Josh takes a break from Sustainable Investing to describe the primary differences between the Traditional and Roth IRA. The focus is on the benefits and flexibility of the Roth IRA—possibly the most powerful retirement planning tool for most investors.

TRANSCRIPT:
Hey, it’s Josh Weller here. It’s Roth IRA Awareness Month at Cary Stamp & Company, so I’m diverting my focus away from Sustainable Investing just for a little while, to focus on a Roth IRA and why I think it is the most powerful and compelling tool in your retirement planning tool box.

First, let’s take a look at a traditional IRA. The big advantage of a traditional IRA is the money that you’re contributing is tax deferred. You’re using pretax dollars and let’s say you contribute $6,000, which is the maximum for anybody under 50, that $6,000 is deducted from your income for the year. So you save the ordinary income tax that you would have paid on that $6,000. Now you will pay taxes on a traditional IRA, but you won’t do so until you start taking distributions in retirement and you’ll be paying the income tax you have at that time.

With a traditional IRA, if you make any withdrawals before the age of 59-1/2, you have to pay income tax and a 10% penalty. When you reach the age of 72 with a traditional IRA, you must start taking what are called required minimum distributions, whether you need the money or want the money doesn’t matter. You have to take them. So a traditional IRA, really, isn’t that flexible. But a Roth IRA is.

Let’s start with the downside of a Roth IRA and that is that your contributions are after tax dollars. But after that, your money grows tax free.

After a Roth account has been open for five years, if you have a need to withdraw your original capital, you can do so for any reason. Now, if you want to withdraw gains from a Roth IRA, you would have to pay a 10% penalty if it’s done before the age of 59-1/2.

There are also no required minimum distributions. Remember I was telling you, you had to take distributions when you’re 72 years old from a traditional IRA. You do not have to do that from a Roth. You can just let it continue to grow. And if you do take distributions, guess what? All of the gains are tax free. So it’s tax free income in retirement from a Roth IRA.

Let’s look at why tax free distributions might be so important. In the future, do you expect income tax rates to be higher or lower? Probably higher, right? And possibly much higher. So would you prefer to have taxable distributions or tax free distributions when taxes are higher? That’s a rhetorical question. So that’s why it’s so important, if you can, to have tax free retirement accounts to avoid rising taxes over time.

Now, everybody’s financial situation is unique. You should consult your financial adviser about whether a Roth IRA is right for you and right for you at this moment in time, especially. Thank you for watching. I hope this was helpful.

Learn about Josh Weller, financial advisor based in West Palm Beach, FL (Palm Beach County, FL, and specializing in Sustainable-ESG Investing and financial planning).

More on Roth IRAs:
Roth IRA Conversions
How to Do the “Back Door Roth”


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