It seems like a roth ira would be better to open at a young age rather than a regular. is this true? my reasoning if you have a roth IRA you don't lose taxes when you take out money but regular you would. so for example if you put 5500 in at an age of 20 and waited till 60+ to take it out it would be worth ~40k if you average 5% return a year while you don't get taxed on the money putting into a regular you would end up paying tax when you take it out meaning that the ~40k you would be taxed on rather than the 5500. is this correct or am i thinking about this wrong? TLDR; wouldn't be better to open a roth and not be taxed when its worth more rather then not paying tax when you first deposit your money
Roth IRA vs Regular IRA
- Thread starter Sotnis
- Start date
If you're young, you're generally in a lower tax bracket where tax deferral doesn't matter as much. In that case a Roth may make more sense.
yes, and when you get older and maybe the current year deduction makes more sense, you can always put new money in a reg IRA. They are not mutually exclusive as long as you don't exceed your max.
https://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits
https://www.irs.gov/Retirement-Plan...-You-Are-Covered-by-a-Retirement-Plan-at-Work
It is quite possible you will not even get a deduction if you are covered by a plan at work.
Roth IRA provides tax-free growth. The contributions are already taxed through earnings tax; therefore, there is no additional taxes incurred when funds are distributed.
Traditional IRA provides tax deferred growth. The annual contributions may be deductable. Tax is incurred when the funds are withdrawn/distributed.
https://www.irs.gov/Retirement-Plan...-You-Are-Covered-by-a-Retirement-Plan-at-Work
It is quite possible you will not even get a deduction if you are covered by a plan at work.
Roth IRA provides tax-free growth. The contributions are already taxed through earnings tax; therefore, there is no additional taxes incurred when funds are distributed.
Traditional IRA provides tax deferred growth. The annual contributions may be deductable. Tax is incurred when the funds are withdrawn/distributed.
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Roth Accounts have no minimum withdrawal requirement starting at at age 70.5. This is another advantage to the Roth. With the traditional IRA You will pay tax on both the ROI and the principle upon withdrawals which offsets to an unknown extent the advantage of deferred taxes. With the Roth you are only taxed on the principle and you know what that rate is. There is no tax on the ROI. I prefer the Roth.
If you do the math on an example you'll see that all benefit comes from putting yourself in the lowest tax bracket when you pay the tax. If your tax bracket is the same when you retire as now, you're mathematically indifferent to either structure. Intuition leads you astray here because you feel like you're not taxed on the gains with Roth so its better, but when you do the math you see that the lower amount you put in initially (because you paid it to taxes) exactly balances out the shielded gains regardless of returns. So basically if your tax rate now is lower now than you think it will be in retirement you go with Roth, if you think it will be lower after retirement you go with regular. Of course you need to take into account the mandatory distribution rules, which favor Roth, the uncertainty of tax rates 40 years from now, and the chances of a change in rules on the Roth. For example, if you truely believe the "flat tax" drivel and the idea that one of its advocates can both get elected and pull it off, you would certainly go with a regular.