TEMPLE, Texas — 32.3 million Americans contributed to a Roth IRA in 2022. It's post tax money, so it didn't reduce their yearly tax that was due, but when these Americans do draw from their Roth in retirement, that money will be tax-free!
We wanted to learn more about Roth vs. Traditional IRA's, so we talked to an expert in this all new Money Talks!
Roth IRA's were created in the taxpayer relief act of 1997 and went into effect in 1998. So, should you take advantage?
"The age-old question that we have now is IRA's," Certified Financial Planner Rolandus Johnson told 6 News. "Should I go traditional or should I go Roth? I deal with it quite a bit! The traditional IRA will be fully taxable upon distribution when you start taking money out or using it for retirement or whatever the case may be. The Roth IRA however, and I believe that this is one of the best things since sliced bread, is that money is going to be tax-free for you!"
That takes us to your limits. You can only put $7,000 into an IRA for 2024 if you are under the age of 50. You can do $8,000 if you are 50 or above and have an income. To contribute to a Roth you have to make less than $146,000 for single filers, and less than $230,000 for those filing jointly.
"As far as some of the downside, they have something called a 59 and a half rule," Johnson said. "So the government says 'These are retirement plans so we don't necessarily want you to touch them before the age of 59 and a half or there could be a penalty involved.'"
Not only do you need to wait on your investment, we want you to know President Biden proposed raising the capital gains tax, and when workers retire someday, these funds will be taxed as income.
"So, the traditional IRA will be treated on distribution as income tax," Johnson said. "There's some other accounts that the capital gains tax deal that President Biden was talking about will effect, but the traditional IRA will be treated as income tax upon distribution."
Johnson also mentioned how much better and how much longer your retirement could be and could last if you were tapping into a Roth that doesn't need to be taxed.
"Wouldn't it be nice to pull only 40 thousand out of your 401K or employee sponsored retirement plan and make up the additional 40 thousand dollars from your Roth IRA?" Johnson said. "Now you are living off of 80 thousand dollars a year and only paying taxes on 40 thousand! That's a great idea. It's a great plan if you are able to get to that point. I think that would be the best, I mean 80 thousand dollars and only paying taxes on 40? I think that anybody would take that!"
Just to seal the deal, imagine if you had a million dollars in a Roth and in a traditional, here's the difference.
"For one, the million in your Roth is going to last a little bit longer," Johnson explained. "Regardless of whatever, say for example that they are both earning 8 percent a year, and now upon distribution, not only are you taking 40 thousand dollars out, you are taking 40 thousand out of a traditional IRA plus taxes, so the money's going, if you need 40, you're probably going to be taking more like 56 or 57k out, versus in the Roth IRA, you're going to be taking just that 40! And you can continue compound growth, so a million in a traditional IRA and a million in a Roth IRA, it's going to last longer in a Roth IRA. That you can bet because we are taking less out to live off of the 40 thousand dollars.”
Another plus of the Roth IRA is that you never need to take minimum distributions, so if you desired, this can be passed tax-free onto your descendants as a wonderful gift after you are gone!
More Money Talks from 6 News: