Roth vs. Traditional Retirement Plans

WATCH HERE: https://www.youtube.com/watch?v=a4qPTO2rMm4

Today we're going to be discussing the major differences between ROTH and TRADITIONAL retirement accounts. You can find both of these in an IRA or individual retirement account or 401k / TSP (Thrift Savings Plan) and more.

I am not going to cover all of the nitty-gritty details about contribution limits, tax deduction limits, and so on, but, I will give you an overview of your retirement account options. I’ll do more in-depth reviews, starting with the TSP next week.

What is a traditional plan?

In a traditional retirement account, you contribute money from your paycheck into your plan and get a tax deduction for doing so. Your money is usually lumped into a fund or you may have the option to choose from multiple funds or even individual stocks. These plans grow in value tax deferred.?

Tax-deferred means that when you begin taking withdraws from this account when you retire, you have to pay taxes on said withdrawals.

For example, let's say you need $75,000 a year in retirement, assuming a 20% tax rate, you would have to withdraw $93,750 to make the $75,000. Your tax bracket could be higher or lower in the future, nobody knows for sure.

This plan could be good for someone who expects to make less income when they retire. If you had multiple streams of income then the odds that your tax bracket will be higher when you retire are greater. Of course, the last thing you want is to jump to a higher tax bracket in your retirement.

What is a Roth plan?

A Roth account lets you take your after-tax dollars and invest into this account. Just like a traditional account, Your money is usually lumped into a fund or you may have the option to choose from multiple funds or even individual stocks. The big difference is that your money grows tax-free and when you take your withdrawals from these accounts they are also tax-free!

So if I need $75,000 a year to live comfortably in retirement, I can withdraw $75,000, and I do not have to worry about taxes.

I would recommend this type of account to most people because the majority are making less money now than they will in the future. Plus there is no telling what tax rates could be later down the road.

Final Notes:

However you choose to plan for your retirement, remember, the money you invest in a Roth and/or traditional 401k, IRA, TSP, etc., is locked up until age 59?. There are exceptions to this rule for certain withdraws, I’ll explain in future videos, but be sure that if you withdraw funds before you reach this age milestone there could be taxes and fees to pay if you do not follow the rules.

My retirement plan being locked up until I'm 59? is my major complaint about retirement accounts as I have absolutely no intention of waiting some 33 years before I could retire.

If you want to join me on my journey to financial freedom and early retirement, share, and send me a connection or friend request to learn more great financial information! Be sure to comment on a topic you want to learn more about so I can do an article and video on it in the future!

WATCH HERE: https://www.youtube.com/watch?v=a4qPTO2rMm4

Disclaimer:

The content in this article is to be taken as educational material and not financial advice. Every individual has their own financial needs and therefore should meet with a financial professional when discussing their financial situation. Any information within is not a guarantee and is subject to change.