Mark Biller is Executive Editor at Sound Mind Investing.In this month’s SMI newsletter, he has a great article to help folks make this decision, titled “Should You Use A Roth Account, Even If You Prefer Traditional?”
WHY IS THIS A GOOD TIME TO ASK WHETHER ONE SHOULD USE A ROTH ACCOUNT EVEN IF THEY PREFER TRADITIONAL?
- Roth IRAs were introduced in 1996 with rules about who can contribute.
- A new law will soon mandate some older, primarily higher income 401k investors to direct some contributions into Roth accounts.
- This law also impacts those using 403 B, 457 B plans, and the Thrift Savings Plan, prompting a reconsideration of investment strategies.
[1:22]
CAN YOU EXPLAIN THE DIFFERENCE BETWEEN ROTH AND TRADITIONAL ACCOUNTS?
- Both Roth and Traditional are specific types of accounts that provide tax benefits, applicable to 401 K plans or IRAs.
- Roth is not an investment type; you can own stocks, bonds, etc., inside or outside of these accounts.
- Traditional accounts offer tax benefits now but tax liabilities upon withdrawal, whereas Roth accounts offer tax liabilities now but tax benefits upon withdrawal.
[4:11]
WHAT'S THE CONVENTIONAL WISDOM ON CHOOSING BETWEEN THE TWO?
- Roth accounts are usually preferred by younger workers with lower income, expecting to be in a higher tax bracket during retirement.
- Traditional accounts are often chosen by higher income, older workers who might have lower income in retirement.
[6:55]
WHAT ARE THE PROS AND CONS OF BOTH TYPES OF ACCOUNTS?
- Having both Roth and Traditional accounts provides diversified tax strategies.
- Uncertainties like future income, changing tax laws, and life events like the death of a spouse can impact tax outcomes.
- Roth accounts offer flexibility, such as not being subject to required minimum distributions.
[12:54]
HOW DO YOU FIND THE RIGHT BALANCE BETWEEN TRADITIONAL AND ROTH ACCOUNTS?
- University of Arizona researchers suggest adding 20 to your age and putting that percentage into a traditional account, with the rest in a Roth.
- This approach considers the risk of changing tax rates in the future.
- Investing some into Roth can mitigate some tax rate increase risks.
[14:44]
FINAL THOUGHTS ON ROTH VERSUS TRADITIONAL ACCOUNTS?
- Diversification is beneficial, applying to both taxes and investments.
The principle of diversification is rooted in biblical teachings.
That’s Mark Biller, executive editor at Sound Mind Investing. You can read more at SoundMindInvesting.org.
On today’s program, Rob also answers listener questions:
- How should I save the money I received from my divorce if I want to buy a property in about three to five years?
- I'm quitting my job to care for my mother full-time; where should I roll over my 401k since I won't be contributing to it anymore?
- We're selling our home and going overseas for a year; what should we do with the profit if we plan to buy another house when we return?
RESOURCES MENTIONED:
Remember, you can call in to ask your questions most days at (800) 525-7000. Faith & Finance is also available on the Moody Radio Network as well as American Family Radio. Visit our website at FaithFi.comwhere you can join the FaithFi Community, and give as we expand our outreach.
Remember, you can call in to ask your questions most days at (800) 525-7000. Faith & Finance is also available on the Moody Radio Network and American Family Radio. Visit our website at FaithFi.com where you can join the FaithFi Community and give as we expand our outreach.
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