Why Roth Investments Are Better Than Traditional

Once you retire, you don’t have any income, so yes your tax bracket drops dramatically. I don’t get how it wouldn’t drop? And then you can withdraw from traditional or roll over to Roth with ladders

But if John doe is in the high tax bracket now and won’t have a job in retirement.

Isn’t traditional ira better.

Cos John Doe will be in a lower tax bracket in retirement bcos he won’t have a Job?

Same thing for Roth 401k?

From what I know, I think Dave makes sense but what financial advisors teach, is that you’re meant to/can contribute MORE to the traditional due to not having to pay taxes up front on them, so they will grow more in the long term, but ultimately about the same because you have to pay taxes on it.

What is you want to retire before 65?

Most people at retirement age are in a lower tax bracket so traditional does better especially if they with draw at standard deduction rate

Dave claims "The Roth absolutely mathematically kicks the traditional's butt". I don't understand his math. Suppose you have $100k income and invest at 10% for 7 years, and your tax rate is 50%. In a traditional, your $100k turns into $200k and you get $100k post-tax. In a Roth your $100k turns into $50k post-tax and gives you $100k 7 years later. If you're in the same tax bracket, there is no difference.

Putting $200 a month into conventional 401K isn't the same as putting $200 a month into a Roth. Because Roth is after tax dollars it's more like putting 2/3 or $133 right?

The Roth advantage is mostly based on a government promise. Congress will probably change all of this stuff in twenty years. I don’t trust the promise..

5 million?!

Question…I have a decent paying job now but am planning on being a SAHM soon and not really sure if I will ever go back into the corporate world. Being I’ll be making no money in the future, should I contribute to 401k because my tax rate will most likely be lower? Or no because with the ROTH, even though my tax rate is high rn I won’t be taxed on the growth? Appreciate the advice thanks

Hang on. I’m not even from the US and I’m seeing a problem with Dave’s logic.
Ok so it’s worth 2.5 million after 96.000 contributed over the years. No tax paid but with trad you pay on the withdrawal.
But if you paid the tax up front (Roth) then you wouldn’t have close to 2.5 million at the end. No ? The 2.5 million was from 96.000 contributed. You pay tax up front then it’s a lot less contributed so yeah no tax at withdrawal but you’ve a lot less to withdraw.

Fully fund wife's match, max Roth TSP, max both our Roth IRAs, everything else goes into indexed funds.

Thanks for the explanation!

“And so the Roth absolutely, mathematically, kicks the traditional’s BUTT!” The way he says that is so funny. 😂

Hopefully someone can help me with this. Both my spouse work and with both our incomes we’re in the 22% tax bracket and we have been owing the IRS money. What can we do differently?
We are union workers so we don’t have a 401k and can’t contribute to our pensions.
I am seeing traditional is better for us but the Roth sounds nicer

Traditional IRA lets you spread you taxes at all of the lower tax rates. With Roth you are paying taxes at your marginal (higher) rate

4:02 No, Dave, you can’t just say “it mathematically works out” but then qualify it by saying, “well, if you use a Roth IRA then you usually put more down up front because of how the human mind works.” That doesn’t mathematically mean a Roth is a better financial tool, that just means that a Roth makes your up-front cost less transparent.

The biggest advantage to a traditional IRA is that the money you would have paid in taxes gets to grow. Yes you will pay taxes on it at the end when you withdraw, but your pool of money is also much larger. I’m not saying it is better or worse than a Roth, but that’s an incredibly significant point to gloss over.

What he is saying isnt true. Roth vs Ira depends on your tax bracket at the time. If you dont make money ti be into a huge tax bracket you should do Roth. Income currently more than retirement you do traditionally. Most people are during retirement. Also time value of money makes sense to get the tax defense now.

I came here for knowledge and I got confirmation of what I'd reasoned through already. That's good. I lacked confidence in my discernment. Thank you Dave for making it extremely clear.

I’m a little confuse about Roth and Traditional IRAs. Everyone keeps stating you don’t have to pay taxes on a Roth because you already paid taxes. My financial advisor told me you have to pay taxes on the interest amount you have made. You only avoid paying taxes on what you’ve put in. I have heard a few other people say you don’t have to pay taxes but who’s right? So confusing

The only factor that matters is whether you'll be in a lower tax bracket now, or later. What Dave is not mentioning, is that a traditional gets (your top tax bracket in %) more than a roth every year to compound and that compounding pays the tax bill later on when it comes time to sell. If your top tax bracket is 22% during employment and retirement, it is mathematically the same.

Pretty much they lied to us, telling us we would be in a lower tax bracket in retirement. Thank God they were wrong.

So I’ve been investing in Roth basic on top of my match that I get at work. Is there any difference between Roth basic versus Roth IRA? I just wanna make sure that I’m not getting taxed later on for all of the growth that I made. Thanks ahead for the insight

Roth should be the primary retirement investment vehicle. The pre-tax/traditional accounts should be used strategically to backdoor into a roth if you make too much money to put into one.

So if more money comes out of my pocket up front, I;ll have more in the end….Genius

As a non-American, I can't believe how the US system makes it so complicated for the standard retiree when it comes to using the different retirement funds.

So many variables, so many possibilities, and you never know what life is going to throw at you.
For instance, an Ira can be attractive to a couple with a plan to convert to Roth later as needed. But then, one person passes and everything changes drastically. Suddenly, you have too much in an IRA., and not enough in your Roth IRA. Very difficult to plan for all of life’s possibilities.

Let me count thy ways…

If you save early enough and often enough you can have a lot of money in either. Wouldn't you rather not pay any more taxes? When it comes to Social Security taxes and Medicare taxes, wouldn't you rather have a lower MAGI?

Awesome comments here on DR’s video. Such good thoughts!! 🎉

Ramsey doesn’t believe in loans, but I’m going to borrow against my stock investments when I have a multi million dollar portfolio and live off that paying little in interest and little in taxes.

I agree with much of this and much of my holdings are Roth for various reasons. However, what Dave fails to address in his math is the opportunity cost of the tax savings gained from traditional contributions and given up today with Roth. He seems, as many do, to assume that any tax savings will simply be spent or put into a bank account making little to no return. If you consider the investment opportunity cost of those dollars, you see that mathematically you end up with the same amount. If I save $2,000 in taxes on $10,000 contributed to a traditional vs a Roth, I can invest that additional $2,000 and get the same rate of return as the rest of the money (up to the max contribution amount for 401k/IRA or invest it in a brokerage account). When you consider the time value of that $2,000 in savings today, just like the time value of the Roth principle amount he discusses, you end up the same if the tax rate now is the same as the tax rate in the future. Therefore, tax rate assumption (now vs future) is the primary consideration when deciding on Roth vs Traditional. There's a lot more to it than "Roth is better." If you're assuming that the typical person would not invest the extra $2,000 savings in my example, then you're making a case that Roth is better due to human nature that you're going to spend what you save now in taxes.

Dave still thinks RMDs kick in at 70 1/2? Clown.

DO NOT listen to dave for investment sdvice. You didn't avoid taxes on a roth goofy. You already paid the tax that traditional did not have to pay. If you're in a higher income bracket it can be stupid to go roth. If you have a paid off house in retirement or even just stay in the same tax bracket traditional is much mkre likely to mathematically be better. If you remain in the same tax bracket then there is no difference folks. Dave SUCKS with math when it comes to investing folks.

From what i am seeing 90% of Roths never payoff. Unless you live really long. There is a lot of data on this.

For pre tax to win you would need to contribute the extra money that would be paid in taxes had they contributed Roth(say an extra $100a month) and then you would need to crush with the compound interest on that ,so much so that it exceeds the amount that will be owed for taxes

6:05 match beat Roth. Roth beats traditional

Great video. I'm looking to start investing in the stock market and other asset classes with $250k this quarter. Should I focus on index funds or individual stocks? Preferably want the route with the best return in investment. Thanks!

Dave really messes up part of the math in his example. His example is about investing $200 / month from age 25-65. So for a Roth, let's say you are in a 25% tax bracket right now. So in order to invest $200 / month that means you have to have $267 withheld from your paycheck every month for 40 years. That will yield you $200 / month that you can invest and yes it will grow to $2.5 million and you can withdraw it tax free. Now let's do the same for a Traditional 401k. If you have invest $267 / month every month for 40 years in a Traditional 401k with the same return he talks about and THEN you pay taxes on that money at the same 25% tax bracket rate guess what…..you come away with $2.5 million! So if your tax bracket is the same now as it will be when you retire it really doesn't matter if you choose Roth or Traditional. The part that Dave always forgets is that in order to have the $200 each month to invest in a Roth you have to have $267 withheld. He ignores that part. Which of course makes the Roth look way better. It annoys me so much that he messes this up.

Taxes aside for a minute. If you max out 401(k) and Roth at age of 30. Annual returns of 7% let's say for both, you'll have over 3 times more at age 60. EVEN if you withdraw the entire amount out of your 401(k) and get nailed hard for taxes, you'll still have over twice as much in a 401(k) You just can generate the wealth in a Roth that you can a 401(k)

Help yeah that helps me Mr.Ramsey.

Just discovered an issue with the Roth 401k. If you retire at 55, due to the 55+ rule you don't get hit with a early withdraw, however, you can only use your Contributions into your Roth without being taxed until you turn 59 1/2. So, having traditional 401k saved me and allowed me to retire at 55. If you withdraw gains from your Roth 401k at 55 to 59 1/2, it will be taxed.

Yeah, but roth maxes out at 7k annually whereas traditional is more than 3 times that at, what is it now, 23,500? That's what kept hanging me up, but I see now why you say max Roth and then, if u want to save more, put it in traditional.

4:47 😂

The problem with a rock is you can't access the money until you retire which does you no good and number two it doesn't earn much interest. You got to be able to hedge to make a living

Some people actually do factor in the tax savings. Lots of people will make the traditional IRA contribution, but not the Roth at end of the year. Without knowing a person's income, what they want to do, their life in retirement, & additional sources of retirement income, you can not properly advise them. Almost every single person is best off having both types so they can control their taxes in retirement. If you do 100% Roth, and don't have a pension, you are giving away tax-free money in retirement because your AGI should never be below the standard deduction. Tax Credits can also factor in. I just advised a client to take $70k in retirement funds because he could do so 100% tax free. You can't beat tax deduction going in and tax free coming out. Absolute best is the be a business owner, pay your kids and invest in Roth to guarantee you the tax deduction now and the tax free withdrawal later (granted it is no longer your money, but its how you set them up for success).

Guys it’s not hard. Do both

I checked my paystub and the math says I'm contributing 8% (for max company match) of GROSS pay, not after-tax pay. So what Dave says about being tricked into contributing the same amount and not a lower amount to Roth is true for me. So the belt is tighter right now since I'm paying taxes on that 8% but I'll still have the same actual amount in my retirement account.

Retire early, so withdraw or rollover at 10% tax rate

I’m concerned Congress will hose the Roth tax breaks by the time I retire, especially in the high income brackets given our nation’s disastrous fiscal trajectory. Because of that I take 75% traditional 25% Roth to hedge and get some benefits today.