Very simple: when you withdraw from your Roth IRA in retirement, you do not pay taxes on the growth in the account.
Whenever your savings accounts earns interest, you pay taxes on that interest.
To be fair, if you're making millions working as a lawyer you won't get the income deduction from a traditional IRA. That's only applicable for people making less than $83,000. If you make more than that you should almost certainly take advantage of a Roth IRA.
We do a backdoor Roth contribution every year.
Make a contribution to a regular IRA. Immediately convert the regular IRA to a Roth IRA. Because you've already paid the taxes on the contribution, and there are no earnings yet, there are no additional taxes due when you convert the regular IRA to the Roth IRA.
This only works if all of your IRA holdings are already on a Roth. Otherwise, the earnings of your entire regular IRA holdings are considered, and you have to pay taxes on the portion that is being converted to a Roth.
We bit the bullet several years ago and converted all of our standard IRAs to Roth IRAs, paying the taxes on the earnings, so now there are no additional taxes when we make backdoor Roth contributions.
When you retire you can pull money from something like a 401k for the first $50k or so where you're in the lower tax brackets. Then pull from a Roth IRA when you would be in the higher tax brackets.
Don't start the year pulling from the Roth IRA.
Right, but then your Roth acts as a supplement to your retirement that you don’t pay taxes on.
Savings interest does accumulate taxes like stock dividends or your Social Security.
Our Traditional IRAs have minimum withdrawal requirements based on the size of the account in retirement, meaning if you save too much while you’re working, you’ll be forced into a higher tax bracket.
Also there’s limits to how much we can deposit in them while we’re working.
You are describing a Traditional IRA.
If you think your income tax rate will be higher in the future, you should get a Roth IRA and pay the taxes now. If you think your income tax rate will be lower in the future, you should get a Traditional IRA. If you think that your tax rate will be the same, then the net yield will be the same for both investments.
I agree. I'm about 5-7 years away from retirement, and I expect my income to drop when my wife and I stop working. That would drop us to a lower marginal tax bracket. Presumably my expenses will also decrease as my freeloading kids get off the family payroll and our mortgage is paid off.
Depending on your career progression, it's likely a good idea to switch to a traditional IRA by your mid to late 30s, since you're probably gonna be in a higher tax bracket at your peak earning potential. when you decide to retire, your income will be substantially lower, and you'll be paying a much lower marginal tax rate.
The question is investing in a Roth vs. earning interest, which is taxed as regular income. All gains in the Roth account accumulate tax-free. Assuming a 30+ year time horizon, you’d expect to have an ending balance approximately 3x what you put in with an average return of 7% and equal monthly contributions.
Would you want to pay tax on $100 monthly for 30 years or be taxed on $130k in 30 years, even at a lower rate?
Even if you withdraw from your RRSP at the same bracket as contribution so you don't benefit from any tax arbitrage, you still enjoy tax-free growth on your investment. And lowering your current income can also help increase income-tested benefits as well.
In Canada we have both options and typically a TFSA is a better option to max out first. This allows you to keep your income lower in retirement and qualify for benefits you wouldn't if you were withdrawing from your RSP.
>when taxes are inevitably higher
Since they are asking about a Roth what is something in the USA, tax rates have been falling in the USA for the past 60 years
And at the rate our government spends money, they can't really go much lower. They will either have to go up, or some major spending cuts that are very unpopular will have to happen.
How they accomplish that gial is the difference in the two parties. The Republicans want to cut Medicaid and Social Security, while Democrats want to raise taxes on higher income people.
https://archive.nytimes.com/www.nytimes.com/imagepages/2007/10/31/business/31Leonhardt.html?action=click&module=RelatedCoverage&pgtype=Article®ion=Footer
What about this chart looks like it's trending up to you?
Well, if I'm living off a retirement account that is taxed when I spend it, I'm still generally spending less in a year to meet my needs than my income on a year I was working, so I'm likely doing better on taxes in that specific scenario.
I'm fine climbing to higher tax brackets while I'm working, but once I stop working, my income is going to likely sink to lower brackets.
But you’re not. You’re still making mortgage payments, you’re still buying food, you’re just not going to work anymore. So you save on gas and that’s about it.
When you're old, you own everything you need. Maybe you need to pay a kid to run the snowblower, but you've had that paid off for years. You don't need a laundry basket and a futon at Target. A new presription or some DME at increasing frequency, but you've got two paid-off cars.
You're probably not making mortgage payments anymore, but you locked in that payment quite a while ago, so it's like 1/5 of whatever someone buying your house is going to pay every month.
Being old can be very cheap, and that's nice, because being old can be very expensive. There's a lot of tricks for living on a fixed income because the system is merciless. Some people work until the day they die, and long ago, little old ladies would eat cat food because it was cheaper.
You know what we did to change that bleak reality?
Raised the price of cat food.
If your old-person future has enough taxes for you to notice or be angry about, you're probably not eating cat food, before or after taxes.
Food is usually a pittance compared to other expenses unless you are very low-income. And many people own their home outright by their mid-60s, assuming they buy on a standard 30 year mortgage by or before their mid-30s. And once you are retired you are, presumably, no longer *saving* for retirement so that's another 10-20% reduction in income needs.
I don’t know a single millennial who’s able to actually save for retirement while also being able to afford food and holding down a mortgage. As with most millennials these days, you only get to pick 2.
Taxes will go up when people get serious about the debt and budget deficit. Will that happen during our working careers? Idk but it's not stupid to think it might
Not exactly a winning strategy for a politician to raise taxes. That’s why the tax rates have been falling for the past half century. It’ll take something serious to have that change.
The compounding interest on what you don’t pay in taxes now will offset taxes increases in the future, barring something insane taking place. By then there’s other bigger issues.
It's more complicated than that though because if instead of interest on a savings account, your non-taxable savings are in say, an SP500 ETF, you also pay no taxes until you sell, and then it's long term capital gains which is generally a lower rate than ordinary income tax.
But yes generally all things being equal you should max out your tax advantaged accounts (like Roth IRA) first, but they have pretty low max contributions so once you've maxed it out move to regular accounts.
Since you can take the contributions out of a Roth tax free before retirement and let the gains continue to grow tax free it's a clear winner when comparing the tax price. Sure sometimes a savings account is faster and simpler so having both as options is great
1. Earnings: investments have higher returns than savings. If you put $10,000 in savings this year and it earns 5% interest, it earns $500. If you buy $10,000 of stocks at $150/share, that gets you 66 shares. If those shares increase in value by $10, you will have earned $660 instead of $500.
2. Taxes: you will owe income tax at the end of the year on that $500 earned in the savings account. You will not own income tax on the $660 earned in the Roth IRA because that is a special kind of account where the government allows you to not pay income tax on the earnings.
3. Timing: because the Roth IRA is a retirement account with rules about how it can be used and how long the money has to stay in it, along with the protection from taxes, the money you put in it will stay there for many years and continue to grow. You may not be as likely to leave a sum of money sitting in your savings account for 20+ years. Once you get to that 20+ year point and start withdrawing the money, you probably will not have a job and will need to keep as much money as possible to pay your bills, so you benefit greatly by not having to give any of it to the government in the form of income tax.
For most people, this will not be an either/or choice. Both are tools to be used for specific financial goals. There is a limit to the amount of money you are allowed to put in a Roth IRA each year, and there are restrictions to whether or not you can even use one in the first place based on your income.
I have a savings account that I use for short term goals like my annual car insurance premium and vacations. I have a Roth IRA for retirement savings. I have other investment accounts that don't have the same tax protections as the Roth IRA because I am limited on how much money I can put into the IRA, but I still want to earn more interest than I can get from a savings account.
Ic thank you, this was very helpful! I didn’t realize that roth IRA was technically an investment rather than being equal to standard interest rates. Thank you!
A Roth IRA is an investment *vehicle*, not just an investment.
It's an investment account with extra tax rules/exemptions. If you simply put money in the account and call it a day, you will get standard interest rates. (A lot of people make this mistake)
After you have funds in the account, you can use them to purchase stocks, bonds, mutual funds, CDs, ownership of publicly traded partnerships(PTPs), etc... If you're not a savvy investor, pick a target date fund or S&P 500 mutual fund with a low expense ratio (under .08%).
I would suggest going to a financial advisor. I use Edward Jones for my Roth IRA because they were local when we opened the account before online banking was SO prevalent. The fees are very minimal (about 1%) and my FA will make biweekly adjustments on the investment choices. My return on that account has been over 20% in the last year.
If you're completely unfamiliar, a financial advisor can be good to get things setup.
I have had accounts with RW Baird and NML, mostly for networking. That 1% fee accumulates, and financial advisors don't get you much more than a mutual fund with appropriate risk after the account is setup.
I'm also an accountant, and my general advise is for people to file their own tax returns, but I know finances and money are just so abstract for some people, and that 1% fee is with it to not have to think about their savings.
As he mentioned there is a Roth IRA and a traditional IRA. Roth IRAs only provide the tax benefits if you make less that $156K a year. Then you need to use a traditional IRA.
Just FYI in case you’re looking at starting one (as you should sooner rather than later cause there’s no minimum to open one and you can put money in there as you have it)
Your brick and mortar banks can explain these to you and the options. But it’s a good idea to get an IRA with your 401K as soon as you can.
ROTH IRAs have tax advantages that a normal savings account doesn't.
With a savings account, you pay tax on your income, put it in savings, and then pay tax on the interest every year as it accrues.
With a ROTH, you pay tax on your income, put it in the ROTH, and then never pay tax on that money again. Whenever you withdraw in retirement, whatever gains you have are tax-free. This can result in _considerable_ tax savings depending on how long you have the ROTH and what your tax rates are.
The disadvantage, of course, is that you can't withdraw from a ROTH early without penalty - there are not additional penalties for withdrawing from savings.
Nothing about your answer is wrong, just pointing out that "Roth" isn't an acronym that needs to be capitalized, but rather the name of one of the two senators who proposed the idea. I guess they chose Roth because the "Packwood IRA" did not sound as pleasing.
Checking account can earn interest too, but it’s usually such an abysmally low amount that it falls well under the bank reporting minimums. Technically you should still pay tax on it but realistically no one cares unless the government wants to find something to charge you with.
Most banks won't send you a 1099-INT unless you made over $10 in interest from them in a given year. It's tough to hit that in most checking accounts since the rate is .05% or so.
My HYSA netted $350 in interest last year though.
> I don’t think I’ve ever thought about tax on the interest from my savings account.
They will send you a 1099-INT (if interest accrued is over $10) at the end of the fiscal year, before taxes are due, that you are required to report.
You do not have to do this with with a Roth IRA.
No, if you earn enough interest (not sure I think it’s $600 or more) on the account the bank will send you a 1099-INT form indicating your interest income. You would then have to include that income in your 1040 which would caluculate if and how much taxes you’d have to pay on that interest.
If you invested the money instead, and received dividends, same thing, you’ll get a 1099-DIV from the brokerage firm holding your stocks to pay taxes on the dividend income.
If the interest is a negligible amount (I think under $600) you won’t receive the 1099 from the bank but legally you may still be expected to include the income, I just wouldn’t know what to put on the 1040 and I assume most people don’t do it and the irs doesn’t really audit specifically for that. But if you did get audited I assume they’d expect their $2 in taxes on your $10 in interest….
Roth IRAs aren't necessarily better. But they also may be. Ultimately, it comes down to what your tax rate is when you deposit the money, what your tax rate will be when you're withdrawing the money, and how much the money grows between those times.
Traditional IRAs, as you know, have the primary benefit of saving you on taxes now by deferring the taxation to when the money is withdrawn, and considering the distributions as income, and taxed at that time based on the tax bracket for your income at that time. Typically, people are in a lower tax bracket when they are withdrawing from their IRA since they aren't working, often have fewer expenses with more things paid off and kids out of the house. Roth IRAs on the other hand won't save you on taxes now, but allow you to grow money tax free, as the distributions are tax free regardless of how much the value grows.
So, to look at an example, let's say your annual income is 60k, which would put you firmly in the 22% tax bracket. And let's say when you are withdrawing, your income will be the equivalent of 40k, which would put it at the 12% bracket. For every $100 you put into a Roth IRA, you're paying $22 in taxes, which would be the equivalent amount of taxes you'd pay for every $183.34 (183.34 * 0.12 = 22.00) you withdrew from a traditional IRA. That would mean you'd need at least 83.34% growth in order to break even. That's not entirely unrealistic depending on how much time you have until you'll be taking those distributions, but it also may well be. And of course, if the difference in your tax brackets will be lower, then you'll also need less growth to break even.
At the end of the day, it really comes down to an individual's personal situation. The more time you have to grow the income and the lower your tax bracket is currently, or if you expect to have a high tax bracket when withdrawing, the better a Roth IRA will be for you. The closer you are to withdrawing the money, the higher your tax bracket is currently or the lower you expect your tax bracket to be when withdrawing, the more a traditional IRA makes sense.
Your IRA is going to earn at least double the amount of even the highest interest savings account. 10% is the general return compared to savings which are below 5%.
It will not do anything different than a savings account if you just deposit funds into an IRA and call it a day.
I am sure you know that, but I just think we should be very clear about that when talking to someone that isn't familiar with how an IRA works.
Right. I have seen several posts where people didn't know what they were doing and left it in the default cash account at their IRA provider and saw their account balance rise a whopping 0.5% over the course of several years.
Where did you open the IRA? (Charles Schwab, Vanguard, through a financial advisor?)
If you have a financial advisor, then they should be setting you up with investments.
If you are using an online broker, then you login to your account, and look at the Holdings tab. If it says 100% of your funds are in cash or a money market, then you need to buy a mutual fund of some kind.
Better to gamble on historical averages. You're always losing money in a savings account due to inflation. At least with investments, you have a much better chance of outdoing inflation even if you have a miniscule chance of losing money.
This is a strange question and I’m not sure it even should be in this sub. A Roth is not taxed by definition, otherwise it’s just a savings account.
So a Roth is better because it’s more money … was this a bot post ??
A brokerage account with long term cap gains, selling stocks after a year for example, can be taxed at 0% depending on your income if you are strategic about it. Roth is a good idea as well but IMO people should have money in both for flexibility and liquidity.
If you plan to retire early the brokerage account is even more important and for a married couple can make up to around 90k and pay 0 taxes for LTCG.
If you're putting away less than the annual max contribution, I think it's pretty safe to keep everything split between HSA, and Roth/trad IRAs.
The big benefit of brokerage accounts is the liquidity. But if you're using an HSA, you don't need to worry about medical emergencies, and you can take your basis out of a Roth with no penalty after keeping it open for 5 years.
(As long as you have an emergency fund on hand)
1) They aren’t an either or. Emergency money shouldn’t go into investments but you should save for retirement.
2) A Roth account means you don’t pay taxes on any gains (increased stock prices, dividends, etc.). On a savings account you pay tax on the interest.
3) Boiler plate investments (e.g., S&P 500 index funds like VOO) grow in value at a higher percentage than the interest on a savings account, at least over the long run.
4) You can technically withdraw from a Roth IRA by how much you contributed, but it’s not a good habit to have, leave retirement accounts alone. Also, you can only contribute earned income in an IRA (or at least you had to have made that much, so $100 in birthday money can be thrown into it if you at least made $100 from work).
Two reasons.
1. The Roth IRA will grow with the market. Over the long-term, this can be reliably expected to be about 8%. Your bank account will only grow by whatever interest rate your bank chooses to give you, which is pretty commonly less than 1% and essentially always less than inflation rates so your money is actually losing value while it sits in the bank for years or decades.
2. The profits on the Roth IRA when you withdraw are not taxed, while the profits on your bank interest are taxed.
To sum it up, the Roth IRA gives you orders of magnitude more money and you don't even have to pay taxes on it.
Very simple: when you withdraw from your Roth IRA in retirement, you do not pay taxes on the growth in the account. Whenever your savings accounts earns interest, you pay taxes on that interest.
Pay taxes now on what you deposit when they’re lower, pay no taxes on what you withdraw when taxes are inevitably higher.
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The assumption is that you will continue to go up in tax brackets over time
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To be fair, if you're making millions working as a lawyer you won't get the income deduction from a traditional IRA. That's only applicable for people making less than $83,000. If you make more than that you should almost certainly take advantage of a Roth IRA.
Only up to $163k as of 2024, then you are ineligible to contribute to that too.
Not if your 401k plan lets you do a mega backdoor Roth
Or if just do a regular backdoor Roth contribution by contributing to a standard IRA and immediately converting it to a Roth IRA.
*Mega Backdoor Roth* is my porn name 😂😂
We do a backdoor Roth contribution every year. Make a contribution to a regular IRA. Immediately convert the regular IRA to a Roth IRA. Because you've already paid the taxes on the contribution, and there are no earnings yet, there are no additional taxes due when you convert the regular IRA to the Roth IRA. This only works if all of your IRA holdings are already on a Roth. Otherwise, the earnings of your entire regular IRA holdings are considered, and you have to pay taxes on the portion that is being converted to a Roth. We bit the bullet several years ago and converted all of our standard IRAs to Roth IRAs, paying the taxes on the earnings, so now there are no additional taxes when we make backdoor Roth contributions.
When you retire you can pull money from something like a 401k for the first $50k or so where you're in the lower tax brackets. Then pull from a Roth IRA when you would be in the higher tax brackets. Don't start the year pulling from the Roth IRA.
Right, but then your Roth acts as a supplement to your retirement that you don’t pay taxes on. Savings interest does accumulate taxes like stock dividends or your Social Security.
Our Traditional IRAs have minimum withdrawal requirements based on the size of the account in retirement, meaning if you save too much while you’re working, you’ll be forced into a higher tax bracket. Also there’s limits to how much we can deposit in them while we’re working.
>. >Then when you stop working, your income drops to 0 0? Do you not get a state and work pension when you retire?
Most US employees do not have employer pension plans anymore.
You are describing a Traditional IRA. If you think your income tax rate will be higher in the future, you should get a Roth IRA and pay the taxes now. If you think your income tax rate will be lower in the future, you should get a Traditional IRA. If you think that your tax rate will be the same, then the net yield will be the same for both investments.
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I agree. I'm about 5-7 years away from retirement, and I expect my income to drop when my wife and I stop working. That would drop us to a lower marginal tax bracket. Presumably my expenses will also decrease as my freeloading kids get off the family payroll and our mortgage is paid off.
Which also means your deductions will decrease, since you won't have mortgage interest or dependent deductions.
Depending on your career progression, it's likely a good idea to switch to a traditional IRA by your mid to late 30s, since you're probably gonna be in a higher tax bracket at your peak earning potential. when you decide to retire, your income will be substantially lower, and you'll be paying a much lower marginal tax rate.
The question is investing in a Roth vs. earning interest, which is taxed as regular income. All gains in the Roth account accumulate tax-free. Assuming a 30+ year time horizon, you’d expect to have an ending balance approximately 3x what you put in with an average return of 7% and equal monthly contributions. Would you want to pay tax on $100 monthly for 30 years or be taxed on $130k in 30 years, even at a lower rate?
Even if you withdraw from your RRSP at the same bracket as contribution so you don't benefit from any tax arbitrage, you still enjoy tax-free growth on your investment. And lowering your current income can also help increase income-tested benefits as well.
In Canada we have both options and typically a TFSA is a better option to max out first. This allows you to keep your income lower in retirement and qualify for benefits you wouldn't if you were withdrawing from your RSP.
>when taxes are inevitably higher Since they are asking about a Roth what is something in the USA, tax rates have been falling in the USA for the past 60 years
And at the rate our government spends money, they can't really go much lower. They will either have to go up, or some major spending cuts that are very unpopular will have to happen.
Lol they’ve been saying that for years and yet…taxes keep going down. Both parties in the US agree on lowering taxes for low and middle income people,
How they accomplish that gial is the difference in the two parties. The Republicans want to cut Medicaid and Social Security, while Democrats want to raise taxes on higher income people.
Yup pretty much. Except I’d add that neither party seem serious about actually balancing the budget and I’m not convinced they are wrong.
https://archive.nytimes.com/www.nytimes.com/imagepages/2007/10/31/business/31Leonhardt.html?action=click&module=RelatedCoverage&pgtype=Article®ion=Footer What about this chart looks like it's trending up to you?
People will say this and then make fun of morons who sold stocks mid 2022 Lines go down and lines go up man
Why are taxing going to go up? And since you can see the future, what will be the stock price of Apple in October 2024?
I’m sorry but do you expect taxes in the USA to go down or stay the same over the next 30 years?
Well, if I'm living off a retirement account that is taxed when I spend it, I'm still generally spending less in a year to meet my needs than my income on a year I was working, so I'm likely doing better on taxes in that specific scenario. I'm fine climbing to higher tax brackets while I'm working, but once I stop working, my income is going to likely sink to lower brackets.
But you’re not. You’re still making mortgage payments, you’re still buying food, you’re just not going to work anymore. So you save on gas and that’s about it.
When you're old, you own everything you need. Maybe you need to pay a kid to run the snowblower, but you've had that paid off for years. You don't need a laundry basket and a futon at Target. A new presription or some DME at increasing frequency, but you've got two paid-off cars. You're probably not making mortgage payments anymore, but you locked in that payment quite a while ago, so it's like 1/5 of whatever someone buying your house is going to pay every month. Being old can be very cheap, and that's nice, because being old can be very expensive. There's a lot of tricks for living on a fixed income because the system is merciless. Some people work until the day they die, and long ago, little old ladies would eat cat food because it was cheaper. You know what we did to change that bleak reality? Raised the price of cat food. If your old-person future has enough taxes for you to notice or be angry about, you're probably not eating cat food, before or after taxes.
Food is usually a pittance compared to other expenses unless you are very low-income. And many people own their home outright by their mid-60s, assuming they buy on a standard 30 year mortgage by or before their mid-30s. And once you are retired you are, presumably, no longer *saving* for retirement so that's another 10-20% reduction in income needs.
I don’t know a single millennial who’s able to actually save for retirement while also being able to afford food and holding down a mortgage. As with most millennials these days, you only get to pick 2.
Taxes will go up when people get serious about the debt and budget deficit. Will that happen during our working careers? Idk but it's not stupid to think it might
Not exactly a winning strategy for a politician to raise taxes. That’s why the tax rates have been falling for the past half century. It’ll take something serious to have that change.
The compounding interest on what you don’t pay in taxes now will offset taxes increases in the future, barring something insane taking place. By then there’s other bigger issues.
Tax the seed not the harvest
It's more complicated than that though because if instead of interest on a savings account, your non-taxable savings are in say, an SP500 ETF, you also pay no taxes until you sell, and then it's long term capital gains which is generally a lower rate than ordinary income tax. But yes generally all things being equal you should max out your tax advantaged accounts (like Roth IRA) first, but they have pretty low max contributions so once you've maxed it out move to regular accounts.
LTCG could still be 20% federal, and for some of us another 9% state. 0% is much better.
Of course. But that comes with a lot of rules and restrictions. In some situations taking the hit on capital gains is worth the extra flexibility.
Since you can take the contributions out of a Roth tax free before retirement and let the gains continue to grow tax free it's a clear winner when comparing the tax price. Sure sometimes a savings account is faster and simpler so having both as options is great
> Hello, IRS? Id like to report the interest gain from my 0.01% APR savings account.
Lots of FDIC insured banks currently offer ~5% APR savings accounts. Ally, CIT, Discover, etc. I use CIT.
Over $10*
Legally, you're required to report all interest earned even if it's below the $10 reporting threshold of the bank.
Also, capital gains within the account are not taxed
1. Earnings: investments have higher returns than savings. If you put $10,000 in savings this year and it earns 5% interest, it earns $500. If you buy $10,000 of stocks at $150/share, that gets you 66 shares. If those shares increase in value by $10, you will have earned $660 instead of $500. 2. Taxes: you will owe income tax at the end of the year on that $500 earned in the savings account. You will not own income tax on the $660 earned in the Roth IRA because that is a special kind of account where the government allows you to not pay income tax on the earnings. 3. Timing: because the Roth IRA is a retirement account with rules about how it can be used and how long the money has to stay in it, along with the protection from taxes, the money you put in it will stay there for many years and continue to grow. You may not be as likely to leave a sum of money sitting in your savings account for 20+ years. Once you get to that 20+ year point and start withdrawing the money, you probably will not have a job and will need to keep as much money as possible to pay your bills, so you benefit greatly by not having to give any of it to the government in the form of income tax. For most people, this will not be an either/or choice. Both are tools to be used for specific financial goals. There is a limit to the amount of money you are allowed to put in a Roth IRA each year, and there are restrictions to whether or not you can even use one in the first place based on your income. I have a savings account that I use for short term goals like my annual car insurance premium and vacations. I have a Roth IRA for retirement savings. I have other investment accounts that don't have the same tax protections as the Roth IRA because I am limited on how much money I can put into the IRA, but I still want to earn more interest than I can get from a savings account.
Ic thank you, this was very helpful! I didn’t realize that roth IRA was technically an investment rather than being equal to standard interest rates. Thank you!
A Roth IRA is an investment *vehicle*, not just an investment. It's an investment account with extra tax rules/exemptions. If you simply put money in the account and call it a day, you will get standard interest rates. (A lot of people make this mistake) After you have funds in the account, you can use them to purchase stocks, bonds, mutual funds, CDs, ownership of publicly traded partnerships(PTPs), etc... If you're not a savvy investor, pick a target date fund or S&P 500 mutual fund with a low expense ratio (under .08%).
That’s good to know, based on these comments I assumed it was automatic. Thank you.
I would suggest going to a financial advisor. I use Edward Jones for my Roth IRA because they were local when we opened the account before online banking was SO prevalent. The fees are very minimal (about 1%) and my FA will make biweekly adjustments on the investment choices. My return on that account has been over 20% in the last year.
If you're completely unfamiliar, a financial advisor can be good to get things setup. I have had accounts with RW Baird and NML, mostly for networking. That 1% fee accumulates, and financial advisors don't get you much more than a mutual fund with appropriate risk after the account is setup. I'm also an accountant, and my general advise is for people to file their own tax returns, but I know finances and money are just so abstract for some people, and that 1% fee is with it to not have to think about their savings.
As he mentioned there is a Roth IRA and a traditional IRA. Roth IRAs only provide the tax benefits if you make less that $156K a year. Then you need to use a traditional IRA. Just FYI in case you’re looking at starting one (as you should sooner rather than later cause there’s no minimum to open one and you can put money in there as you have it) Your brick and mortar banks can explain these to you and the options. But it’s a good idea to get an IRA with your 401K as soon as you can.
ROTH IRAs have tax advantages that a normal savings account doesn't. With a savings account, you pay tax on your income, put it in savings, and then pay tax on the interest every year as it accrues. With a ROTH, you pay tax on your income, put it in the ROTH, and then never pay tax on that money again. Whenever you withdraw in retirement, whatever gains you have are tax-free. This can result in _considerable_ tax savings depending on how long you have the ROTH and what your tax rates are. The disadvantage, of course, is that you can't withdraw from a ROTH early without penalty - there are not additional penalties for withdrawing from savings.
Nothing about your answer is wrong, just pointing out that "Roth" isn't an acronym that needs to be capitalized, but rather the name of one of the two senators who proposed the idea. I guess they chose Roth because the "Packwood IRA" did not sound as pleasing.
Are taxes on savings interest paid automatically? I don’t think I’ve ever thought about tax on the interest from my savings account.
No, you should get a 1099-INT from the bank each year with the amount of interest you earned, and you add that to your tax return as income.
Ah thank you. I keep everything in my checking account so I guess it’s never been an issue.
Checking account can earn interest too, but it’s usually such an abysmally low amount that it falls well under the bank reporting minimums. Technically you should still pay tax on it but realistically no one cares unless the government wants to find something to charge you with.
Most banks won't send you a 1099-INT unless you made over $10 in interest from them in a given year. It's tough to hit that in most checking accounts since the rate is .05% or so. My HYSA netted $350 in interest last year though.
> I don’t think I’ve ever thought about tax on the interest from my savings account. They will send you a 1099-INT (if interest accrued is over $10) at the end of the fiscal year, before taxes are due, that you are required to report. You do not have to do this with with a Roth IRA.
Thank you! Good to know.
No, if you earn enough interest (not sure I think it’s $600 or more) on the account the bank will send you a 1099-INT form indicating your interest income. You would then have to include that income in your 1040 which would caluculate if and how much taxes you’d have to pay on that interest. If you invested the money instead, and received dividends, same thing, you’ll get a 1099-DIV from the brokerage firm holding your stocks to pay taxes on the dividend income. If the interest is a negligible amount (I think under $600) you won’t receive the 1099 from the bank but legally you may still be expected to include the income, I just wouldn’t know what to put on the 1040 and I assume most people don’t do it and the irs doesn’t really audit specifically for that. But if you did get audited I assume they’d expect their $2 in taxes on your $10 in interest….
1099-misc and 1099-NEC limits were $600, going to be raised to $1,000. 1099-ints are sent out for anything over $10.
Roth IRAs aren't necessarily better. But they also may be. Ultimately, it comes down to what your tax rate is when you deposit the money, what your tax rate will be when you're withdrawing the money, and how much the money grows between those times. Traditional IRAs, as you know, have the primary benefit of saving you on taxes now by deferring the taxation to when the money is withdrawn, and considering the distributions as income, and taxed at that time based on the tax bracket for your income at that time. Typically, people are in a lower tax bracket when they are withdrawing from their IRA since they aren't working, often have fewer expenses with more things paid off and kids out of the house. Roth IRAs on the other hand won't save you on taxes now, but allow you to grow money tax free, as the distributions are tax free regardless of how much the value grows. So, to look at an example, let's say your annual income is 60k, which would put you firmly in the 22% tax bracket. And let's say when you are withdrawing, your income will be the equivalent of 40k, which would put it at the 12% bracket. For every $100 you put into a Roth IRA, you're paying $22 in taxes, which would be the equivalent amount of taxes you'd pay for every $183.34 (183.34 * 0.12 = 22.00) you withdrew from a traditional IRA. That would mean you'd need at least 83.34% growth in order to break even. That's not entirely unrealistic depending on how much time you have until you'll be taking those distributions, but it also may well be. And of course, if the difference in your tax brackets will be lower, then you'll also need less growth to break even. At the end of the day, it really comes down to an individual's personal situation. The more time you have to grow the income and the lower your tax bracket is currently, or if you expect to have a high tax bracket when withdrawing, the better a Roth IRA will be for you. The closer you are to withdrawing the money, the higher your tax bracket is currently or the lower you expect your tax bracket to be when withdrawing, the more a traditional IRA makes sense.
You can invest in stocks and other higher growth investments than money in a savings account, and aren’t taxed on those gains.
It’s only better if you want to and are able to keep your money in it until you retire and withdraw then
Your IRA is going to earn at least double the amount of even the highest interest savings account. 10% is the general return compared to savings which are below 5%.
It will not do anything different than a savings account if you just deposit funds into an IRA and call it a day. I am sure you know that, but I just think we should be very clear about that when talking to someone that isn't familiar with how an IRA works.
Right. I have seen several posts where people didn't know what they were doing and left it in the default cash account at their IRA provider and saw their account balance rise a whopping 0.5% over the course of several years.
Could you explain this a bit more? I'm not that financially literate and you described what I basically do.
Where did you open the IRA? (Charles Schwab, Vanguard, through a financial advisor?) If you have a financial advisor, then they should be setting you up with investments. If you are using an online broker, then you login to your account, and look at the Holdings tab. If it says 100% of your funds are in cash or a money market, then you need to buy a mutual fund of some kind.
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You’re not going to earn enough to retire in a savings account period, full stop.
Could earn. Could also lose money. The hope is that over time returns will be 9-10%.
Better to gamble on historical averages. You're always losing money in a savings account due to inflation. At least with investments, you have a much better chance of outdoing inflation even if you have a miniscule chance of losing money.
I agree 100%. But the comment I replied to said it will earn at least double…we all hope historical averages continue into the future.
That makes sense, thank you!
This is a strange question and I’m not sure it even should be in this sub. A Roth is not taxed by definition, otherwise it’s just a savings account. So a Roth is better because it’s more money … was this a bot post ??
A brokerage account with long term cap gains, selling stocks after a year for example, can be taxed at 0% depending on your income if you are strategic about it. Roth is a good idea as well but IMO people should have money in both for flexibility and liquidity. If you plan to retire early the brokerage account is even more important and for a married couple can make up to around 90k and pay 0 taxes for LTCG.
If you're putting away less than the annual max contribution, I think it's pretty safe to keep everything split between HSA, and Roth/trad IRAs. The big benefit of brokerage accounts is the liquidity. But if you're using an HSA, you don't need to worry about medical emergencies, and you can take your basis out of a Roth with no penalty after keeping it open for 5 years. (As long as you have an emergency fund on hand)
1) They aren’t an either or. Emergency money shouldn’t go into investments but you should save for retirement. 2) A Roth account means you don’t pay taxes on any gains (increased stock prices, dividends, etc.). On a savings account you pay tax on the interest. 3) Boiler plate investments (e.g., S&P 500 index funds like VOO) grow in value at a higher percentage than the interest on a savings account, at least over the long run. 4) You can technically withdraw from a Roth IRA by how much you contributed, but it’s not a good habit to have, leave retirement accounts alone. Also, you can only contribute earned income in an IRA (or at least you had to have made that much, so $100 in birthday money can be thrown into it if you at least made $100 from work).
Two reasons. 1. The Roth IRA will grow with the market. Over the long-term, this can be reliably expected to be about 8%. Your bank account will only grow by whatever interest rate your bank chooses to give you, which is pretty commonly less than 1% and essentially always less than inflation rates so your money is actually losing value while it sits in the bank for years or decades. 2. The profits on the Roth IRA when you withdraw are not taxed, while the profits on your bank interest are taxed. To sum it up, the Roth IRA gives you orders of magnitude more money and you don't even have to pay taxes on it.
Does your savings account pay 3.5% in annual dividends as well as have the principal grow in value? No? Okay then.
I have a savings account with Capital One that currently pays 4.35 APY.
I would say that's unusually high.
You can check into it. There are high yield savings accounts out there.