Are tax-free retirement accounts like the Roth IRA overrated?

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Today is q&a tuesday today’s question or tax free retirement accounts like the roth ira over rated i don’t know but let’s find out but before we do if there’s your first time at our channel or you haven’t subscribed click on the subscribe button at the bottom my name is travis sickles certified financial planner with sickle under financial advisors there is a

Ton of information out there that says the roth ira is the greatest savings vehicle ever no don’t use that use the 401k instead and you’re totally confused on which type of account is the best account and everybody’s going to give you their two cents but there’s not a cut and dry answer but what you really need to look at is what works for your particular situation

So today i want to give you some reasons why you might want to consider the roth and also why the 401k or those pre-tax dollars are really important as well so let’s get into it and let’s go over the pros and the cons to the roth ira and whether or not tax-free accounts are actually overrated so some of the reasons why we would like the roth ira right now we’re in

Historically low tax environment so the tax rates were adjusted in the 2017 tax cuts and jobs act here’s well of a ton of different credits and deductions and changes galore there’s a lot to deal with when we’re trying to figure this out but historically speaking tax rates are really low right now so you’re probably paying less now than you did a couple of years

Ago or you might not even be paying very much at all in taxes if you’re in a lower tax bracket or were in a lower tax bracket and we also have to look at the standard deductions that went up considerably so there’s a lot of things to deal with but considering that we’re in a relatively low tax environment right now what that means is every dollar that were earning

We’re paying less in taxes than we did previously so this might be a good opportunity to take those dollars and put them into the roth ira or a roth type of account because it’s going to be post tax and then it’s gonna grow to be tax-free down the road so you’re not gonna pay any taxes on that growth so that’s historically low tax rates and tax free growth and

Let’s not forget about our mds required minimum distributions so with accounts like traditional iras and 401ks and 403 b’s at some point you’re gonna have what’s called a required minimum distribution or probably have an rmd later on down the road even if you don’t need those dollars you have to pull a certain amount out each and every single year after age 70

And a half so it’s called an rmd and if you didn’t know that rmd required minimum distributions the roth ira or the roth style accounts don’t have the rmds now if they’re inside of the roth 401k you might have burned these down the road but if you roll it into a roth ira which was what most people do then you’re not going to have those rm ds so that will continue

To grow and keep the money inside of the roth ira where the other accounts where you’re gonna have to pull the rmd out that means it’s added to your taxable income so if in a year that you didn’t need that taxable income you’re getting it anyways and since the 401ks will increase your taxable income the roth iras will not what that means is if you pull money out

Of that roth ira in retirement and it’s not going to get added to your taxable income so even if you do need that money then it’s not gonna increase your tax liability later on down the road now on the flipside your income actually might be probably will be lower in retirement and here’s a couple of things that will jump out huge expenses first savings you’re not

Gonna have to save any more so all that income that you had coming in through the door you don’t have to take it and put it into savings because you already accumulated all the money that you need in retirement another huge one is your mortgage hopefully your mortgage is paid off and you’ll have one less expense to deal with and that’s usually a pretty big one now

You probably still have property taxes but at least you won’t have that huge mortgage payment so those are huge two huge pieces to your financial life that you no longer have to fund or pay for right off the top and maybe you’re even downsizing where you’re living so it’s actually a little cheaper maybe you took a portion and put it off to the side to then spend

In retirement so there’s a lot of factors that would show that in retirement you’re gonna spend less so those are a couple of points of why reducing your taxable income today using the 401 k versus the roth ira would be more advantageous but here’s the thing we’ve talked about this previously it’s really hard to know where tax rates are going to be what credits or

Deductions that you have or really anything tax related because that’s what we’re talking about with these types of accounts we’re talking with your taxes we’re talking about your taxes so we don’t know where that’s going to be so it makes a lot of sense but if you’re looking at each year as you’re saving to make sure that you’re qualifying for the most deductions

And credits that you can but then flipping that money over into a roth ira if you can so it’s about focusing on what you can do to reduce it today and tomorrow so that gives you the flexibility today now the flexibility comes into tomorrow because when taxes go up or if taxes go up then you can pull more money out of that roth ira but again just like it is today

If tax rates go down then maybe we want to look at your retirement plans like the 401 k or the 403 bay which are pre-tax but then there are taxable in retirement who’s giving you that flexibility so again if tax rates go up then we could take more money out of the roth ira again another win for the roth ira but we also want to have those pre-tax accounts because

If tax rates go down we can pull more money out of there and remember pulling more money out of there so it’s taxable helped us today so there’s kind of a little bit of a balancing act that’s going on and we don’t really know what it’s going to be in the future so i like to have more control so you can make those decisions on your terms and depending on how much

You need to save for retirement if you saved it all into the 401 k that can mean you have a bigger or indeed down the road that you really didn’t want take but now you need to take it by having both accounts since you’re putting a little bit of money into the post tax a little bit into the pre-tax or the 401k versus the roth then in retirement when you do have

Those rmds after age 70 and a half maybe it’ll be a little bit less so that that tax burden on those dollars the rmds won’t be quite as much now there’s a lot of reasons why you would want to use a roth ira and a lot of reasons why the 401k would make more sense to save into but really it comes down to your particular situation on how you can take advantage of the

Tax credits and deductions today to reduce your overall tax liability but then look to the future to make sure you have the control and the flexibility again to control your taxes and to have the most money in your pocket so do you use the roth ira or the 401k which do you prefer let me know at the comments down at the bottom and if you’ve enjoyed this video don’t

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Transcribed from video
Are tax-free retirement accounts like the Roth IRA overrated? By Travis Sickle