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Hovedindhold
Aktuel tid:0:00Samlet varighed:16:30

Retirement accounts: IRAs and 401ks

Video udskrift

what I want to do in this video is to give you the gist of what the Roth the Roth IRA is all about it just to get a nice idea of why it's called the Roth IRA it's named after William Roth the late senator from Delaware he helped I guess you could say Shepherd this legislation in 1997 when it was first passed so they named the IRA after him William William Roth from Delaware so that's where the word comes from so it's a special type of individual retirement account so why did they go to the trouble of creating a new one so let's think about what a traditional IRA does and then I'll talk about why a Roth IRA could be interesting or it's a little bit different or what could be beneficial and then we'll actually see it in an example so the first question is what happens when you put money into a traditional or Roth IRA in the traditional IRA video you saw that is tax deferred tax deferred that if you were to put $5,000 in your traditional IRA you are not taxed on that money in the Roth IRA it is not deferred it is not deferred so you would actually pay taxes on that $5,000 so immediately you're saying hey gee you know this doesn't seem like that great of a thing why would I ever use it I have to pay taxes on the money I put in and this is the interesting thing in both situations or as long as your investments stay in the either traditional or Roth accounts earnings earnings earnings are not taxed are not taxed while in account this is true for both of them this is true for both of them but you're still going to say hey Sal the traditional still looks a lot better I had to pay taxes on the Roth right from the get-go I didn't have to pay it on the traditional and then they can both grow and I can buy and sell my stocks or I invest in mutual funds or whatever I do inside of them I don't pay taxes the traditional still looks better now the interesting thing is what happens when you would draw the money so there's a lot of special circumstances on when a withdrawal is qualified or not I'm not going to know the details I really just want to give you the essence of why the Roth is interesting so let's say you're over fifty nine and a half years old fifty nine and a half years old and in the Roth your money's been there for more than five years it's been seasoned I'm not gonna go into all the particulars so the traditional IRA when you withdraw so let's say we're older older then older than fifty nine and a half for both and then we do a withdrawal with drawl in the traditional IRA you have to pay taxes you pay taxes you're taxed ordinary income tax ordinary income tax income tax while in the Roth IRA no taxes not taxed not taxed and we saw in the traditional IRA video that this is tends to be pretty good when you're older than fifty nine and a half you might be retired you might be in a lower tax bracket you're going to pay lower taxes on it and it's been deferred for however many years your IRA has been in existence now this is especially interesting because over here you paid tax just on the original amount that you put in and then you allow that original amount to grow over many many many many years and then all of a sudden you're not taxed at all so that all of a sudden becomes a little bit interesting this seems like a pretty good thing to have and we're gonna actually play with the numbers to see how they work out now the other interesting thing about the Roth is if you early withdrawal early withdrawal early withdrawal for a traditional IRA you pay ten percent ten percent penalty on the withdrawal plus you get taxed plus taxes on the Roth IRA if you're just taking the original amount you put in and I'll do this with a numerical example if you're just taking out your principal amount no taxes or penalty on the principle no taxes or penalty penalty on principle on principle I've spelled that badly print principal and you will only have to pay even if it's a non-qualified withdrawal and there's all these special circumstances what's qualified and and I'm not going to go into the details you will only have to pay the 10% penalty 10% penalty and taxes on earnings and taxes on earnings and one of the main reasons why I'm not going all the details is one it would make the video a little confusing but also the government is constantly changing the details so I want this I want you to be able to watch this videos many years in the future and not to be dated so I don't want to go into all of the different things that the government is changing from year to year but let's just do a very basic example just to get the sense of things so let's look at a traditional IRA traditional and then we have a Roth let me write IRA just to be clear that we're talking about an IRA in both circumstances so let's say my original income amount let's say I made more than $5,000 I'll just use $5,000 as my example and also make another note Roth IRA is subject to more limitations in terms of your total overall income and that's also changing so I don't want to be specific on the numbers you could look that up but there are ways that you can transfer traditional IRAs into Roth IRA so that's kind of a little bit of a loophole on being able to get around some of those restrictions but anyway I won't go into the details just yet but just remember Roth IRA there are some more limitations on whether or not you can put things into it but if you're tricky you might be able to get around them so let's say you have $5,000 and just so you know the limits on IRAs they apply to Roth or traditional or any combination of the two so if you you're starting with $5,000 so in the traditional IRA you have zero taxes initially in your Roth IRA initially let's say you have a thirty two percent tax bracket just like in the previous video thirty two percent tax bracket then you'll pay thirty two percent on fifteen I'm sorry on five thousand dollars thirty two percent on five thousand dollars that's point three two times five thousand dollars that's sixteen hundred dollars so you're going to pay you're going to pay sixteen hundred dollars in taxes so your amount in the account so in your account your principal principal in your traditional IRA maybe I should write it out here starting with that five thousand dollars your principal principal is going to be five thousand dollars here and it's going to only be yet to pay yet to take sixteen hundred out for taxes so it's only going to be thirty thirty 3,400 3,400 right there now let's say in either situation you were to take that invested in some stocks and then five years later five years later you were to it doubles so let's say it's some future point it doubles and you sell those stocks so that becomes ten thousand dollars in your account there and then this you invested in stocks and it doubles this becomes seventy eight hundred dollars seventy eight hundred dollars in your account right here so this is ten years I think I said five years into the future I'm just picking that into into the future and let's say we're still not fifty nine and a half years old just yet now we could just continue to leave each either of these amounts in our account until we're 59 and a half but let's say we have some type of need we need a we need to give a loan to our brother-in-law or something so we really want to have access to this money so let's look at the situation where we withdraw if we were to withdraw if we were to withdraw well let's think of a couple of situations if we were to withdraw $3,400 $3,400 let's say that's exactly what my brother-in-law needs just right now so if we were to withdraw $3,400 in the traditional IRA sense in the traditional IRA case so - so we take out $3,400 we're going to have to do two things first we're going to have to pay taxes on it so we're going to have to pay 32% of that assuming we're still in the same tax bracket so $3,400 times 0.32 is equal to we're going to have to pay a thousand eighty-eight dollars in taxes so we're going to have to pay one thousand eighty eight in taxes and we're also going to have to pay a penalty on this entire amount on the $3,400 so we're also going to have to pay ten percent penalty three hundred and forty dollar penalty so we're going to be left with after paying all of this this is let me get the calculator out let's see the calculator right there we're going to be left with 3400 - 1088 - three hundred and forty dollars is equal to nineteen seventy two dollars so we're left with 19 1972 dollars now in the Roth IRA when you needed that money all of a sudden you decided to withdraw it early and we're only taking out thirty four hundred dollars so we're taking them out the amount that was our original principle in the Roth IRA we get the $3,400 because that was our original amount and we pay no taxes so we act or penalties so at any point in time on the Roth IRA you can always take your principal out and the other types of our IRAs not only will you have to pay taxes on it you're also going to have to pay a penalty on top of that so the Roth IRA one of the very positive things is it gives you a lot of flexibility now let's say you won't need it to withdraw I don't know let's say you need to withdraw $4,000 with draw this is another scenario for $1000 at this same point in time within the traditional IRA scenario once again you're gonna have to pay 32% of that in taxes so you're gonna have to pay four thousand times thirty-two percent in taxes and you're also going to have to pay plus four hundred dollar penalty penalty in the Roth IRA case you pay nothing you get your thirty four the original principle you put in that was your original amount $3,400 and I'm in all of this I'm assuming that we're not 59 and a half years old just yet so in the Roth situation you get the $3,400 free and clear tax and penalty free but the other six hundred dollars the other six hundred dollars you're going to have to pay thirty-two percent taxes or whatever your tax bracket is and then you're also going to have to pay $60 a ten percent penalty on just the earnings portion remember 3400 was your principal then if you want to take four thousand out the six hundred extra that's stuff that you earned that stuff that was grown from the principal so you're gonna have to pay plus another $60 penalty but it's still a much better situation if you do the math than this one here so in general if you think if you're not sure whether you're going to need that money before you retire the Roth gives you a lot more flexibility now let's go all the way to retirement let's go all the way to retirement let's say we invest let's say we didn't ever withdrew any money we invest it in another stock and so we go ten years later so we never would throw any money we never withdrew any money we're just going to look at the retirement situation and we go to our stock and we sell it our new stock we get twenty thousand they're here we get fifteen thousand six hundred dollars and of course in both of these situations great that we're able to buy and sell stocks inside of these retirement accounts and not pay taxes if these weren't sitting in retirement comps every time we bought and sold the stocks we would have to pay capital gains tax and you saw that in the previous video now now that we are over let's say we're 60 years old we're 60 years old we can now withdraw our money from either situation there are some other vil stipulations your money has to be seasoned has to be sitting there for five years and all that I won't go into the details but let's see what happens when we withdraw the money let's say we have a 25% tax bracket now 25% tax bracket so we're retiree we're earning a little bit less money we are in a lower tax bracket in this situation we're going to pay when we would draw from a traditional IRA we are going to pay 25% in taxes which is $5,000 in taxes and we are going to be left with $15,000 for ourselves to spend in our retirement years in the Roth IRA situation once we're over 60 years old our tax bracket doesn't matter we just get the money we just get the money $15,600 free and clear so if you think about it in either situation when we withdrew early the Roth IRA was much more forgiving especially if we would draw less than the amount that we originally put in $3,400 the Roth IRA does not tax us or give us penalties it only does that on any money that we earned any money in excess of the $3,400 the traditional IRA taxes us and penalizes us on everything on everything and then even when we go into the future remember in the traditional IRA and the traditional IRA we didn't pay any taxes to begin with but we had to pay taxes to end with so when we paid taxes in the end we're paying taxes not just on what we put in initially we're also paying taxes on all of our cumulative earnings right we originally put in 5,000 now we're paying taxes on 20,000 so we're going to only end up with $15,000 while in the Roth IRA we don't pay taxes on anything for I guess in return for being willing to pay our taxes front-loaded to pay them in the beginning we would never have to pay taxes on that money or on any of the earnings that that money makes now I fix the numbers here to make them close depending on your tax bracket before and after or how much growth you actually see in your earnings one maybe better than the other but these are important considerations and so I just want to let you know the the pros and cons the Roth IRA tends to be better in terms of giving you this flexibility and never not worrying to pay taxes at the end and there's one other thing and this is you know depending on how you view life it might be a minor thing in the traditional IRA when you're 70 and a half they force withdrawal force withdrawal and then of course you have to start paying taxes on things in a Roth IRA there's no age limit no age limit so that's another consideration you might want to take into