Welcome to Questioning Your Cents where you can get your real-world, pragmatic tax & financial advice for business owners, entrepreneurs and independent contractors.
We are your host Kevin Molen and Charles Steinmetz. Our job is to educate you on how to manage your money and save taxes. We hope you will use the knowledge from this episode on traditional IRA’s, Roth IRA’s and retirement accounts. We will discuss how they are different for each other and the factors to look out for when investing.
- The main idea of using these vehicles is when you retire you have a lower tax bracket and hence you save your tax money and get a high return
- The retirement vehicles do not matter as much how much money is invested or how it will perform, they are based on how you can enter and exit the system, which then changes your taxes.
Comparing the Vehicles:
- You can always add money to the IRA but depending on how much you make determines if it can be considered as tax deductible or not
- If you plan on making less money in after retirement (and a lower tax bracket) this can be a useful strategy
- Traditional IRA’s mean tax savings initially, but then the tax hits you again on a higher amount later on due to investment increases. If you are strategic and take out the money slowly, this could be advantageous
- After inheriting a Traditional IRA money needs to come out over 10 years and will be taxed.
- After you turn 72 you need to take out the money from the Traditional IRA, not all of it, but a required minimum distribution (RMD). This amount depends on many factors. If you own multiple Traditional IRA accounts, you can take money out of the poor performing account and write it out without touching the better performing accounts. Generally, the RMD amount is 3-5% of the total value of the account. If you don’t take it out then there will be a penalty of 50% of RMD, which is a very high penalty.
- No tax write off can be done for money invested in a Roth IRA.
- In order to withdraw money from a Roth IRA, there is a minimum of 5 years that the account must be held and if you take the money out after you turn 59 then no penalty is applicable on that money taken out.
- Money invested in a Roth IRA is taxed initially so no tax is taken after investment growth. This could mean huge tax savings if you plan on retiring at a higher tax bracket.
- If you make more than $139k/year in adjusted gross income you cannot invest in a Roth IRA. If you are married filing joint, then the limit is $260k of adjusted gross income.
- It is easy to transfer a Roth IRA to a child or spouse since the income has already been taxed, it will not be taxed again upon transfer.
- This type of account is normally provided by your employer and automatically deducts from your payroll
- The maximum that can be added is $24k annually
- Compared to IRA, a401(k) can have a lot more money contributed
- No income limitations
- You can’t take the money out until you retire
- Need to be careful in how the 401k is investing as some 401(k) providers don’t offer the best investment options
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00:03:00 – Introduction
00:05:00 – What to look for in a retirement account
00:06:45 – Traditional IRA
00:15:55 – Roth IRA
00:22:15 – Roth vs Traditional IRA scenarios
00:26:00 – Inheritance of IRA’s
00:31:40 – Required Minimum Distributions
00:39:15 – How 401(k) works
00:47:45 – Comfort Zone – Questions round
00:48:02 – Benefits of filing taxes early
00:52:00 – Paying taxes after the deadline
00:56:00 – Difference between Exemption, credit and deduction
01:00:00 – Outro