I hate to correct you, but there is one fundamental flaw with your explanation on this topic. There is NO WAY Mr. Krabs pays a salary of $100,000 a year. Side note; I can almost guarantee he does not provide employer match.

I literally just deposited my first $100 into my new Roth IRA, then I saw your video!

I think the idea behind traditional is that in your retirement years, with a paid off house and no debt, you wouldn’t need to withdraw the money to have your income at the same level as your highest earning years. So Squidward, would live on social security and RMDs from his traditional account, but be in the lower marginal tax bracket. Not poor, but not needing to draw $100, 000 a year anymore. His tax rate wouldn’t be 24% in this example. It would be lower than the 24% he saved from the high income years. And like the other commenters said, traditional saves you money on state income taxes, which means your savings could be even higher. But in defense of Roth, the money you withdraw does not count as income, which means that you pay the lower income tax rate on your Social Security. Social Security is taxed at a different rate than standard income up to a certain limit when including other income. But if your other money doesn’t count as income, you pay the lower rate. Meaning if you get 33,000 in SS money, only half is counted as taxable income. If the other portion of your monthly check is Roth, you can stay in that range rather than have it jump to 85%. So Roth can have additional tax savings based on how it helps with the SS income calculation.

I have a couple family members that funded traditional in 20-30% brackets and are now withdrawing and doing Roth conversions in the 12% tax bracket. It worked for them, but may not work for our generation.

I've watched a lot of investment videos recently and got a lot of different view points and man... This guy here knows what he is talking about and gives very honest good advice. Great content to help the average investor, subscribed!

Good point about traditional. “What are you doing with the savings now?” I never really thought of it that way. More in paycheck but mostly spent on silly stuff

Thank you!! Ive learned more from ur one video than a bunch of ira videos! And im a person who doesnt understand taxes very well

i love the picture not just numbers. it makes it more fun to watch lmfao

so far, the best, clearest explanation. Thank you so much

What if you live in a high tax state like California but plan to eventually move to a lower tax state later in your career. I feel most Roth vs traditional videos don’t really touch on it at all, but the costs/savings could be really significant over time

I'm soo glad I found you channel before it actually blows up. You run the numbers using facts and logic

Thank you for the useful comparison Jake! Started my own Roth this year and now going to help my girlfriend do the same. Comparisons like these help me feel confident that Roth is the way to go for us. Cheers!

Thanks for watching everyone! If you found this video helpful, then be sure to give this video a LIKE to support my channel! If you are a high income earner and are worried you cannot contribute to a Roth IRA, check out my video on the backdoor Roth IRA: kzfaq.info/get/bejne/bceXncudyZiniXU.html

I recently read that the money you contribute to an IRA, whether Roth or Traditional, only grows if you use it to invest in the market. You don't just put it in and grow it 8%. And when I looked up the interest rate of a Fidelity IRA (because I'm interested in opening a Roth account with them), it was something like .001% or .0001%. If that's the case, it seems like I'd be better off with just a regular brokerage account.

I love the Roth IRA, I hate that they haven't raised the contribution limit this year again.

Jake, I agree with your points, but here is a case for Traditional. If you are *single* and are in a high income tax bracket, then you can go for the immediate tax savings with traditional. Once you get married, you can do Roth conversion and pay tax in a lower bracket. That way, you get the best of both Traditional and Roth.

Awesome Illustration of Soundness of your logic and compelling arguments, Jake ! Very insightful, thank you Jake !! Look forward someday for your thoughts on ROTH Conversion and if it is a good idea as well.

Jake, thank you for your upload. But i think you missed big point here. You want to lower your ordinary income and increase other type of income that has a favorable tax treatment. For example your KZfaq income, you long-term capital gain your qualified dividend income has nothing to do with your marginal tax rate. Traditional has great advantage if you plan for lower ordinary income in the future.

I can tell I am way less successful than a lot of the rest of your audience. I think your arguments for marginal tax rates being higher in 30 years are spot-on, and you make a great point of Roth folks actually saving more. I am pretty confident I am going to make less money when I am old, though. Realistically I started saving too late, and I am saving too little to retire rich in 30 years. I haven't planned to fail, but I did make big career changes a bit too late in life.

There is a factor I never understand in this; why would I assume my tax bracket will increase or stay the same in retirement? My income from work is my largest and only income stream. If drawing on my savings + SSI + 401(k)/IRA + Pension could more than replace my income form work - I would've retired earlier! Why would I continue to work if I could have the same or more monthly income in retirement?! I'm planning my monthly income to decrease by 30% when I retire. That's the number I see in most retirement calculators. This suggests a traditional IRA is not nearly as bad a plan as presented. That said, I have a ROTH in addition to my traditional simply because diversified income is desirable.

Thanks for this awesome video, Jake! You're helping a lot of people with these clear explanations and good guidance!

You made a very good point! That is if you contribute to a traditional what are you doing with that current tax savings! My self I need that tax bring now...but that current tax savings I use to max out my Roth!

Wow, you should be able to win some kind of award for this video! It was awesome 👍

Thanks for a 2021 update!

I think the idea or assumption with traditional IRA’s is that when you retire, your income drops - and you are in a much lower tax bracket. You are are making withdrawals from your account to match expenses - maybe half what your income was, right? I.e., $100k income while working is reduced to $50k while retired.

OMG. SUCH a great explanation!

But my income has gone down now since I am retired and not working anymore and just existing on my Pension. I was making much more money when I was working so now I'm in a lower Tax Bracket. So now I pay a lower Tax Rate on my retirement income withdrawals....right ?

Awesome breakdown, Jake👍🏽👍🏽.

this will get very complicated to compare the two...which account and how much to contribute depends on your marginal tax bracket, your withdraw bracket, how close you are to retirement, how long you live, and the opportunity cost of being able to invest the tax savings in a brokerage account.

A perspective I agree with. 💯

Thank you

Thank you as always

Great video, great info, as always! Thanks for enlightening me!

Thank you Jake, I am in my 50s and do not have a long time horizon to take advantage of compounding. This means, I have to get large amounts of money into my brokerage accounts since I am limited to $7000 in both of my Roth's. Will I get to a million? Doubtful, but if I can get halfway there, I will be fine. I just wish I had the last 20-25 years to do over again.

Great video, loved the content. Personally, I do traditional and try to invest the difference. I think there's also potentially unknown benefits of keeping your taxable income as low as possible. One that happened just last year were Covid stimulus checks. If we had done Roth instead of Traditional, we wouldnt have qualified for multiple stimulus payments since we happened to be at borderline of the cut-off

As always great video!

14:38 I think you made a pretty big oversight here with this high income example, at least for IRAs. A single person whose AGI is over $140k can't make any direct contributions to a Roth IRA. And additionally, if they have an employer sponsored retirement account, they can't take a deduction on their taxes if their AGI is over $76k. I do agree that your analysis still applies for a 401k, but once you hit $140k in taxable income, the only way to maximize your tax advantaged savings on top of the $19500 for the 401k is to do a backdoor Roth conversion.

Thanks for this video,it really did help me.

For this year, we will both max out each Traditional 401(k), but that's only because I converted $50K from a Traditional IRA to a Roth IRA. Needed to make the backdoor Roth work correctly and needed that a zero balance. I'll go back to Ruth next year, regardless of tax burden. I'd rather pay now than later, plan on making more in retirement. And yup, I have a tax attorney do my taxes. 🤣

Question about future retirement options? Currently Active Duty Military with 15 years and will retire in about 5 years. I contribute into the TSP monthly. Our annual contribution limit for the Roth TSP is $19,500. If the TSP monthly. Our annual contribution limit for the Roth TSP is $19,500. I max this out over the next 5 years and leave the military with a $100,000 balance and decide to roll this into an IRA. How Can I continue to invest at least 15% of my income if the annual limit for a Roth IRA is $6,000. Would I be better off just rolling it into a Index mutual fund so I can continue investing at least 15% of my income?

Pedantic quibble: not everyone gets Social Security. If, for instance, you worked for a state and that state has a pension plan, you may not be paying into Social Security and thus wouldn't earn it upon retirement. Practically speaking most U.S. workers will qualify, but it's worth knowing exceptions do exist.

Jake, can you please make a video explaining the 72t rule for the traditional TSP.?Anyone who dislikes Roth TSP always bring up the 72t rule, saying stay away from the Roth and just use the 72t rule on your traditional.

Squidward wouldn't be paying 24% income tax though, his effective tax rate would be lower

I agree with a lot of your points, however, I think you overlooked the minority FIRE people who plan on withdrawing before 59 1/2. Also, while I definitely don’t plan on living on substantially less, the way the tax code is set up, if we limit capital gains and rely more on qualified dividends, our tax rate can be effectively zero. Edit: Just for background I’m 25 in college pursuing a stem degree so I realize I may not be quite the target audience.

Would we not be paying long term capital gains tax when we pull the money out as opposed to the much higher income tax upfront? This is what I don't get about roth.

Roth tsp/IRÁ especially as a young person making a lower income. You usually pay higher taxes the older you get.

Sadly, I am one of the many that had major medical problems (renal failure). I am a physician and I went from earning $300,00+ to living on my group long-term disability (non-taxed). So I was one of the few that SHOULD use a 403(b) (pre-tax) and plan to roll it into a Roth IRA in the future because my income effectively went to 0. I would suggest that anyone that can do it, and *know* they are going to go down in tax bracket in the near future, eat the tax on a backdoor in the future if you have a current spike in income.

thank you for this

I thought that, if I wait until age 59 1/2 to start taking money out of ANY IRA, I have no tax penalty. Now you are saying that with a traditional IRA, I WILL be taxed even if I don’t touch it until I am 59 1/2. How much am I paying?

Hey Jake! You often say in your videos that you do not recommend that people participate in actively traded mutual funds for a number of different reasons and you often cite studies that have been done that point to similar conclusions. Could you make a video about this? It would really help us know what you mean and where you are coming from. Love your videos, keep up the great work!

Love the spongebob reference.

Great video, thanks

Awesome job.

how does that pension system compare to a Scandinavian country's system?

If you have other income sources you dont necessarily need to withdraw from the accounts so you can let it ride and if you go into retirement debt free you won't need as much income by controlling how fast you pull it out you can mitigate the loss if you were a high earner it should be pretty easy to draw a lower rate than when you earned it. Also why not both? Like tools in a toolbox I can use more then one especially for the high earners Should we ask what are the retirment goals how do they contribute to the answer? (Jake don't read as a contradiction read as spitballed ideas or thoughts I had as the viewer. enjoyed the content)

What if you have multiple roth accounts. Is it $6000 per account or total?

Great video!!!

i’m 58 my employer just offered the Roth so I’m only doing 3% pretax and 3% Roth they contribute 8 1/2% because I’m working at a school. I hope I’m not too old because I just started it.

In the video your slide said $62,625 is $40,125 plus the standard deduction, implying that the standard deduction is $22,500 for a single filer. Is that a typo? I thought it was like $12,500?

Great video Jake. However, you left out a big con with Roth 401k which is the employer match is taxable. Something to consider of down the line if one choose to leave his/her job and trying to roll over to a Roth IRA.

Is it true that money now with worth more than money in the future? So if you save money now by not paying taxes (traditional IRA), then you can invest that extra money to make even more money? Or does it not work? Thank you!

i learned a lot, my question now is, fidelity or vanguard for my roth ira! i currently have a fidelity account, but im thinking of going over to vanguard based on your comments of about them being investor focused instead of profit focused AND they dont sell your information.

Hi Jake, love your channel I'm 57 and retired with a 401k and 457 what's would you suggest for allocation thanks.

You can take out up to $12,000 out of the traditional in retirement and claim the standard deduction to pay no tax on it (assuming you have no other taxable income).

I am not sure you talked about the income limits.....2 years ago one of my long term stock was bought by another company for cash and that pushed me above the Roth limit, had to withdraw my contribution.

As someone in my early 50s just starting to really save for retirement (but w/ pension and social security), I’m wondering about just straight-up investing in a non tax advantaged account and paying the capital gains taxes rather than investing under the cover of an IRA and pulling money out of that later that will be taxed at the marginal tax rate. Of course, dividends complicate matters, but....

But if are earning 175k a year it won’t make sense to contribute to traditional because it is not deductible at that point

Actually, I had a 8% match 8% delivered on Allied Signal (now HON), but got whacked in a divorce. Despite this I maintained the 8% contribution, taking on boarders working [when they used to have paid overtime]. And you know you get hit with maximum taxes as if you are a happy go lucky single guy, despite paying 30% of more of your income. Worse when the Ex spends it on themselves and you spend again on food and trips to Kohls. The double whammy, . So I was able to put more into my 401k which grew and grew. Of course I was restricted from Roth because I was single and made over 90K. Peter Theil managed to create a Roth worth 9 Billion maximum although it's come down lately. We'll I still do not have a Roth option, but Thiel still has 5 billion in his Roth.

lol Jake I am in CA and we have high tax and I am in 24% plus 10% from state. So is it better to do traditional and contribute the tax saving to roth ira or rental!

I'm not sure why you said you can't quantify the tax savings. The obvious answer is that you would invest your tax savings. You shouldn't compare $10k Traditional contributions to $10k Roth contributions. You should use $10k Traditional contributions, plus either your tax savings invested in the Traditional account, or in a taxable account if your pretax account is maxed out. You can do the math on this, and Traditional wins every time. Ultimately, your recommendation to invest Roth below $40k plus the standard deduction is right though. But even with Roth, there's a caveat that both your income is below $60k, AND is expected to go higher. If you are 40-50 year old and your earning potential has peaked below $60k, you should actually still do Traditional in that scenario. Roth is best for young people who are lower income. I have the Traditional vs Roth debate with people all the time on reddit and people just don't seem to get it. $1 invest Roth isn't comparable to $1 invested in Traditional. And Roth contributions don't have some magical "tax free growth" that Traditional accounts don't have...Roths have just already been taxed so the net effect is the same. Also, the amount that the government would need to raise taxes to increase your effective tax rate whereby using Roth now is very very high. The government isn't going to suddenly decide to start taxing retirees at 50%. That would be the bait and switch of the century. So the argument that the government will raise taxes therefore Roths are better is a complete gamble and terrible advice for people to give. See my comment on reddit below, didn't feel like typing it all out again. www.reddit.com/r/investing/comments/gte6k8/roth_vs_traditional_401k_for_middle_tax_brackets/fsbl936?context=3

Awesome video Jake I had a traditional 401k that I converted into a roth 401k to pay taxes in 2020 since I plan on my income to go up in 2021. I am also planning on taxes to skyrocket in the future.

can you make anotjer video simplyfying i dont understand sorry

Hi Jake! I have a situation I'd be curious of your insight on. What would you recommend for someone who makes too much to contribute to a Roth IRA, but could qualify if they lower their taxable income by contributing to their 401(k) with Traditional Contributions? That's currently the situation I'm in, so to me it would make more sense to lower my income to take advantage of the 6,000 IRA contribution.

Good Job Jake ! question can we open Roth IRA and Sep IRA in the same time ! 6k for Roth and 58k for the Sep?

Just watched video, I have question if I live in Texas does that mean traditional is more beneficial for me ? I am currently in Roth TSP

At 14:15, the income (pre deduction) should be $52,525 and not $62,625.

Jake, I know you do 100 in the C in your TSP.....do you do all Roth (5% match goes into Traditional) and are you going to hit the max yearly goal of 19,500? Keep up the good work great info on your page!

Would it make financial sense to invest 5% with match with my employer and invest the other 10% into a Roth IRA as someone making around $45k at the moment.

Thank you for the video. For Roth IRA account, when I take out money, pay no tax... does it mean any amount I take out would be tax free?

Hi Jaker -I have a 401k and a plan b supplemental plan as i work for non profit. What is the maximum contribution limit for this plan b supplemental account? Can I still contribute to ira account with both 401k and plan b supplemental plan?

Do a backdoor IRA next!

I had a CPA tell me they think 30 years from now the IRS/Govt will find a way to tax Roth withdrawals/gains. Do you think there is any way they’d be legally allowed to do this?

What would you recommend for a AD member who’s planning to retire early around 45 years old? (BRS) Currently at 8 years TIS unsure about 20

I walk away from this video realizing there are pros and cons to each method. So I do both in order to capture all positives and hope they outweigh the negatives. I wish I had 20 more years to retirement.

Hey Jake! Great explanatory video with in-depth analysis that everyone can learn from. I'm one of the 'high income earners' with goal to retire early so I'm trying to use all options I have at my disposal (including mega-backdoor Roth IRA). I'm wondering if there's a good ratio (or strategy around it) for traditional vs Roth 401K investment if my intention is to use the investment earning as my primary source of income when I retire early (i.e. overall tax bracket is

Good point about trying it to work harder and be in a higher tax bracket later! My 403b and IRA are both Roth. If I'm not in a higher tax bracket in 30 years, so be it...

Thanks Jake. With your advice, I would invest into a Traditional IRA while I'm taking college courses so I maximize my FAFSA reward, then start a Roth IRA once I'm done with college.

Not nearly old enough for this to matter yet, still however I will watch this, and save the video for later.

What do you think about the Roth IRA from banks/credit unions? I know Navy Federal has one, but theirs appears to be like a certificate that you renew every x amount of years.

Can you open more than one account, to even save more?

In the future, you may plan to make less income since ideally you will own a house and 25% of your income will no longer go to rent or mortgage

Hm. Who knew Mr. Krabs was such a generous man

You good.

When’s the merch dropping

What if you changed jobs and want to roll old 401k into an IRA. Traditional or Roth?

Hello Jake, I have 5 years old daughter (turning 6 in a few weeks )and my hubby and I are thinking to open a brokerage account( birthday gift) on her name probably through Charles Swab. Any investment advice that would grow her money in the long term. Thank you!

7:15 But I thought you couldn't put 10,000 into a ROTH?

ain't the money you put in the traditional is also tax money? so you putting tax money in and than pay tax again when taking out

What if you have a traditional IRA but are thinking about rolling it over to a Roth IRA?

Other cases where Traditional makes sense is when one is pursuing FIRE and retiring early adopting series of ROTH conversions after retirement. Second one is when you move from a high to low/zero income tax state in the retirement.