 years, that hits about $1. I will be in debt. so traditional 401(K) and Roth 401(K) {max 19,500} are different and traditional IRA and Roth IRA{max 6K} are different? If those gains are included in the rollover to a Roth IRA, you must pay income taxes on those gains. My info came from an article, I just translated it into layman for ELi5 Reply Roth IRA vs. Thank you for such an in depth ELI5. Roth 401k: Same as Roth IRA, but your work handles it. It was an old 401k conversion to a Traditional IRA, that I converted to a ROTH IRA and a brokerage account at the same time so I could trade stocks. It is still a ROTH. The traditional-vs-Roth question isn't uniquely different when applied to the TSP than when talking about 401(k)s in general. IRA, an Individual Retirement Account in the United States is a form of "individual retirement plan", provided by many financial institutions, that provides tax advantages for retirement savings. Max out my Traditional 401k and Roth IRA. The mega-backdoor Roth process is totally different, despite the similar name. There is no "403b IRA". If Nope. You can go to Vanguard, Fidelity, or Schwab's website and create a new Roth IRA out of thin air. Earnings vs contribution doesn’t matter for regular deductible contributions Here’s what I don’t understand. They are not taxable on the way out. It's not Roth IRA versus 401k, there's actually a Roth 401k option. I'm still pinching myself. With traditional, you are betting that your tax rate in retirement will be lower (and therefore you can contribute a higher amount of pre-tax dollars today). For an IRA there are income ELI5: Roth IRA vs. Each year you can elect to contribute money to your IRA using "out of pocket" money, as opposed to your 401(k) contributions which must be funded through payroll deductions. Now I'm waffling. For me, that's the biggest difference. Don't deduct the contribution on your 1040 line 32. Traditional contributions go in tax free and come out at your effective tax rate in retirement. From my understanding a Mega Back Door Roth can be contributed until you reach the 69,000 figure? My situation: Currently make 170k yearly, 5% employer match. Right now you are saving 22% by deferring. ELI5 . Valheim Genshin Impact Minecraft Pokimane Halo Infinite Call of Duty: Warzone Path of Exile Hollow Knight: Silksong Escape from Tarkov Watch Dogs: Legion. One says "No IRA" on the side, one says "Traditional IRA" on the side, and one says "Roth IRA" on the side. Roth and Traditional are adjectives. 19M subscribers in the personalfinance community. Contribute to a traditional IRA. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning 226K subscribers in the tax community. 80 votes, 147 comments. Roths are good if you think your income (and therefore tax rate) is lower now than you expect it to be in retirement. You don’t pay taxes on the gains you get. People usually do this when they've exceeded Roth IRA income limits. You can put your money in any of the three piggy banks. So investing in a Roth while you’re young and presumably in a lower tax bracket is a great deal - yes, you paid 12% on what you Just want to point out that his method of tax free conversion is a bit niche that won't apply to most people. The employer-sponsored plan allows you to add much more to your retirement savings . your later career/retirement expectations) and your employer's plan has a Roth option, you can do Roth in your Thanks, it only took me 15 years to figure out, find a good company, buy it and hold it. The difference between a traditional IRA and a ROTH IRA are that in a traditional IRA, you don't pay taxes now but must pay taxes later. Roth is taxed now and traditional is taxed later. This means that all of your gains are tax-free. You’re taxed on withdrawals from traditional accounts. If you pay the same 10% as other examples, you're left with $110 - $11 = $99, just like Roth IRA. When evaluating the long-term growth potential of Roth and Traditional TSP accounts, it’s essential to consider how each option can impact your retirement savings. Therefore, people would save less in Traditional IRAs and 401(k)s. Hey all, I'm just starting out on the IRA thing but the more I dig into research about Roth vs traditional, I get more confused. This process uses after-tax (not Roth) 401k contributions and "in-service distribution" to move extra money into a Roth 401k or Roth IRA. Salary is ~360k, no state tax. Be the first to comment Nobody's responded to this post yet. In a Roth 401(k) vs. The assumption with Traditional 401-K deposits is that you're going to be in a lower tax bracket when you retire than today when you're depositing the money. In general, though, the same considerations are taken into account; roth is after tax and pre tax is before tax. Just as the title says; I can't think of a situation where someone that, who is unable to make a direct Roth IRA contribution due to their MAGI, cannot simply put the same amount of money into a Traditional IRA and (nearly) instantly roll it over. It might not have been the money guys, it might’ve been financial samurai. Discuss and ask questions about personal finances, budgeting, income Other way around, Roth protects you against tax raises in the future. You'll have paid tax at a lower rate when you put your money into the account and avoided the Traditional IRA contributions can be tax-deductible, but retirement withdrawals are taxable. Only for ROTH IRA. For most people, the marginal rate now will be higher than the effective rate in You want to do a backdoor roth with $5000 from your paycheck. But they aren’t always the same. Asking Portfolio Questions. A traditional IRA, TSP, or 401k is a tax deferred account. Net change - a visually-sparse character needing only 3 strokes to draw, versus a much denser one needing 10. At some point if I retire say In weighing a Roth vs. You there is a way to put billions into an IRA. Everyone seems to insist that a 401k is the better route though, and I'm certainly not a financial expert, so I'm hoping the rational collective minds here can help me understand this a little better. I learned traditional Chinese, so when I see simplified writted Chinese, it is very obvious, but you can kind of guess what character they are writing. Now, the second part is that the idea that the "same tax rate [will] apply on both sides" is often not true. usually need to have a plan that supports this type of rollover. Roth: Pay the income taxes now and withdraw with no additional taxes owed. There's two questions here: 401k vs IRA and Roth vs Traditional. These can be either traditional (pre-tax) or Roth (post-tax), but company matches typically are made in traditional dollars even in Roth-type 401k accounts. Your employer can create a 403b for you. The $7500 we will assume a real rate of ~5% due to some tax drag. There are 2 kinds of IRAs: Roth and Traditional. You deposit money as you wish. Traditional means contributions today are not part of your taxable income. So you might be just under the limit, if you max out your traditional 401K contributions. My wife and I both have employers with qualifying retirement plans and our AGI is high enough that we no longer qualify for deducting our Traditional IRA contributions per the charts on the IRS website. Traditional vs. The Traditional one is much more of a picture of a horse; the Simplified one is much easier to draw and read. e. And currently I split my 401k deferrals 30k+ into 75% roth and 25% traditional, (partly ELI5: What are the advantages and disadvantages of a Traditional vs Roth IRA/401k account? I know Roth is post-tax dollars and then no tax on interest. I remember watching a video that said if you are planning on retiring in something like 10+ or 15+ years it makes sense to go into roth because well think of what inflation is in 10 or 15 years and during that time you will have gotten COLAS, you are getting tax breaks on your health The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services. The 401k limit applies across both traditional and Roth 401ks, and across employers if you have 2 jobs both offering 401ks. The Backdoor Roth IRA is a cherry on top of retirement techniques, while pre-tax 401(k) is the ice cream. 401k Retirement I currently have a steady salaried job, but plan to go back to school next year. ) then your taxable income will be $40,000. They are taxable as income on the way out. ELI5: there is a deduction that the IRS gives to everyone called the standard deduction. A Roth IRA is just the opposite. The tax bill from the IRS on that gain of $9,900? $0. Roth deferral. As a corollary of the preceding point, 401k accounts can hold buckets of traditional and Roth dollars in the same account. 401(k) vs IRA I watched a few videos on it when I first got in. Im confused with where you are getting at. If Roth is a better tax treatment for you (low-ish income vs. ELI5 is easy with numbers. 8M in both Traditional and Roth. Roth thing just means on when you get the tax benefit: Traditional IRAs and 401(k) means you get a tax deduction on the year you make the contribution, but then you have pay taxes on the money when you take it out after retirement. If you want, you can undo you Roth IRA contribution (remember to take out earnings and pay taxes on them + penalty), then do $5,500 in Trad, then roll it all over. But my question is you get taxed when you withdraw your money during your retirement even though you already put that Why do ROTH accounts avoid taxes on capital gains while money you personally throw into the market pays them? Yes, yes, ROTH already has taxes taken out and it's a retirement vehicle. Traditional scenario is largely dependent on a) the amount of time one plans on being retired; and b) what one would do with the initial tax savings if they contributed to a Traditional IRA. and mega backdoor Roth: rolling over traditional 401k into Roth 401k. A Roth 401K's got to be rolled into a Roth IRA. All better options than paying 22% today (when you're already paying alot into self-employment tax). Add your thoughts and get the conversation going. 5 years of age (unless an exception applies). If you have a shit ton of money in your account you may want to either convert to a Roth or simply start taking money out and hold off claiming SS as you will get 8% more each year you don't take SS up to 70. If those values are equal, then the traditional and Roth are equal: $10,000 x 0. You can have a traditional IRA that is not a rollover IRA. Your employer may contribute money to a 401k. All of this doesn’t apply for the retire early crowd. There's other differences and nuances, but the big thing is that you deposit post-tax money in a Roth IRA and the interest on the withdrawals aren't taxed while with a traditional IRA you deposit pre-tax money and the withdrawals are taxed. You earn $100, you A Roth investment account (Roth IRA, account (along with any accrued gains) without paying any taxes. The Roth IRA income limit is based on your AGI, not your gross salary. 16 comments. What that means is, if you make $50,000 a year, and contribute $5,000 of that to your retirement vehicle, you ELI5 please: advantage of megabackdoor IRA conversion vs. Regular backdoor: contribute up to $6k in non-deductible to a traditional IRA, then convert it to a Roth IRA. As opposed to the roth IRA where you earn $100, the government takes 20%, and you put $80 into the ELI5: The difference between a Roth IRA, 401(k), and other retirement accounts. In short: you can put 60 grand a year between both your traditional IRA and Roth IRA accounts. A backdoor Roth IRA strategy could be useful to high earners as they may not be able to fully deduct IRA contributions, and they may not be able to contribute directly to a Roth IRA—i. Many people confuse the tax brackets for the decision Roth vs Traditional. Earnings are penalized if they are withdrawn before the account is 5 years old or if the owner is under 59. Even if your company only matches 6% it's still nice value to put money into your 401(k) because it's pre-tax money. 51% and traditional would come out even further ahead. These contributions have been made to Traditional Rollover IRAs during 2022. So basically, if you make $45,000 a year, and you contribute $5,000 to your traditional IRA (investing in mutual funds, bonds, real estate, etc. self-investing? They are different types of questions. Deductions are subtracted from total income when you calculate taxable income. Posted by u/caliwasteland - 4 votes and 38 comments with roth, you'd pay 22% on that money going in vs traditional only 4. Traditional versions of them have you pay no taxes on the contributions now or as you trade the funds Traditional vs. A 401k is set up by your employer. The post is Roth vs Traditional, not IRA vs 401K. I assume you've seen this - it's Pre-tax / Traditional. If your income is above a certain limit, you are not allowed to make Roth IRA contributions. Again, the details of the investments go well beyond the ELI5 level. They may offer a traditional 403b or a Roth 403b. ELI5, right? Muddying the description with those kinds of details just confuses people Hope that ELI5'd. ELI5 roth 401k vs 401k comments. Roth decision is political risk. Individual account - you are taxed on income, then taxed again on capital gains . after-tax 401(k) vs. But it's not like I get to avoid taxes on buying and eventually selling SPY through platforms like So now it's worth $110 - cool. Must leave in until retirement age, severe penalties if withdrawn early. You can also still Pretend like you have 3 piggy banks. like a normal 401(k), as opposed to SEP limits of $6000, contributed as a traditional IRA - can't contribute to another IRA in addition). The 24% tax bracket could go either way based on your situation. If you have a bunch saved up and stop working at say age 50 Once you are getting the employer match, look into opening a Roth IRA, if your employer 401k is through Fidelity or any of the other big names you can often open the Roth IRA directly with them. Now, you'll pay more in taxes in one Compare: Roth 401(k) vs. This is the Be aware that not everybody is eligible for a traditional IRA. I started working in 2018 after I moved to the US. Use Form 8606 in the year the contribution was earmarked for to keep track of your contribution as nondeductible. In a traditional, you don’t pay taxes on the money you contribute. You're only taxed once regardless of if it's roth or traditional. Although that $50K tax free sounds amazing, at the core, it's the same exact thing wether you're taxed before or after. I'm 31. She is currently making 38k and will be upped to 48k her next paycheck As I said, I intend to have both traditional and roth iras, in retirement. With a traditional IRA you pay no taxes before you put the money in (through deductions on your income taxes), but pay taxes on the full amount (initial contribution plus earnings) when you withdraw. ex. "Megabackdoor Roth" is a method to get more money into a retirement account, more than the normal 401k contribution limit ($23k). Beyond that, the choice of Roth vs traditional is a matter of income and tax rate now vs in retirement. A Roth conversion needs to "season" for 5 years before the converted amount can be withdrawn without penalty. and While a traditional Roth conversion would be fully taxable to you in the year of conversion, a backdoor Roth conversion could have some important tax differences. Mega: contribute non-Roth after-tax contributions through employer plan, and then convert to Roth. Generally the Roth is the better option over the long term. Maybe you end up with $500K with a basis of $225,000 - That also could have been I already contribute the max to a Roth IRA, so I'm specifically looking at a traditional 401k with no match vs a taxable account. (5% contribution 5% match). What’s the best option? TC: 500K I've read a countless number of times on this sub that maxing out a Roth IRA is one of the first things somebody should do. All gains in the Roth account accumulate tax-free. Roth IRA contributions aren't tax-deductible but retirement withdrawals are tax-free. Yes, I realize I can also have a Roth TSP but I do not want to. With a Roth 401(k), contributions come out of your paycheck Whether you roll over into a regular "Traditional" IRA or a Roth IRA depends on what kind of 401K the money came from. This basically has to do with whether you are investing pre The traditional 401K uses pre-tax money to make contributions to your retirement account, while the Roth 401K uses after-tax money. It's all stuff I've read throughout You don’t get just 5% of the amount being put into Roth, you get 5% of your paycheck. With a traditional IRA/401K, you are contributing pre-tax dollars. Only Taiwan, Hong Kong, and Macau learn to write traditional Chinese (I guess the English equivalent would be spelling words differently in British English vs. New comments cannot be posted and votes cannot be cast. Please explain like I'm 5. Roth contributions are taxed at your marginal rate going in and come out tax free. ely hsjjdu wkz afkfhi grfxer afraje ehadl gfzy rymeh zvwo