Roth vs Traditional - Which is Better?

[@PhantomSavage]

I hate to correct you, but there is one fundamental flaw with your explanation on this topic. There is NO WAY Mr. Krabs pays a salary of $100,000 a year. Side note; I can almost guarantee he does not provide employer match.

[@JakeBroe]

Haha, maybe Spongebob unionized the workers and they all got raises. I feel like Mr. Krabs would make a good scrooge in a Spongebob adaptation of the Christmas Coral. Cheers PS!

[@DerekWrightX]

I'm soo glad I found you channel before it actually blows up. You run the numbers using facts and logic

[@JakeBroe]

I am glad you found my channel as well Derek! Great to have you with us! Hopefully I do start getting pushed, haha.

[@bsm6776]

Good point about traditional. “What are you doing with the savings now?” I never really thought of it that way. More in paycheck but mostly spent on silly stuff

[@ThatGuitaristPaisa]

Thank you for the useful comparison Jake! Started my own Roth this year and now going to help my girlfriend do the same. Comparisons like these help me feel confident that Roth is the way to go for us. Cheers!

[@JakeBroe]

Roth is the way to go for probably about 90% of people! Plus the future level of taxes is uncertain and I like the idea of locking in a 0% future tax rate forever!

[@TrulyEpic]

I've watched a lot of investment videos recently and got a lot of different view points and man... This guy here knows what he is talking about and gives very honest good advice. Great content to help the average investor, subscribed!

[@JakeBroe]

Awesome! Welcome to the channel Truly Epic! Great to have you with us!

[@fylhupihrass8658]

Thank you!! Ive learned more from ur one video than a bunch of ira videos! And im a person who doesnt understand taxes very well

[@tannermeyers]

I literally just deposited my first $100 into my new Roth IRA, then I saw your video!

[@JakeBroe]

That's awesome Bo! Congrats on opening your Roth IRA!

[@fred-chang]

What if you live in a high tax state like California but plan to eventually move to a lower tax state later in your career. I feel most Roth vs traditional videos don’t really touch on it at all, but the costs/savings could be really significant over time

[@Nguyen35]

I don’t plan to retire in California and I refuse to give them anymore tax dollars so they just can squandered it away

[@JakeBroe]

He Fred! Yeah, it depends on the state and their tax laws, but you are correct that you could get state deductions for contributing to a traditional account, then after retiring move to a state to make withdrawals that does not have state income tax.

[@thomas8827]

Ya Fred I’m debating the same thing I live in chicago now then plan to retire Dallas so doing Roth don’t help much plus my tax filing CPA also telling me to do traditional. I love to see more videos example on this subject.

[@nickdoyle-achievefinancial2464]

I have a couple family members that funded traditional in 20-30% brackets and are now withdrawing and doing Roth conversions in the 12% tax bracket. It worked for them, but may not work for our generation.

[@JakeBroe]

This is a possibility! Could work out per the math if people plan far enough in advance. Cheers Nick!

[@trojanqtie]

I recently read that the money you contribute to an IRA, whether Roth or Traditional, only grows if you use it to invest in the market. You don't just put it in and grow it 8%. And when I looked up the interest rate of a Fidelity IRA (because I'm interested in opening a Roth account with them), it was something like .001% or .0001%. If that's the case, it seems like I'd be better off with just a regular brokerage account.

[@JakeBroe]

An IRA is not a type of investment. It is just an account that holds your investments. After depositing money, you have to then choose what kinds of investments you want to make in the account like stocks, etfs, mutual funds, or bonds. You can buy Vanguard's S&P 500 ETF in your account (VOO) and it averages 9.8% a year.

[@trojanqtie]

@@JakeBroe Ohh, ok. That clears it up. Thank you for replying so quickly!

[@pjsriman]

Awesome Illustration of Soundness of your logic and compelling arguments, Jake ! Very insightful, thank you Jake !! Look forward someday for your thoughts on ROTH Conversion and if it is a good idea as well.

[@JakeBroe]

Thanks PJSRIMAN! Roth Conversion makes sense if your taxable income is low in a given year!

[@sksziggy]

You made a very good point! That is if you contribute to a traditional what are you doing with that current tax savings! My self I need that tax bring now...but that current tax savings I use to max out my Roth!

[@JakeBroe]

Thanks for watching sksziggy! Cheers!

[@conureron3792]

I think the idea or assumption with traditional IRA’s is that when you retire, your income drops - and you are in a much lower tax bracket. You are are making withdrawals from your account to match expenses - maybe half what your income was, right? I.e., $100k income while working is reduced to $50k while retired.

[@JakeBroe]

Yep! For these people, traditional makes sense. But for anyone starting young enough, they should be setting themselves up for being pretty wealthy later in life. Not the case for most obviously... but maybe a majority of people watching this video.

[@saiaravind2007]

Jake, I agree with your points, but here is a case for Traditional. If you are *single* and are in a high income tax bracket, then you can go for the immediate tax savings with traditional. Once you get married, you can do Roth conversion and pay tax in a lower bracket. That way, you get the best of both Traditional and Roth.

[@JakeBroe]

Sure, there is some extra steps in there with the conversion, but you are right in that this could work in your favor long term. Cheers Aravind!

[@sethkang4410]

i love the picture not just numbers. it makes it more fun to watch lmfao

[@ganthc]

I think the idea behind traditional is that in your retirement years, with a paid off house and no debt, you wouldn’t need to withdraw the money to have your income at the same level as your highest earning years. So Squidward, would live on social security and RMDs from his traditional account, but be in the lower marginal tax bracket. Not poor, but not needing to draw $100, 000 a year anymore. His tax rate wouldn’t be 24% in this example. It would be lower than the 24% he saved from the high income years. And like the other commenters said, traditional saves you money on state income taxes, which means your savings could be even higher. But in defense of Roth, the money you withdraw does not count as income, which means that you pay the lower income tax rate on your Social Security. Social Security is taxed at a different rate than standard income up to a certain limit when including other income. But if your other money doesn’t count as income, you pay the lower rate. Meaning if you get 33,000 in SS money, only half is counted as taxable income. If the other portion of your monthly check is Roth, you can stay in that range rather than have it jump to 85%. So Roth can have additional tax savings based on how it helps with the SS income calculation.

[@kmque3166]

Thanks for a 2021 update!

[@JakeBroe]

You are very welcome K! Cheers!

[@bmgvideos86]

Question about future retirement options? Currently Active Duty Military with 15 years and will retire in about 5 years. I contribute into the TSP monthly. Our annual contribution limit for the Roth TSP is $19,500. If the TSP monthly. Our annual contribution limit for the Roth TSP is $19,500. I max this out over the next 5 years and leave the military with a $100,000 balance and decide to roll this into an IRA. How Can I continue to invest at least 15% of my income if the annual limit for a Roth IRA is $6,000. Would I be better off just rolling it into a Index mutual fund so I can continue investing at least 15% of my income?

[@JakeBroe]

Once you no longer have a job that qualifies you to contribute to a 401K or a TSP, then your only option is a IRA and your contribution limit is $6,000 a year. If you want to invest more than that, then you can always just open an ordinary brokerage account. There is no tax advantage, but you are still saving and investing.

[@bmgvideos86]

@@JakeBroe thank you for the information.

[@BigBoyOtero]

As always great video!

[@JakeBroe]

Thanks for watching Rafael! Cheers!

[@ElitaAli1]

Wow, you should be able to win some kind of award for this video! It was awesome 👍

[@lukehowerter]

I can tell I am way less successful than a lot of the rest of your audience. I think your arguments for marginal tax rates being higher in 30 years are spot-on, and you make a great point of Roth folks actually saving more. I am pretty confident I am going to make less money when I am old, though. Realistically I started saving too late, and I am saving too little to retire rich in 30 years. I haven't planned to fail, but I did make big career changes a bit too late in life.

[@JakeBroe]

Hey Luke! I don't think my other subscribers are more successful than you, I just think the KZbin crowd tends to be younger people (20s and 30s) and it is easier for them to dream of larger retirement account balances in the future. If you are older (50+), and you are getting serious about saving for retirement, then taking the tax savings this year with traditional is the better option for you. You figured that out and you are making the best financial decisions you can for you today! You are doing great!

[@bridgetg1916]

Thanks for this awesome video, Jake! You're helping a lot of people with these clear explanations and good guidance!

[@JakeBroe]

Thanks Bridget! I'm just glad people are finding my channel. If I can help explain confusing finance topics, then I feel like I am helping others save and invest. Pretty fun!

[@带老婆转码]

Jake, thank you for your upload. But i think you missed big point here. You want to lower your ordinary income and increase other type of income that has a favorable tax treatment. For example your KZbin income, you long-term capital gain your qualified dividend income has nothing to do with your marginal tax rate. Traditional has great advantage if you plan for lower ordinary income in the future.

[@JakeBroe]

For sure Zhuo! I tried to make this video a simplified as possible so people who just work a single job and earn W-2 income can make a decision about which is better for them. It's complicated for sure and people should do more research on what is possible for them. Cheers!

[@headlibrarian1996]

Between 401k distributions triggering taxes on your social security benefits and IRMAA it is very easy to suffer effective marginal tax rates on your 401k income that significantly exceed what you paid while working.

[@Glitch852]

Great video, great info, as always! Thanks for enlightening me!

[@JakeBroe]

Thanks for watching Eugene! Best of luck to you with your move!

[@dwalker6868]

Thank you as always

[@JakeBroe]

You are very welcome D!

[@kunaldes]

14:38 I think you made a pretty big oversight here with this high income example, at least for IRAs. A single person whose AGI is over $140k can't make any direct contributions to a Roth IRA. And additionally, if they have an employer sponsored retirement account, they can't take a deduction on their taxes if their AGI is over $76k. I do agree that your analysis still applies for a 401k, but once you hit $140k in taxable income, the only way to maximize your tax advantaged savings on top of the $19500 for the 401k is to do a backdoor Roth conversion.

[@JakeBroe]

Hey Kunal! You are correct. There are lots of lesser details I omitted for time in this video. High income earners should be doing a backdoor Roth IRA. In this video I mostly wanted to hit the average person making about $60,000 a year and get them to stop contributing to traditional, haha.

[@MegaTxDude]

Great video Jake. However, you left out a big con with Roth 401k which is the employer match is taxable. Something to consider of down the line if one choose to leave his/her job and trying to roll over to a Roth IRA.

[@nickdoyle-achievefinancial2464]

A lot of employers make their match as a traditional contribution.

[@JakeBroe]

Yeah, I'm not sure about this. In the military, if we contribute Roth, our matching goes on the traditional side. I just assumed this is how more employer 401Ks do it.

[@headlibrarian1996]

@@nickdoyle-achievefinancial2464 All employers do that, it’s required by law that employer contributions go in the Traditional bucket.

[@wildtype5556]

Hey Jake! You often say in your videos that you do not recommend that people participate in actively traded mutual funds for a number of different reasons and you often cite studies that have been done that point to similar conclusions. Could you make a video about this? It would really help us know what you mean and where you are coming from. Love your videos, keep up the great work!

[@JakeBroe]

Sounds like a solid video idea! I'll add it to my list! Thanks Adrian!

[@johnnyboyzZ]

A perspective I agree with. 💯

[@JakeBroe]

Thanks Johnny Boy! Cheers!

[@rogerm9728]

Jake, can you please make a video explaining the 72t rule for the traditional TSP.?Anyone who dislikes Roth TSP always bring up the 72t rule, saying stay away from the Roth and just use the 72t rule on your traditional.

[@jasonlongton1876]

There is a factor I never understand in this; why would I assume my tax bracket will increase or stay the same in retirement? My income from work is my largest and only income stream. If drawing on my savings + SSI + 401(k)/IRA + Pension could more than replace my income form work - I would've retired earlier! Why would I continue to work if I could have the same or more monthly income in retirement?! I'm planning my monthly income to decrease by 30% when I retire. That's the number I see in most retirement calculators. This suggests a traditional IRA is not nearly as bad a plan as presented. That said, I have a ROTH in addition to my traditional simply because diversified income is desirable.

[@photografs]

OMG. SUCH a great explanation!

[@JakeBroe]

Thanks BJ! Glad people are finding my explanation helpful. Cheers!

[@behrensf84]

this will get very complicated to compare the two...which account and how much to contribute depends on your marginal tax bracket, your withdraw bracket, how close you are to retirement, how long you live, and the opportunity cost of being able to invest the tax savings in a brokerage account.

[@JakeBroe]

Yep, there are lots of variables to consider, but I tried to make it as simple as I could and keep the video under 20 minutes.

[@chrisbrown8748]

Awesome breakdown, Jake👍🏽👍🏽.

[@JakeBroe]

Thanks Chris! Cheers!

[@wallacefrey6247]

Thanks for this video,it really did help me.

[@JakeBroe]

You are very welcome Wallace! Cheers!

[@rino7789]

Thank you Jake, I am in my 50s and do not have a long time horizon to take advantage of compounding. This means, I have to get large amounts of money into my brokerage accounts since I am limited to $7000 in both of my Roth's. Will I get to a million? Doubtful, but if I can get halfway there, I will be fine. I just wish I had the last 20-25 years to do over again.

[@JakeBroe]

Sounds like you know what you are doing now! That's still more than most people. My dad is 67 and still working full time because he doesn't have enough money in his retirement account. You might be right that traditional is best for you. Cheers!

[@QTMarkus88]

At 14:15, the income (pre deduction) should be $52,525 and not $62,625.

[@JakeBroe]

You are correct, that was an error. Good catch!

[@QTMarkus88]

@@JakeBroe just makin sure you stay on your toes. Amazing video!

[@CobaltLobster]

Sadly, I am one of the many that had major medical problems (renal failure). I am a physician and I went from earning $300,00+ to living on my group long-term disability (non-taxed). So I was one of the few that SHOULD use a 403(b) (pre-tax) and plan to roll it into a Roth IRA in the future because my income effectively went to 0. I would suggest that anyone that can do it, and *know* they are going to go down in tax bracket in the near future, eat the tax on a backdoor in the future if you have a current spike in income.

[@JakeBroe]

Hey rorschach! Thanks for becoming a channel member. I appreciate the support. Also thanks for sharing your experience and perspective on this issue. I hope your health improves. You sound pretty sharp, so I'm glad to have you with the channel!

[@Moonstar_Fpv]

thank you for this

[@JakeBroe]

You are welcome Moonasar! Cheers!

[@TomSramekJr]

As someone in my early 50s just starting to really save for retirement (but w/ pension and social security), I’m wondering about just straight-up investing in a non tax advantaged account and paying the capital gains taxes rather than investing under the cover of an IRA and pulling money out of that later that will be taxed at the marginal tax rate. Of course, dividends complicate matters, but....

[@JakeBroe]

Hey Tom! I have a follow up video coming soon talking about how ordinary brokerage investing (and getting long term favorable tax gains) might be better than traditional IRAs and 401Ks. I'll film it next week!

[@nickdoyle-achievefinancial2464]

If you’re going to pay taxes now, why not use Roth to get tax free growth and withdrawals?

[@headlibrarian1996]

At a minimum you want to max out a Roth IRA.

[@sammysliver]

But my income has gone down now since I am retired and not working anymore and just existing on my Pension. I was making much more money when I was working so now I'm in a lower Tax Bracket. So now I pay a lower Tax Rate on my retirement income withdrawals....right ?

[@mrwsilva1]

Great video!!!

[@JakeBroe]

Thanks Mr. Silva!

[@roburb73]

For this year, we will both max out each Traditional 401(k), but that's only because I converted $50K from a Traditional IRA to a Roth IRA. Needed to make the backdoor Roth work correctly and needed that a zero balance. I'll go back to Ruth next year, regardless of tax burden. I'd rather pay now than later, plan on making more in retirement. And yup, I have a tax attorney do my taxes. 🤣

[@nickdoyle-achievefinancial2464]

Did you know you could rollover to a self employed 401k to allow back door Roth? I roll all employer accounts to se401k to keep the back door open.

[@JakeBroe]

Very nice Rob! Sounds like you are planning ahead well!

[@roburb73]

Nick, The in-service distribution option is not available for my 401(k), so it has to stay put until I leave the company. Unless I'm not understanding you correctly?

[@nickdoyle-achievefinancial2464]

@@roburb73 Rob, I was assuming the 50k in a traditional IRA was from a prior 401k rollover. Sorry if that assumption is incorrect, but I think you could still rollover an IRA to SE401k. I was just pointing out that it's an option you may want to consider if it's interfering with your backdoor strategy. :)

[@EvilGenius007]

Pedantic quibble: not everyone gets Social Security. If, for instance, you worked for a state and that state has a pension plan, you may not be paying into Social Security and thus wouldn't earn it upon retirement. Practically speaking most U.S. workers will qualify, but it's worth knowing exceptions do exist.

[@EvilGenius007]

"In 2018, one-quarter of state and local government employees-approximately 6.5 million workers-were not covered by Social Security on their current job. The Social Security Act of 1935 excluded all federal, state, and local government employees from coverage because of constitutional ambiguity over the federal government's authority to impose Federal Insurance Contributions Act payroll taxes on public employers and because these employees were already covered by defined benefit pensions" Maybe less pedantic than I thought.

[@sincere355]

Federal employees hired after a certain date do pay in to social security.

[@JakeBroe]

Yeah, wasn't tracking this was a thing. Interesting!

[@edgarf829]

Great video, thanks

[@JakeBroe]

Thanks Edgar! Cheers!

[@AntonioInvests]

I love the Roth IRA, I hate that they haven't raised the contribution limit this year again.

[@JakeBroe]

Haha, same here! Maybe next year Sensei!

[@headlibrarian1996]

They should raise the IRA contribution limit to match the 401k.

[@MC-gj8fg]

Would we not be paying long term capital gains tax when we pull the money out as opposed to the much higher income tax upfront? This is what I don't get about roth.

[@GOPA90]

Awesome job.

[@JakeBroe]

Thanks Gerry! Cheers!

[@amherst2013]

lol Jake I am in CA and we have high tax and I am in 24% plus 10% from state. So is it better to do traditional and contribute the tax saving to roth ira or rental!

[@JakeBroe]

For sure! Everyone's situation is unique and this one would make sense. Cheers Xiao!

[@amherst2013]

Jake do you invest individual stock besides call option?

[@JAllen01]

If you have other income sources you dont necessarily need to withdraw from the accounts so you can let it ride and if you go into retirement debt free you won't need as much income by controlling how fast you pull it out you can mitigate the loss if you were a high earner it should be pretty easy to draw a lower rate than when you earned it. Also why not both? Like tools in a toolbox I can use more then one especially for the high earners Should we ask what are the retirment goals how do they contribute to the answer? (Jake don't read as a contradiction read as spitballed ideas or thoughts I had as the viewer. enjoyed the content)

[@jvaldez5]

Roth tsp/IRÁ especially as a young person making a lower income. You usually pay higher taxes the older you get.

[@JakeBroe]

I agree! Cheers jvaldez!

[@Gsoda35]

how does that pension system compare to a Scandinavian country's system?

[@joelhurtado3652]

I agree with a lot of your points, however, I think you overlooked the minority FIRE people who plan on withdrawing before 59 1/2. Also, while I definitely don’t plan on living on substantially less, the way the tax code is set up, if we limit capital gains and rely more on qualified dividends, our tax rate can be effectively zero. Edit: Just for background I’m 25 in college pursuing a stem degree so I realize I may not be quite the target audience.

[@JakeBroe]

You are correct Joel. I have another video coming out soon talking exactly about this and why I don't think retirement accounts are actually even worth it anymore because of long term favorable capital gains rates.

[@nickdoyle-achievefinancial2464]

You can also Roth convert in lower brackets if you RE.

[@oz-wealth8629]

Good Job Jake ! question can we open Roth IRA and Sep IRA in the same time ! 6k for Roth and 58k for the Sep?

[@JakeBroe]

I am not familiar with a Sep IRA, but that sounds right. They are separate.

[@Lexdex1111]

Thank you

[@janety7264]

Thank you for the video. For Roth IRA account, when I take out money, pay no tax... does it mean any amount I take out would be tax free?

[@alrocky]

... tax free at retirement

[@caezar044]

In the video your slide said $62,625 is $40,125 plus the standard deduction, implying that the standard deduction is $22,500 for a single filer. Is that a typo? I thought it was like $12,500?

[@JakeBroe]

Yep... it was a typo. I noticed in editing and just left it in. The point still stands that if your taxable income is below $40K, federal tax is still 10% or 12%. Kudos for catching that!

[@mando8254]

Just watched video, I have question if I live in Texas does that mean traditional is more beneficial for me ? I am currently in Roth TSP

[@JakeBroe]

Probably the opposite. Contributions to traditional save you MORE money in taxes if you live in a state with high state income tax like California or New York. If I were you, I would stay in Roth.

[@mando8254]

@@JakeBroe thank you for the response

[@Dom59878]

I am not sure you talked about the income limits.....2 years ago one of my long term stock was bought by another company for cash and that pushed me above the Roth limit, had to withdraw my contribution.

[@JakeBroe]

Hey Domenico! Roth 401ks do not have income limits and Roth IRA income limits can easily be avoided now. I explain how in my Backdoor Roth IRA video. kzbin.info/www/bejne/bZLKm5uimZd2j6M

[@muffemod]

You can take out up to $12,000 out of the traditional in retirement and claim the standard deduction to pay no tax on it (assuming you have no other taxable income).

[@JakeBroe]

This is true!

[@JacksonWelch]

Awesome video Jake I had a traditional 401k that I converted into a roth 401k to pay taxes in 2020 since I plan on my income to go up in 2021. I am also planning on taxes to skyrocket in the future.

[@JakeBroe]

Thanks Jackson! Yeah, if your income isn't very high at the moment, then converting a traditional 401k to Roth was pretty smart!

[@JakeBroe]

Thanks for watching everyone! If you found this video helpful, then be sure to give this video a LIKE to support my channel! If you are a high income earner and are worried you cannot contribute to a Roth IRA, check out my video on the backdoor Roth IRA: kzbin.info/www/bejne/bZLKm5uimZd2j6M

[@howardgofstein7366]

I thought that, if I wait until age 59 1/2 to start taking money out of ANY IRA, I have no tax penalty. Now you are saying that with a traditional IRA, I WILL be taxed even if I don’t touch it until I am 59 1/2. How much am I paying?

[@johnyoung4443]

What if you have multiple roth accounts. Is it $6000 per account or total?

[@jinjiangwang]

Total ,

[@leammeas9425]

Hi Jake, love your channel I'm 57 and retired with a 401k and 457 what's would you suggest for allocation thanks.

[@JakeBroe]

Hey LEAM! I'm not sure what you mean by allocation? Allocation in your 401k and 457? I always recommend a total stock market index fund or a S&P 500 index fund. Buy and hold, do not sell if there is a dip.

[@mattsimmons5432]

Jake, I know you do 100 in the C in your TSP.....do you do all Roth (5% match goes into Traditional) and are you going to hit the max yearly goal of 19,500? Keep up the good work great info on your page!

[@JakeBroe]

Hey Matthew! Yes, I do 100% in the C Fund (5% match in traditional) and yes, I am going to max it out at $19,500 this year. Cheers!

[@mattsimmons5432]

@@JakeBroe nice bro keep up the good work!

[@Bangpaulxu]

Love the spongebob reference.

[@JakeBroe]

Thanks Bangpaulxu! Cheers!

[@poolking25]

Great video, loved the content. Personally, I do traditional and try to invest the difference. I think there's also potentially unknown benefits of keeping your taxable income as low as possible. One that happened just last year were Covid stimulus checks. If we had done Roth instead of Traditional, we wouldnt have qualified for multiple stimulus payments since we happened to be at borderline of the cut-off

[@prexzone]

But if are earning 175k a year it won’t make sense to contribute to traditional because it is not deductible at that point

[@jo-annmacneill6454]

i’m 58 my employer just offered the Roth so I’m only doing 3% pretax and 3% Roth they contribute 8 1/2% because I’m working at a school. I hope I’m not too old because I just started it.

[@caezar044]

I'm not sure why you said you can't quantify the tax savings. The obvious answer is that you would invest your tax savings. You shouldn't compare $10k Traditional contributions to $10k Roth contributions. You should use $10k Traditional contributions, plus either your tax savings invested in the Traditional account, or in a taxable account if your pretax account is maxed out. You can do the math on this, and Traditional wins every time. Ultimately, your recommendation to invest Roth below $40k plus the standard deduction is right though. But even with Roth, there's a caveat that both your income is below $60k, AND is expected to go higher. If you are 40-50 year old and your earning potential has peaked below $60k, you should actually still do Traditional in that scenario. Roth is best for young people who are lower income. I have the Traditional vs Roth debate with people all the time on reddit and people just don't seem to get it. $1 invest Roth isn't comparable to $1 invested in Traditional. And Roth contributions don't have some magical "tax free growth" that Traditional accounts don't have...Roths have just already been taxed so the net effect is the same. Also, the amount that the government would need to raise taxes to increase your effective tax rate whereby using Roth now is very very high. The government isn't going to suddenly decide to start taxing retirees at 50%. That would be the bait and switch of the century. So the argument that the government will raise taxes therefore Roths are better is a complete gamble and terrible advice for people to give. See my comment on reddit below, didn't feel like typing it all out again. www.reddit.com/r/investing/comments/gte6k8/roth_vs_traditional_401k_for_middle_tax_brackets/fsbl936?context=3

[@JakeBroe]

Hey Julian! I said I can't quantify what people choose to do with their tax savings. What kind of return they get from real estate or starting a small business or whatever they choose to do with their tax savings if they are a small business.

[@headlibrarian1996]

Your analysis is wrong. You don’t consider taxes on your social security benefits triggered by your 401k withdrawals, nor do you consider IRMAA. Your low brackets are consumed by your SS benefits.

[@devonpeters9458]

I had a CPA tell me they think 30 years from now the IRS/Govt will find a way to tax Roth withdrawals/gains. Do you think there is any way they’d be legally allowed to do this?

[@JakeBroe]

No. Taxes can definitely go up in the future. Which would hurt traditional retirement accounts. They may even stop letting people open new Roth accounts or contribute to their Roth accounts, but they will never change the laws to tax Roth accounts.

[@christinajordan7483]

Hi Jake! I have a situation I'd be curious of your insight on. What would you recommend for someone who makes too much to contribute to a Roth IRA, but could qualify if they lower their taxable income by contributing to their 401(k) with Traditional Contributions? That's currently the situation I'm in, so to me it would make more sense to lower my income to take advantage of the 6,000 IRA contribution.

[@JakeBroe]

Sure, you can do this. But you are better off just doing a backdoor Roth IRA. Anyone can do it. Brokerage firms advertise how to do it and Congress has blessed it. Basically you open a traditional IRA, deposit $6,000 in to it, then the next day roll it in to your Roth IRA. Here is my video explaining it: kzbin.info/www/bejne/bZLKm5uimZd2j6M

[@laborer_in_the_harvest]

Is it true that money now with worth more than money in the future? So if you save money now by not paying taxes (traditional IRA), then you can invest that extra money to make even more money? Or does it not work? Thank you!

[@alrocky]

What do you mean by "that extra money"? Are you assuming that's the result of contributing to traditional IRA?

[@ZeroCountdown1]

What do you think about the Roth IRA from banks/credit unions? I know Navy Federal has one, but theirs appears to be like a certificate that you renew every x amount of years.

[@JakeBroe]

I wouldn't bother with Navy Federal Antonio. Either Schwab, Fidelity, or Vanguard. Those are the three brokerage firms I always recommend on my channel for IRAs. Choose one!

[@ZeroCountdown1]

@@JakeBroe Thanks for the response! I opened a Charles Schwab Roth IRA. Your videos have been so informative and helped me a lot. Keep it up!

[@AlexC-dd5ic]

What would you recommend for a AD member who’s planning to retire early around 45 years old? (BRS) Currently at 8 years TIS unsure about 20

[@JakeBroe]

Hey Alex, if the choice is between traditional or Roth, I always tell people to do Roth if they do not need the tax savings this year. Roth helps you save more for retirement this year!

[@Apio]

can you make anotjer video simplyfying i dont understand sorry

[@rayzerot]

Squidward wouldn't be paying 24% income tax though, his effective tax rate would be lower

[@vandanakdr]

Hi Jaker -I have a 401k and a plan b supplemental plan as i work for non profit. What is the maximum contribution limit for this plan b supplemental account? Can I still contribute to ira account with both 401k and plan b supplemental plan?

[@JuggerJake]

When’s the merch dropping

[@JakeBroe]

Hey Jake! Maybe I'll make some next year, haha. Cheers!

[@larrykrepp7428]

Not nearly old enough for this to matter yet, still however I will watch this, and save the video for later.

[@PhantomSavage]

You are exactly old enough for this to matter. The earlier you have an IRA the more money ot will have by the time you retire. Significantly more depending on your age.

[@larrykrepp7428]

@@PhantomSavage Fair enough, gotta finish college first.

[@JakeBroe]

Thanks for watching and saving for later Larry! Cheers!

[@mantiscity]

Can you open more than one account, to even save more?

[@JakeBroe]

You can have as many accounts as you want, but the contribution limits for your 401ks are the same all together. Same as any IRAs you have, combined you can't put more than $6,000 per year in all of them combined.

[@mantiscity]

@@JakeBroe got it....thanks

[@michaelhastriter3299]

Do a backdoor IRA next!

[@JakeBroe]

Hey Michael! I actually already made that video. Check it out: kzbin.info/www/bejne/bZLKm5uimZd2j6M

[@turntprophet7960]

Would it make financial sense to invest 5% with match with my employer and invest the other 10% into a Roth IRA as someone making around $45k at the moment.

[@alrocky]

< $41,775 is 12% Federal Tax Bracket. 5% * $45k = $2,250. 10% * $45k = $4,500. Yes $2,250 traditional 401(k) + $4,500 Roth IRA is a reasonable choice. If you can manage, bump up your Roth IRA to $6,000; you have until tax day (typically Apr 15) 2023 to contribute $6,000 to your 2022 Roth IRA.

[@devon7584]

Good point about trying it to work harder and be in a higher tax bracket later! My 403b and IRA are both Roth. If I'm not in a higher tax bracket in 30 years, so be it...

[@JakeBroe]

I'm the same way. I would rather plan to be in a higher bracket in the future... and if I am not, well, I tried! But if it is the otherway around, I'd hate to be pulling from a traditional 401k and paying in the 30% bracket.

[@jimcallahan448]

What if you have a traditional IRA but are thinking about rolling it over to a Roth IRA?

[@JakeBroe]

Hey Jim! You can do this, but it will create a tax event for you. What you might want to do is convert only a little bit each year to keep your tax burden down. Or just don't worry about it, contribute to Roth only for the rest of your life, then once you retire, pull from and use your traditional money first (saving your Roth money for later in life).

[@headlibrarian1996]

@@JakeBroe That’s what I did. Save a nice amount in my Traditional 401k, then watch it grow on its own while I switched to exclusively Roth contributions.

[@Simonjose7258]

You have to pay 10% if you only made $10k in a year! Or is that Tax on Gross Profits? (I just looked it up. Phew! You don't have to file if you're single until up to 40k BUT if you are working and paying bills you might miss out on Tax Returns 😉 😜 ✌)

[@thegardencity92]

You need to file if you made more than the standard deduction, which is $12,400 for 2020 and $12,550 for 2021. All income made up to the standard deduction is not taxed for income, just Social Security and Medicare. So if you made $10,000, you don't pay anything for income tax, just medicare and social security which is automatically withheld by your employer. Your employer likely still withholds income out of your paycheck, which you should receive back from the government if you only made $10,000, so if you don't file you will lose out on that money

[@rino7789]

I walk away from this video realizing there are pros and cons to each method. So I do both in order to capture all positives and hope they outweigh the negatives. I wish I had 20 more years to retirement.

[@JakeBroe]

If you have both kinds of accounts, something you can do is pull from the traditional accounts FIRST once you retire. This allows your Roth to go untouched and keep growing tax free. Once your traditional accounts are used up, THEN you would start living on your Roth accounts.

[@juniorsavoy1010]

You good.

[@JakeBroe]

Thanks Savoy! Cheers!

[@Simonjose7258]

7:15 But I thought you couldn't put 10,000 into a ROTH?

[@JakeBroe]

You can put up to $19,500 in to a Roth 401k and another $6,000 in to a Roth IRA every year.

[@daveski99x]

Actually, I had a 8% match 8% delivered on Allied Signal (now HON), but got whacked in a divorce. Despite this I maintained the 8% contribution, taking on boarders working [when they used to have paid overtime]. And you know you get hit with maximum taxes as if you are a happy go lucky single guy, despite paying 30% of more of your income. Worse when the Ex spends it on themselves and you spend again on food and trips to Kohls. The double whammy, . So I was able to put more into my 401k which grew and grew. Of course I was restricted from Roth because I was single and made over 90K. Peter Theil managed to create a Roth worth 9 Billion maximum although it's come down lately. We'll I still do not have a Roth option, but Thiel still has 5 billion in his Roth.

[@usethegrace21]

Hm. Who knew Mr. Krabs was such a generous man

[@karlbork6039]

What if you changed jobs and want to roll old 401k into an IRA. Traditional or Roth?

[@alrocky]

Traditional 401(k) to traditional IRA is acceptable as less tax paperwork involved. If you like Roth accounts just contribute $6,000 to Roth IRA every year. If current job 401(k) has good investment choices and low fees, you can roll the old 401(k) to new 401(k).

[@Jttte35]

In the future, you may plan to make less income since ideally you will own a house and 25% of your income will no longer go to rent or mortgage

[@DaStrangeWeasel]

Thanks Jake. With your advice, I would invest into a Traditional IRA while I'm taking college courses so I maximize my FAFSA reward, then start a Roth IRA once I'm done with college.

[@JakeBroe]

That's an interesting strategy! Best of luck to you BlueSEF!

[@tracym4132]

Most likely the government will find it necessary to collect more taxes, so they will change the law. They always do.

[@JakeBroe]

I think taxes might go up. But I don't see them imposing taxes on Roth accounts... that would be a disaster and people would stand for it.

[@devlavaniya]

Hey Jake! Great explanatory video with in-depth analysis that everyone can learn from. I'm one of the 'high income earners' with goal to retire early so I'm trying to use all options I have at my disposal (including mega-backdoor Roth IRA). I'm wondering if there's a good ratio (or strategy around it) for traditional vs Roth 401K investment if my intention is to use the investment earning as my primary source of income when I retire early (i.e. overall tax bracket is

[@sarbadavarun6102]

Other cases where Traditional makes sense is when one is pursuing FIRE and retiring early adopting series of ROTH conversions after retirement. Second one is when you move from a high to low/zero income tax state in the retirement.

[@behrensf84]

Yay! I'm cool!

[@JakeBroe]

You sure are Felipe! Cheers!

[@travis10466ny]

ain't the money you put in the traditional is also tax money? so you putting tax money in and than pay tax again when taking out