Roth Or Traditional Account?

1 00:00:08,810 --> 00:00:11,830 no matter how good you are picking stocks you don't know all the Byzantine 2 00:00:11,830 --> 00:00:14,050 rules or kind of accounts to keep your money 3 00:00:14,050 --> 00:00:17,810 or at a manager personal finances well you get the most bang for your 4 00:00:17,810 --> 00:00:21,590 block when it comes to major lifetime expenses 5 00:00:21,590 --> 00:00:27,700 then you could miss you have some terrific gains cost yourself a fortune 6 00:00:27,700 --> 00:00:29,239 in all sorts a hidden fees 7 00:00:29,239 --> 00:00:32,540 that's why every week I take you through my playbook in a segment that is 8 00:00:32,540 --> 00:00:35,730 entirely devoted to teach you how to handle your personal finances 9 00:00:35,730 --> 00:00:39,480 what some basic investing principles in order to get a better sense of what 10 00:00:39,480 --> 00:00:40,920 matters to you I want you to send 11 00:00:40,920 --> 00:00:44,570 all of your questions to Twitter it Jim Cramer with the hashtag 12 00:00:44,570 --> 00:00:48,359 get a plan so I wasn't very good on Twitter today really GM to this market 13 00:00:48,359 --> 00:00:51,859 but I will do my best to get back to you Romy we're at it 14 00:00:51,859 --> 00:00:56,010 it's always worth checking are your money dot CBC dot com 15 00:00:56,010 --> 00:00:59,809 Patrick financial by 6 I think has got to stop this is Pauline is picking 16 00:00:59,809 --> 00:01:03,480 stocks along gala day like today it's not so bad of course you like to know 17 00:01:03,480 --> 00:01:06,870 really could help you build up more wealth than a couple paid stock picks 18 00:01:06,870 --> 00:01:07,180 can 19 00:01:07,180 --> 00:01:11,290 in the simple truth is that I don't want you leaving that money on the table 20 00:01:11,290 --> 00:01:14,610 just because nobody could be botherd to explain say 21 00:01:14,610 --> 00:01:18,230 the finer points retirement investing 22 00:01:18,230 --> 00:01:22,260 vehicles with that in mind here's a question from Mitch 23 00:01:22,260 --> 00:01:28,780 who s and I quote traditional or Wat for 1k for grad starting full time job in 24 00:01:28,780 --> 00:01:30,480 twenty-eight percent tax bracket 25 00:01:30,480 --> 00:01:33,590 wary a potential tax climate when i'm sixty-five 26 00:01:33,590 --> 00:01:36,590 perhaps could use Twitter space 27 00:01:36,590 --> 00:01:39,910 now I don't talk endlessly about the benefits of using individual retirement 28 00:01:39,910 --> 00:01:41,240 account or IRA for short 29 00:01:41,240 --> 00:01:45,500 a 401 k plan a Vesper time I them both and I don't beat a dead horse here 30 00:01:45,500 --> 00:01:49,800 but we haven't really gotten the distinction between a row of the cap 31 00:01:49,800 --> 00:01:53,520 and a regular one and this is something I get on to questions about 32 00:01:53,520 --> 00:01:57,949 should I put my money in a walking cast were should I put one in to rate a cat 33 00:01:57,950 --> 00:01:59,270 and is one of the more 34 00:01:59,270 --> 00:02:04,110 home Mitch just about what 4.1kb only some employers choose to offer these two 35 00:02:04,110 --> 00:02:04,830 the workers 36 00:02:04,830 --> 00:02:08,090 so to set the stage ur let me give you some background 37 00:02:08,090 --> 00:02:11,620 on the beautiful tax paper vehicle known as a walk iraq 38 00:02:11,620 --> 00:02:16,040 which anyone can contribute to as long as they make less than 222,000 39 00:02:16,040 --> 00:02:19,760 your I think that aside from the earned income tax credit 40 00:02:19,760 --> 00:02:21,500 the water are a maybe this 41 00:02:21,500 --> 00:02:24,770 single greatest thing our government has gone 42 00:02:24,770 --> 00:02:28,210 for more income families since the end of the war on poverty where 43 00:02:28,210 --> 00:02:34,490 I'll ask some in poverty one I told you about how a regular IRA let you take 44 00:02:34,490 --> 00:02:35,370 pre-tax income 45 00:02:35,370 --> 00:02:38,470 invested and then your gains can compound year to year 46 00:02:38,470 --> 00:02:42,459 decade after decade totally tax-free until you decide to withdraw 47 00:02:42,459 --> 00:02:46,740 start withdrawing money when you've retired but a Roth IRA works differently 48 00:02:46,740 --> 00:02:51,670 with the wat you make contributions with all after-tax income 49 00:02:51,670 --> 00:02:54,989 so in other words unlike a regular a putting money 50 00:02:54,989 --> 00:02:58,430 into a wall of Walt decrease want 51 00:02:58,430 --> 00:03:01,890 decrease your tax bill on the other no what your money is there what are you 52 00:03:01,890 --> 00:03:03,660 will never pay taxes on it again 53 00:03:03,660 --> 00:03:06,900 as long as you pat your cash remains in a camp 54 00:03:06,900 --> 00:03:11,030 you know pay capital gains taxes not paid in taxes and when you withdraw 55 00:03:11,030 --> 00:03:15,610 which you can do without Pedley after the aged 59 half mean closing in 56 00:03:15,610 --> 00:03:19,489 you don't pay any income tax on your withdrawals in other words with %uh what 57 00:03:19,489 --> 00:03:22,239 you pay taxes now so you don't have to pay any income tax 58 00:03:22,239 --> 00:03:26,239 thirty or forty years from now when you retire there's one more positive point 59 00:03:26,239 --> 00:03:26,920 about a Roth 60 00:03:26,920 --> 00:03:30,320 after five years you can withdraw the money you've invested not you gaze 61 00:03:30,320 --> 00:03:33,870 just he met you contributed and you okay with that nasty 10 percent penalty 62 00:03:33,870 --> 00:03:36,980 which is what happens when you try to withdraw money from a regular IRA 63 00:03:36,980 --> 00:03:41,010 before you hit that magic each up 59 have and when you're close you want 64 00:03:41,010 --> 00:03:44,090 cause you know that don't have it doesn't feel very magical 65 00:03:44,090 --> 00:03:47,980 so music what is fundamentally different from a regular are 66 00:03:47,980 --> 00:03:51,320 with the radio when you don't pay any taxes and contributions now and your 67 00:03:51,320 --> 00:03:53,250 games don't get tax with the kneecap 68 00:03:53,250 --> 00:03:58,019 but once you start withdrawing money every penny you take out as taxes 69 00:03:58,019 --> 00:04:01,739 ordinary income which means that when you're trying to decide between what I 70 00:04:01,739 --> 00:04:04,670 ray or 41 K and a regular IRA or 401 K 71 00:04:04,670 --> 00:04:08,100 here basically deciding whether it makes more sense to pay income tax now with 72 00:04:08,100 --> 00:04:08,610 the roth 73 00:04:08,610 --> 00:04:12,769 or two week pay income tax once you've retired with the regular camp 74 00:04:12,769 --> 00:04:16,570 in other words you have to try to figure out whether you'll be in a higher tax 75 00:04:16,570 --> 00:04:17,238 bracket 76 00:04:17,239 --> 00:04:21,160 after you've retired or lower one office is a complicated question really has a 77 00:04:21,160 --> 00:04:24,060 lot to do with specific severe situation your career 78 00:04:24,060 --> 00:04:27,760 it should be how old you are but my quick quote from for anyone is marginal 79 00:04:27,760 --> 00:04:28,560 tax rate is 80 00:04:28,560 --> 00:04:32,849 25 percent ross 25 percent which is most in america 81 00:04:32,849 --> 00:04:34,409 I think you got the wrong 82 00:04:34,410 --> 00:04:38,230 better take the hit up front nanowire what I rate a compound tax-free 83 00:04:38,230 --> 00:04:39,110 threshold like 84 00:04:39,110 --> 00:04:42,490 remember for those of you who don't have the time to pick your own diverse my 85 00:04:42,490 --> 00:04:44,100 portfolio five to ten stocks 86 00:04:44,100 --> 00:04:47,300 the smartest thing to do is just park your retirement money in a low-cost 87 00:04:47,300 --> 00:04:48,070 index fund 88 00:04:48,070 --> 00:04:52,849 that mirrors the S&P 500 as you get older you can add some bonds but really 89 00:04:52,850 --> 00:04:54,340 into your actually retire 90 00:04:54,340 --> 00:04:57,870 stock should make up the majority view retirement investments I know I said 91 00:04:57,870 --> 00:05:00,760 this before but I'll keep repeating until they take be off the air because 92 00:05:00,760 --> 00:05:02,280 it's so so necessary 93 00:05:02,280 --> 00:05:06,110 it's so contrary to the conventional wisdom all my books say it if you don't 94 00:05:06,110 --> 00:05:08,270 understand I got much longer explanation 95 00:05:08,270 --> 00:05:11,320 back to Mitch's question the idea for Wat for 1k 96 00:05:11,320 --> 00:05:15,070 this works just like a what I read meaning you make contributions with 97 00:05:15,070 --> 00:05:18,909 after-tax income and then you never pay taxes on that money can accept because 98 00:05:18,910 --> 00:05:24,050 it's a 401 k plan is much higher contribution 17,500 per year versus 5500 99 00:05:24,050 --> 00:05:24,720 for iraq 100 00:05:24,720 --> 00:05:28,500 and there's one other big difference you can take advantage a Roth IRA if you 101 00:05:28,500 --> 00:05:29,250 make more than 102 00:05:29,250 --> 00:05:33,400 one earned twenty thousand a year single or 100 said 9,000 you're married filing 103 00:05:33,400 --> 00:05:33,920 jointly 104 00:05:33,920 --> 00:05:37,050 are what following kato has doesn't have any kind of income cap 105 00:05:37,050 --> 00:05:40,370 no matter how much you make you take the banja wanted these as long as your 106 00:05:40,370 --> 00:05:42,220 employer decides to give you the option 107 00:05:42,220 --> 00:05:45,770 now mitch is marginal tax for twenty percent that's the point where I'd say 108 00:05:45,770 --> 00:05:48,280 go with a regular IRA in a regular for 1k 109 00:05:48,280 --> 00:05:51,750 because they let you make contributions with pre-tax dollars so the higher 110 00:05:51,750 --> 00:05:55,930 your current tax rate is the more Baguio fine did not what I IRA or 401 K 111 00:05:55,930 --> 00:05:59,380 but he also says he's worried about where tax rates will be when he retires 112 00:05:59,380 --> 00:06:00,570 say forty years from now 113 00:06:00,570 --> 00:06:03,890 alternate if you believe the taxes are headed 114 00:06:03,890 --> 00:06:07,159 inexorably higher over the course of your lifetime 115 00:06:07,160 --> 00:06:10,950 than a Roth 401 K were you pay your taxes now and pay nothing in future is 116 00:06:10,950 --> 00:06:11,830 the way to go 117 00:06:11,830 --> 00:06:14,740 even if you're making a lot of money in the present I think the person the 118 00:06:14,740 --> 00:06:15,610 police mistaken 119 00:06:15,610 --> 00:06:19,000 for those view young people who only became politically conscious under the 120 00:06:19,000 --> 00:06:20,050 Obama administration 121 00:06:20,050 --> 00:06:23,410 it may seem like there's no way to stop tight higher taxes history says 122 00:06:23,410 --> 00:06:23,930 different 123 00:06:23,930 --> 00:06:27,470 and I believe we can close the deficit without substantially raising taxes 124 00:06:27,470 --> 00:06:31,290 my view not political that back at the end the day though 125 00:06:31,290 --> 00:06:34,570 this is both beyond our control and beyond our ability to predict so here's 126 00:06:34,570 --> 00:06:35,270 the bottom line: 127 00:06:35,270 --> 00:06:38,280 the lower your present income than the lower your taxes 128 00:06:38,280 --> 00:06:43,050 a RAW file for 1k or what IRA what you pay those low tax rates 129 00:06:43,050 --> 00:06:44,150 and net 130 00:06:44,150 --> 00:06:47,810 now net and never worry about taxes again for your retirement money 131 00:06:47,810 --> 00:06:51,250 so the less you make the more likely it is that the waters for you 132 00:06:51,250 --> 00:06:54,949 it's that simple and when you're saving for retirement don't worry about what 133 00:06:54,949 --> 00:06:56,509 bill catastrophically wrong 134 00:06:56,509 --> 00:06:59,860 thirty or forty years in the future just worry about making the best choices 135 00:06:59,860 --> 00:07:01,030 right now 136 00:07:01,030 --> 00:07:02,800 don't move like Rams

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