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Roth vs Traditional IRA and How You Get the Best of Both - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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Most Americans are losing $90,000 because
they donât know the benefits of an IRA or
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the differences between a Roth vs traditional
IRA account.
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In this video, Iâll not only show you how
to decide between these two types of retirement
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investments, Iâll reveal a strategy to get
the best of both.
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Weâre talking retirement plans explained
today on Letâs Talk Money!
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Beat debt.
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Make money.
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Make your money work for you.
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Creating the financial future you deserve.
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Let's Talk Money.
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Joseph Hogue with the Letâs Talk Money channel
here on YouTube.
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I want to send a special shout out to everyone
in the community, thank you for taking a little
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of your time to be here today.
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If youâre not part of the community yet,
just click that little red subscribe button.
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Itâs free and youâll never miss an episode.
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So hereâs a question for you.
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How many hours a week, a month do you spend
thinking about your investments?
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Thinking about how to get a higher return,
about how much you need or will have by the
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time you retire?
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If youâre like most people, itâs at least
a few hours a monthâŠor a lot more for some
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of us.
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But thereâs a good chance youâre missing
out on one of the best opportunities to make
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that extra return, to earn $90,000 or more
extra on your portfolio, and all without having
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to do anything more than youâre already
doing.
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Weâre going to be talking about individual
retirement accounts, IRAs and their cousin
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the Roth IRA in todayâs video and this could
be the most important video on investing you
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ever watch.
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The Federal Reserve reports that just one-in-three
households invests in an IRA.
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That means nearly 80 million families not
taking advantage of this opportunity.
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Beyond that, Fidelity reports that the people
that are investing in an IRA, are only contributing
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an average of $4,150 a year, well below the
maximum and missing out on some big benefits.
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So I donât want to oversell this, I want
to get to some IRA basics, the differences
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between a Roth versus traditional IRA and
then a strategy to get the best of both worlds.
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I do want to share this graphic though, this
shows the value of a $500 monthly investment
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over 30 years in an IRA account versus in
a regular taxable account.
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Now weâll get into why these numbers are
but look at that, if there was any doubt as
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to the power of IRA investing, look at that
$90,000 difference.
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Now letâs get to how you collect that ninety-grand!
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Weâll look at the basics of an IRA and a
Roth, the average amount people have invested
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by age and the big differences between these
two investment accounts.
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Iâll then show you how to decide which to
use and a strategy to get the best from each.
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So an individual retirement account, an IRA,
is a special investing account you set up
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and you can set these up on almost any online
investing platform.
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It literally takes no extra time to set these
up.
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When youâre opening an account or opening
another on the same site, itâs going to
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ask if you want it to be an individual taxable
account or an IRA so you just click the IRA
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box and thatâs it.
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There are two types of IRAs, the traditional
which is just referred to as an IRA and a
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Roth account.
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Weâll go into more detail on the differences
and when to use each but itâs basically
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when you pay taxes.
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When you put money in an IRA, you take that
amount off your income when filing taxes so
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thatâs an instant tax break.
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Even if youâre in the 10% tax bracket, thatâs
saving you $600 every year from not having
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to pay taxes on that income.
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When you take that money out of your IRA in
retirement, you pay normal income taxes on
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everything you take out.
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So here youâre paying the income tax rate
on what you paid in and the returns over the
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years.
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Now compare that with a Roth IRA.
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With a Roth, you donât get that instant
tax break.
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You invest in your Roth IRA but donât take
that money off your taxes.
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Hereâs the sweetness though.
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When you take that money out in retirement,
you pay nothing.
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You already paid taxes on the amount you invested,
so thereâs nothing to pay there, but you
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also donât have to pay taxes on the money
you made in the account.
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Thatâs huge and something most people donât
realize about Roth IRA accounts.
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You never pay taxes on money you made on the
investments.
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Yeah, itâs nice getting that instant tax
break with a traditional IRA but youâre
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still paying taxes on the contributions AND
returns eventually.
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You get tax-free returns with a Roth.
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Itâs one of the reasons I say every investor
needs some money in a Roth account.
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There are a few basics here I want you to
see then weâll get to the average people
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have in their IRA by age, some of those important
differences between the Roth and IRA and how
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to use both.
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You can invest a maximum of $6,000 a year
into your IRA accounts and this is total.
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So if you have multiple IRA accounts, both
Roth and traditional IRA, and on multiple
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websites, you can only contribute $6,000 total
into all of them combined.
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If youâre age 50 or older, the government
allows you to invest up to $7,000 a year called
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a catch-up contribution.
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Now that money you invest in an IRA is locked
up until age 59 and a half.
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You control the investments but canât take
the money out without paying a penalty and
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taxes owed.
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Weâll talk more about this in a bit but
Iâm going to show you why it really shouldnât
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be a problem.
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The deadline for contributing to your IRA
is the April after the tax year and this is
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a big benefit of IRAs.
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This means you can invest into an IRA by April
2020 to get the tax break for 2019.
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Thatâs going to allow you to do some tax
planning, figure out whether you want that
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instant tax break this year or in the future.
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Iâm all about that company match on 401K
plans, thatâs free money, but IRAs have
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some big advantages over a 401K.
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Since this is your own account you opened
and control, you never have to worry about
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leaving your employer and what to do with
your money.
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IRAs give you more flexibility to invest in
stocks, bonds, real estateâŠbasically anything
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you want versus being trapped into a package
of funds in your 401K.
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IRAs are also less expensive by far compared
to all the fees you pay in a 401K.
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Despite all these benefits, only about a third
of American households invest in an IRA account.
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Of those that invest, most arenât maxing
out that $6,000 contribution each year.
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We see the average IRA balance by age here.
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So an average around $20,000 for those in
their early 30s growing slowly to about $50,000
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for those in their early 40s and $92,000 for
those in their early 50s.
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So letâs get the biggest complaint I hear
about IRAs out of the way.
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I know it sucks to have that money locked
up âtil youâre 60 years oldâŠbut is it
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really an issue?
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Investors see that they canât withdraw the
money and freak out but you know you need
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to be saving for retirement, right?
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What are you going to live off for 30 years
of your life?
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You going to be able to make it on the thirteen-hundred
a month from Social Security?
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Even while that moneyâs locked up, you still
control it.
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You can change the investments.
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You can move the money to a different IRA
account on a different website or into a different
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asset.
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Thereâs really no difference here between
your IRA money and the money you have saved
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in a taxable account for retirement.
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NoneâŠwell except for that sweet tax break
on the IRA account.
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So before we get to the differences between
a Roth versus traditional IRA, I want to get
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your IRA questions.
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I truly believe these accounts are some of
the best investing youâll ever do so I want
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to make more videos on the topic.
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But I need to know what questions you have
or suggestions for retirement investing videos
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so scroll down and tell me in the comments.
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What are your questions about IRA investing
or what video topics do you want to see in
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retirement investing?
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So even though these are both types of IRAs,
there are some differences between the Roth
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and traditional IRA you should know.
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Weâve already covered the difference in
taxes.
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With a Roth, you pay regular income taxes
but get to take all the money out tax-free.
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With an IRA, whatever you invest is taken
off your taxable income that year but then
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you pay taxes on everything you withdraw in
retirement.
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You can contribute to a Roth account at any
age even in retirement.
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For an IRA, you can only contribute up to
age 70 and a half years old.
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There are income limits to contributing into
a Roth account, if you make more than $137,000
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as an individual or $200,000 filing jointly,
you arenât allowed to contribute but Iâm
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going to reveal a strategy to get around this
later.
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Thereâs no income limits to contributing
into a traditional IRA.
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Now if you do take some money out of an IRA
early and you donât meet a few hardship
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circumstances, youâll pay taxes on the money
plus a 10% penalty.
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So if you withdraw $2,000 from your IRA before
age 59 and a half, that money is added to
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your taxable income and taxed at your income
tax rate and you pay the 10% penalty or $200
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on top of your taxes.
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Roth accounts are different though.
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You already paid taxes on the money you put
into the account.
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You can withdraw from your Roth up to the
amount you contributed even before you hit
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that 59 and a half.
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No taxes, no problem.
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Now if you withdraw from the earnings you
made on investments, youâll be hit with
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the tax bill and 10% penalty.
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So the moral here is donât touch your IRA
money because itâs hugely expensive if you
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do.
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One last difference here, with traditional
IRAs youâre required to start taking money
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out when you hit 70 and a halfâŠand yeah,
I donât know why everything is that half
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year, itâs completely stupid and takes longer
to sayâŠbut politicians I guess.
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Anyway, money in that IRA, youâre required
to take a certain percentage out each year
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after 70 and pay taxes on it.
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With a Roth IRA, no requirements.
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You could be 120 and still contributing or
not taking money out of your Roth.
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Now I want to show you how to choose between
the Roth versus traditional IRA and reveal
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a strategy to take advantage of both but letâs
recap the pros and cons here.
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With an IRA, you get the instant tax break
and thatâs great for high income individuals
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that can save more on current taxes.
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I feel like IRAs give you more discipline
also since you canât withdraw the contributions
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like with a Roth.
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The cons of course are that you eventually
pay taxes on everything, what you put in and
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your earnings, and you have the forced withdrawals
at 70.
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With a Roth IRA, youâll never pay taxes
on returns.
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That deferred tax break is great for someone
not making much money now so someone that
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wonât get much from that immediate tax break
but the downside is that youâre paying taxes
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now on the contributions.
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But how do you choose between an IRA or a
Roth IRA?
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If you can only invest up to $6,000 a year,
how do you decide?
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The old school of thinking used to be to use
the one with the biggest tax break.
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So if youâre in a high tax bracket now but
maybe donât expect to have as much income
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in retirement, youâd take that immediate
tax break and contribute into an IRA.
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On the other hand, if you arenât making
much money now but expect to make more in
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the future, you contribute into a Roth IRA.
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You pay your taxes now at the lower rate and
then get tax-free income when your tax bracket
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is higher.
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The problem with this thinking is, first,
nobody knows what taxes will be like in the
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future.
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Not only do you not know how much money youâll
be making but tax rates could be higher or
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lower so itâs tough deciding between the
immediate tax break or taking it in the future.
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Second though is that each of these retirement
accounts offer some great advantages and you
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donât want to limit yourself to just one.
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Why not get an immediate tax break now AND
tax-free income in retirement?
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So Iâll get to that strategy on how to get
both but I want to cover one last question
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I get a lot about IRAs and thatâs, âCan
I have multiple IRA or Roth IRA accounts?â
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UhâŠyeah, I have five Roth and IRA accounts.
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Iâve got a Roth and an IRA account on ETrade.
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Iâve got a Roth on Ally Invest and an IRA
on M1 Finance and another account in a privately
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managed IRA I use to invest in alternative
assets.
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Not only do I get access to different types
of investments on different platforms; for
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example p2p loans, real estate and traditional
stocks.
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I take advantage of all the little freebies
and promotions like getting a $100 cash bonus
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for opening a new account.
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Now to that strategy for getting the most
out of Roth and traditional IRA accounts.
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First, itâs important to be strategic about
what you put into these.
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You want to focus on cash-paying investments
like bonds, dividends and real estate investment
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trusts when youâre investing in your IRA.
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Put these investments in a regular taxable
account and youâll pay taxes every year
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on the dividends or interest you collect.
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Hold them in a retirement account though and
youâll get those tax benefits.
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You wonât pay taxes for decades in an IRA
and youâll never pay taxes on these cash
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payments into a Roth.
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Next is how to split your investment between
the two types of IRAs, Roth and Traditional,
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to get the best of both worlds.
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So youâre limited to that $6,000 contribution
each year.
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You can put it all in one type of account
or split it up.
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What I suggest is putting it all into a traditional
IRA each year.
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You get the max on that instant deduction.
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Then every few years, you do whatâs called
a Roth conversion.
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This is where you take some of that money
in a traditional IRA and move it into a Roth
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account.
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Thereâs no limit to how much you transfer.
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So if youâve been contributing that six
grand a year and you have $18,000 in your
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IRA, you can move $8,000 into a Roth and keep
the rest in the IRA, you can move it all into
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the Roth or however you want to split it up.
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Now youâre going to have to pay income tax
on this money you move over since you didnât
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pay it when you contributed to your IRA, but
you wonât owe any penalties as long as it
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goes straight from one IRA to a Roth account.
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What this does is first it gets over that
income limit for high-income families.
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Itâs also going to give you that tax flexibility
in retirement though.
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Youâll be able to withdraw tax-free money
from the Roth account and still get the instant
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tax-savings each year contributing to your
IRA.
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In retirement, you can plan each year to save
the most on taxes.
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In years where your income and tax rate is
higher, take a little less out of your IRA
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and more out of that tax-free Roth.
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Years where your tax rate is lower, take more
from the taxable IRA and let your Roth account
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grow.
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Click on the video to the right to see why
I loveâŠand hate 401K plans.
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I share my strategy for getting free money
in a 401K and how to decide whether to invest
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in your company plan or an IRA account.
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Donât forget to join the Letâs Talk Money
community by tapping that subscribe button
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and clicking the bell notification.
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