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Jim Cramer: Roth Or Traditional Account? | Archives | CNBC

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Mad Money's Jim Cramer breaks down the differences between traditional retirement methods and a Roth 401(k) or IRA. » Subscribe to CNBC: http://cnb.cx/SubscribeCNBC About CNBC: From 'Wall Street' to 'Main Street' to award winning original documentaries and Reality TV series, CNBC has you covered. Experience special sneak peeks of your favorite shows, exclusive video and more. Connect with CNBC News Online Get the latest news: http://www.cnbc.com Find CNBC News on Facebook: http://cnb.cx/LikeCNBC Follow CNBC News on Twitter: http://cnb.cx/FollowCNBC Follow CNBC News on Google+: http://cnb.cx/PlusCNBC Follow CNBC News on Instagram: http://cnb.cx/InstagramCNBC Jim Cramer: Roth or Traditional Account? | Archives | CNBC
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Text Comments (202)
sadfasde3 (9 days ago)
The Government has made this all so damn complicated with taxes. Can we end all the complexity? If you want my money just take it - don't make me jump through all these hoops and add waste to the economy (Tax Accounts, Lawyers, etc.).
ron whiteleo (1 month ago)
cant believe people still listen to this used car saleman... if you want to make money in the stock market, do the opposite of whatever Cramer says and you will make a boat load of money... i remember clearly when he bashed Tesla when they came out, i purchased Tesla the same day he said 'DONT BUY' and look at me today,, boat load of money..
Jim Feaster (1 month ago)
Liar scum
Jim Feaster (1 month ago)
Scam united health care is a complete Senior rip off
Chris Choir (1 month ago)
You don't want either. You want cash and gold. We all know traditional IRA or 401K are bad because if Bernie or AOC get their way the Federal tax rate will be 75% when you retire. The problem with Roth IRA, is now Liz Warren and other snowflakes want to tax all stock market transactions. Not to mention many states like Illinois are taxing IRA and 401K to pay for State pension funds. In 20 years a 401K and IRAs are going to be worthless. Oh did I mention a stock market crash possibility?
Sterling M (2 months ago)
Pretty much always go Roth. Taxes are low and not likely to go down. The Roth is better if taxes go up and also if you maximize your contribution.
Steven Hill (2 months ago)
Another reason to go Roth is EARNINGS ARE NEVER TAXED...unlike traditional. Makes ALL the difference regardless of your income.
Me Too (2 months ago)
Why not have both
canefan17 (2 months ago)
Never pay tax now if you have a choice. If you don’t believe state governments and the federal government won’t be looking to tax your Roth IRA’s when you retire, then you haven’t been paying attention. States with unfunded liabilities (federal pension plans) are already starting to target private retirement accounts.
Gee purrs (1 month ago)
That's a damn good point.
Yg Bodybuilder (2 months ago)
So am I the only one in america with a 457
Viet Nguyen (2 months ago)
Yg Bodybuilder I have a 457 at 24. I work for a public university. My university has a pension program I’m required to partake in, and basically, it’ll give me the average of my top 5 salaries if I work with them long enough. I initially contributed to a 457 until I realize how nice my pension program is. Since I got no employee contribution like a traditional 401(k) for my 457, I stopped contributing to it and started a Roth. I’ll most likely convert that 457 into a Roth and pay the taxes now while my bracket is low if I move to another institution. That my situation ¯\_(ツ)_/¯
lakorai2 (2 months ago)
Roth only. Traditional IRAd are stupid
Steve (4 months ago)
I believe Roth is logical for higher income earners and lower income. No one really talks about the other Roth/IRA and 401k Roth positive items.... If you do all Roth you will have a lower AGI (adjusted growth income basically what portion goverment taxes of your earnings) in you older ages. Why is this always better well if your AGI is too high then you may pay taxes on portion of your social security checks and the portion that is taxable grows as you even have a higher AGI and RMD will push you higher every year more of you social security checks being taxed. A higher AGI could also put you into the dreaded premium health care penalties you pay for Medicare and those can get steep (again just because you saved too much). So if you do more Roth you should have a lower AGI in retirement when you are older and you may avoid these odd penalties the Goverment charges because your making too much in retirement. Also you can avoid the dreaded Ira required minimum distribution which pushes you AGI higher every year after 70s meaning more taxes if it pushes you into a new tax bracket. Kind of crazy. You can still contribute to a standard Roth if you make too much. You can do after tax contribution and roll them to Roth (aka mega Backdoor) or you can do normal back door or why not do both tricks if you make too much if you can afford it. I basically do 401k Roth maxed and Roth maxed. I use to do traditional and I wish I knew then what I knew now. Unfortunately all matching your company will do will still be contributed to your 401k as traditional but that should not be so bad when you calculate your AGI in retirement.
Valens (4 months ago)
Roth for low income,401k for large.
BlackWorldTraveler (4 months ago)
Valens I rather do it all. I make $135k-$160k/yr..and contribute up to $50k a year into my 401k. Maxing my 401k I contributed to aftertax,pretax in the early years and 100% into Roth 401k when it started. Maxing my Roth IRA since it started.. My Pretax 401k is $600k. Roth 401k is over $900k. Aftertax 401k converted to mega Roth IRA. Roth IRA over $700k. Retiring early with additional savings,investments,pension,passive income,etc.. and maximum monthly social security income.
Michael Palumbo (5 months ago)
You CAN take advantage of a Roth of you make more than the income limit. Every year you simply contribute into a regular IRA and then immediately roll it over to a Roth IRA.
Texas Owl (3 months ago)
Michael Palumbo yes a back door 🤦🏼‍♂️
TheIntJuggler (5 months ago)
Wouldn't it make sense to get your regular 401k to the point that you are withdrawing an amount equal to the standatd deduction every year in retirement? If it is a tax deferred account and you only withdraw $12,000 per year from it in retirement it will also be tax free when you withdraw since $12,000 is the current standard deduction. It would be difficult to guesstimate what markets will return or what the standard deduction will be in a few decades, but if you do it right it could be tax free in and tax free out for the first $12k you take out in retirement. From there you would take the rest out of a roth.
Siegfried3203 (7 months ago)
It begins at 2:00
2 4 (8 months ago)
that’s a lot of information to be speed talking
Chuck Christopher (9 months ago)
Forget your ROTH IRA and 401k, I found a better way! Research The Dividends Pay My Bills Method.
BlackWorldTraveler (4 months ago)
Chuck Christopher Don't need to research anything. I get over $80k/ year reinvested dividends in my Roth 401k and Roth IRA. At retirement I will have access to this tax free on top of pension,passive income,savings,qualified dividends,,pretax 401k,$2700/mo. social security,etc..
L_J (9 months ago)
love to watch these old vid's
GainesMediaInc (1 year ago)
"FIH-nances".
Nolo Kobo (10 months ago)
GainesMediaInc noit's fahnances
John Galt (1 year ago)
Maxed on both. What's wrong with that?
Big Red (1 month ago)
You don’t make enough to max out both
Dziobak productions (1 year ago)
Who has more ADHD? Cramer or the cameraman
Charlie J (1 year ago)
so even if my roth ira multiplies by many factors, i'll never have to pay any capital gains tax when i withdraw at 59 and a half?
Edge HODL (1 month ago)
Yep,after 59.5 it's all yours not taxes owed, Roth is best thing ever!
Texas Owl (3 months ago)
Charlie J correct
Ananth Agastya (1 year ago)
Charlie J correcto
WPLU572 Trunked Radio (1 year ago)
is Vanguard the best broker?
kensworth39 (8 months ago)
I like Betterment, they use some vanguard, but they reinvest your money for you efficiently and allocate your money in more than just a total stock market ETF and do all you tax paperwork made easy at end of year.
MAURICO2 (1 year ago)
I don't understand why anyone would advise someone to pay taxes up front in order to save after tax money in a tax-free Roth 401K when they can to save pretax money in a tax-deferred traditional 401K. I think it is probably always better to defer paying taxes as long as possible and thus better to save pretax money in a traditional 401K than after tax money in a Roth 401K. Taxes paid up front is money forever gone and thus not available to invest for compounding growth over many future years. Concerns that a traditional 401K will leave retirees saddled with taxes in their retirement years seem to assume retirees will draw down ALL of their traditional 401K savings and thus be taxed on ALL of it in their life time. However, those with considerable retirement savings are unlikely to withdraw all of it but will leave a considerable portion to their surviving spouse. However, if they have already paid taxes up front in order to fund Roth retirement savings they deprive their surviving spouse the opportunity for further investment growth on pretax money as well as the benefits of a larger investment portfolio from pretax funding. Similarly, a surviving spouse is unlikely to draw down all traditional 401K savings rolled over to them but would likely leave some to their children... ...and even if a surviving spouse and children must meet annual taxable withdrawals, the minimum withdrawals could stretch out full exhaustion of the account over many years over which time some portion of the account would still be pretax seed money that is invested and growing. Thus a child with a life expectancy 30 years after the death of the parent could stretch out withdrawals over 30 years.
BlackWorldTraveler (4 months ago)
MAURICO2 Well I have over $900k in my Roth 401k and over $700k in Roth IRA and retiring early. Not many people can say they have over $1.5 million tax free and can live off tax free dividends in addition to pension and other savings,investments,passive income,qualified dividends,SS,etc..
BlackWorldTraveler (1 year ago)
MAURICO2 One of the reasons I go to Roth is because I'm retiring early and my retirement income can be $80k a year and pay zero to $200 a month for health care instead of $1k or more.
MAURICO2 (1 year ago)
I agree with you in preferring the Roth over the traditional IRA with regard to funding going forward because the tax deductibility of contributions phase out as a person's income rises.  However I would not pay upfront taxes in order to covert an existing traditional IRA into a Roth.  In my example above I mentioned that money not paid out in taxes but instead invested over time could quadruple.  In 20 years $1000 invested in a traditional IRA and earning an average 7.2% annual return would grow to $4,000 (it would double very 10 years under the rule of 72). As I stated above I would rather pay taxes on $4,000, 20 years from now than pay $1,000 in taxes today;  also 20 years from now I would only pay taxes as I withdraw portions of the $4,000 during retirement.As for your comparison between the traditional and Roth IRA that only looks at the $5,500 annual limit on contributions, the Roth would always be better and it would not even be close.  But to only consider the contribution and overlook the tax difference between traditional and Roth is an incomplete analysis.You must take into account the tax deductibility of the contributions in a traditional.  If the contribution were fully deductible for someone in the 25% tax bracket a $5,500 tax deduction would free up $1,375 to be invested for retirement outside the IRA.  Thus the person with the traditional IRA would have $6,875 in total retirement funding.  In 20 years at 7.2% the $1,375 could grow to $5,500.  Again I would rather pay taxes on $5,500 starting 20 years from today than pay $1,375 more in taxes by not taking the deduction.  If you invested the $1,375 in a stock index mutual fund that has a low turnover in the securities they buy and sell, you taxes are likely to be low.   In taxable accounts that hold stock mutual funds you only pay taxes on stocks they sell during the year at a capital gains rate that is lower than the rate on ordinary income.  Stock index mutual funds only sell stocks that are taken out of the index that they simulate.  They don't buy and sell like actively managed stock mutual funds.I am not familiar with any limits on withdrawals from any IRA in retirement. I doubt that this is true.  In fact, at age 70.5 you have to start making certain minimum withdrawals.  If you can't ultimately withdraw all of it who is the remaining 15%-25% supposed to go to when you pass on?  The logic of this does not hold  together. You perhaps should double check your source.
Matt Schwartz (1 year ago)
+MAURICO2 Correct me if I'm wrong, but the way I see it, Roth accounts ultimately allow you to put more value into tax-advantaged accounts. You can fund both a Roth IRA and a traditional IRA at $5,500/year, but you'll be able to withdraw the _entire_ Roth IRA amount, while you'll only be able to withdraw maybe 75%-85% of the traditional IRA, even though _both_ had the same initial funding of $5,500/year. If you could only fund Roth IRAs with after-tax amounts based on $5,500 gross income, then the two would be identical, but if you can put $5,500 post-tax into a Roth IRA and $5,500 pre-tax into a traditional IRA, it seems to me that the Roth IRA ultimately allows you to park greater value into a tax-advantaged account. Would you agree, or am I missing something? Basically, even though traditional accounts give you up-front savings relative to Roth accounts, you can't put any of those upfront savings into tax-advantaged accounts, because the contribution limits are the same for both traditional and Roth, so you may as well put after-tax money into the account so that you can withdraw it in full upon retirement. At least, that's how I see it.
MAURICO2 (1 year ago)
-------I have both a traditional IRA and a Roth IRA. When the Roth IRA option became available I starting funding one because of the tax free benefit and I stopped further funding my traditional IRA. The Roth was also more attractive because I did not get full tax deductibility of my funding of my traditional IRA; it starts phasing out as one's income rises. Those with high income get no tax deduction at all; thus it would make no sense for high income persons to put any additional money in a traditional IRA. -------Whether a traditional is better or worse than a Roth depends. In the above example the Roth is better. However the above analysis pertains to ongoing funding. For money already in a traditional IRA I don't think it is ever wise to pay taxes upfront in order to convert it to a Roth IRA. Once those taxes are paid, the money is gone forever and cannot be invested to earn more money. -------as for 401ks I prefer the traditional to the Roth because you can fund it with pretax money (from your gross pay). Overtime, this means people can have quite a bit of money go into their traditional 401k that otherwise would be taxed away. Thus a person in the 25% tax bracket can put $1,000 of pretax money into their traditional 401k for every $750 in after tax pay that they would put into a Roth 401k. Every additional $250 in the traditional 401k, can grow to $1,000 in 21 years (assuming a 7.2% average annual rate, using the rule of 72). I'd rather pay taxes on $1,000, 21 years from now than pay $250 in taxes today. -------People who out live their retirement savings include some who were high earners in high tax brackets during their working years but who did not save very well. Their rapidly dwindling or meager retirement savings would indicate they are likely to be in a low income bracket in retirement and perhaps on some government assistance and perhaps regretful if they paid a bunch of up front taxes to fund a Roth 401k.
lanceoa (1 year ago)
2018: easy choice. Fund both the 401k @$18.5k and the Roth for $5.5k! Saved tons from Uncle Sam by reducing my AGI putting full pop on 401k, using the tax savings to fund the Roth full pop... the math puts me at over $1M in 16 yrs. Comment, Debate, Scrutinize...go!
BlackWorldTraveler (1 year ago)
lanceoa I've been maxing my Roth 401k since it started about 12 years ago. Roth IRA since it started. Crossed one million two years ago I think. So it's possible.
Al Rocky (1 year ago)
@ Chris your $3,300 into a traditional IRA and $2,200 into a Roth IRA is the maximum ($3,300 + $2,200 = $5,500) you can contribute yearly. Did you designate this for 2017 or 2018? You have until (tax day which is normally) April 15 2018 to contribute to your 2017 IRA and April 15 2019 to contribute to your 2018 IRA. So it seems you can contribute another $5,500 for either your 2017 or 2018 (traditional and or Roth) IRA. If you make less than $38,700 you are in 12% federal tax bracket. If you expect to make more than $38,700 in the future (22% tax bracket) then you should prefer to making Roth IRA contributions now and maybe traditional IRA contributions when in the 22% tax bracket. What tax bracket are you in and what tax bracket do you expect be in right before you retire? If your employer offers a company match in their 401(k) you should contribute at least to the match.
Christopher Johnson (1 year ago)
I have recently opened both an IRA and Roth, I am 35 and this is the first serious steps to retirement I have taken so far. I have 60% going to IRA and 40% to Roth. Is this a good configure? I am putting in the max I can, and believe the max for both is $5500, is this correct or can I do $5500 to both?
lanceoa (1 year ago)
Al Rocky with your example yes I agree... at that salary I would aim to save 20% max... you need money for actual living expenses, ⛽️, food, housing. I make a bit more so I set aside 20% of my salary. Anytime I can pay the tax man less is good for me! Using Uncle Sams loan for growth and dividends
Sunil Chulliyil (1 year ago)
Am I doing it wrong? For example, if annual income is $100K and 25% tax bracket and 10% contribution. Case 1: Traditional 401K: Contribution amount=$10,000 . Tax savings = $2500 (which can be invested elsewhere). effective investment amount per annum=$12,500. Compounded annually at 7%, for 20 years, balance after 20 yrs=500K Case2: Roth 401K: Contribution amount=$7500 (because 25% tax is deducted). Tax savings=0. Effective investment amount per annum=$7500. Compounded annually at 7%, for 20 years, balance after 20 yrs=300K. Even if the tax bracket after 20 yrs is 40%, wouldn't the traditional be the winner?
Heritage Wealth Planning (1 year ago)
ahhhh, you're missing a critical point here. If you are married and under 65 your standard deductions are $24k. Thus $100k of income = $76k of taxable income, meaning you are in the 12% bracket! Which makes the ROTH even more beneficial! Secondly, you really need to understand the tax consequence of your RMDs. And how it will affect your taxes on Social Security and Medicare Parts B and D premiums. Roth does not cause any taxation or increased premiums for either
Al Rocky (1 year ago)
@ Ianceoa, Sunil wrote: "Case2: Roth 401K: Contribution amount=$7500 (because 25% tax is deducted)."
lanceoa (1 year ago)
ROTH scenario: you forgot to account for the $10k being taxed, so essentially you put $7,500 into ROTH and paid $2,000 (rounding) to Uncle Sam..
Al Rocky (1 year ago)
@Sunil: There is no "Tax savings = $2500 (which can be invested elsewhere)." and thus no "effective investment amount per annum=$12,500." That is where you are wrong.
Nathan Hedglin (1 year ago)
Case 1: Equals $ 438,652 Case 2: Equals $328,989 by my calculations. Case 1 @ 25% tax = 328,989, Exactly the same as the Roth. Only difference is taxes now versus later. If one is over the 15% tax bracket now, the Traditional wins (especially with state tax included). Or if one plans on having a lot of income or sizable pension later in retirement. DONT worry about what congress will do or what MAYBE MIGHT COULD happen, making decisions on the worst case is not logical nor beneficial. It is best to SAVE taxes NOW based on what you do know.
Medmann48 (1 year ago)
I have both Traditional & Roth IRA & I contribute to both but more into the Traditional. The Traditional IRA is better because it gives you a tax deduction now AND it can put you into a lower tax bracket. I think I will be in a low tax bracket when I retire & I am cheap so I will be in a lower tax bracket then. Take the money now & put the lions share into the Traditional.
Al Rocky (7 months ago)
"a reason why the IRS exclude people making more than X amount from participating, the tax advantage is huge." --- that same IRS allows "people making more than X amount" to participate via a back door Roth IRA. The tax advantage may or may not be huge. For some some traditional IRA is the better tax route.
Dennis Vu (9 months ago)
Nah Roth IRA is better if you are a savy investor. There's a reason why the IRS exclude people making more than X amount from participating, the tax advantage is huge. My current split is 70 Roth 30 t. IRA
Christopher Johnson (1 year ago)
I have done this recently as well 60/40 traditional to roth.
Al Rocky (1 year ago)
"tax refund I am able to contribute healthily to Roth!" again you repeat the same mistake and misunderstanding that you DO NOT have extra money with which to fund a Roth IRA by contributing to a traditional 401(k).
lanceoa (1 year ago)
I’m with you! Max traditional to lower AGI, keep more of my earnings, with the lower bracket and tax refund I am able to contribute healthily to Roth!
Jewel Thompson (1 year ago)
Do you have to accept a roth ira, roth 401k or 401k plan from your employer. Or can you decline their retirement plan offers and go get a ira or another private retirement plan for yourself.
Gee purrs (1 month ago)
When I was an employee I'd contribute the minimum amount to get the maximum amount possible from my employer. That was free money.
Matthew Freye (1 year ago)
Hi Jewel! Great questions. I do not believe that any employer can force an employee to contribute to a 401(k). Employers may automatically set it up so that an employee's pay is automatically deducted for a 401(k) contribution, but you should have the ability to go in and opt out. Often times, an employer will do this automatic deduction (to the consternation of some employees) with good intentions of getting their employees started in retirement savings. Regardless, you should definitely have the option to opt out and then, if you qualify, open an IRA yourself. I guess the question would be why do you want to opt out of a 401(k) and instead open an IRA? Also, why not contribute to both an IRA and your employer 401(k)? I recently wrote a book on the basics of investing that covers these sorts of topics in very plain English. Please feel free to check it out and let me know if it helps or if you have questions! http://a.co/0kYuuBh
Al Rocky (1 year ago)
Your employer might offer a 401(k) plan but you are not required to invest in it. Of course if they offer a company match you'd be pretty much a fool not to take advantage of the match. They do not offer a traditional IRA nor a Roth IRA - that is something you do on your own with earned income. Many people do both the 401(k) and IRA.
Nate Moyer (1 year ago)
Roth is a no brainer if you're eligible for it!
Corey Hillesheim (11 months ago)
Miguel Rojas, this is a common misunderstanding. The final amount will be the exact same for a Roth as a traditional. The only thing that matters is the rate you pay. Do the math yourself and see. Assume a 10% growth rate for 30 years and 20% tax rate. Roth=($10,000*0.8)*1.1^30=$139,595. Traditional=($10,000*1.1^30)*0.8=$139,595. It’s called the Commutative Property of Multiplication. I recommend Roth’s because they essentially allow you to contribute more because the contribution limit is the same for both.
Miguel Rojas (1 year ago)
Do people not under stand that with a traditional 401k you have to pay taxes on the money you contribute and the interest you earn after you start withdrawing. With a Roth IRA you only pay taxes on the money you contribute. Example putting in $5.5k a year for 35 years earning 7% you will have $893k while only paying taxes on $192,000. In traditional 401k you might be able to invest a little more. But you will end up paying taxes on all of the money.
K S (1 year ago)
Say you are in the 15% bracket now and in retirement you are in 25% so many things to consider how much is your ss when do you take it 62 or 70, do you have a pension, you may want to take the traditional withdrawal until you hit the 25% bracket and Roth for the money above 25% bracket so you may want some of both.... love vanguard vti etf
Nate Moyer (1 year ago)
Indian Outlaw How?
Break From The Herd (1 year ago)
I am in a high tax bracket, and so a 401(k) is better for me.
xenoepist (1 year ago)
Only piece of advice from CramerI agree with
S D (2 years ago)
Here is to hoping I am trying to figure out if there is a best way pre or post. I work for the city have a pension and no match plan 401k. I have been putting into both pre and post with pre having more but I can always adjust % down the road to equal them out or not at all. I'm also wondering if creating an IRA in addition would make sense?? my tax bracket will not change while I work or retire due to my pension and passive income. Everyone's goal should be to make more when retired then not through passive income :)! So in my situation which seems different then most what advice could you share and thanks?! I also am not maxing out the 401k yet likely because I cannot afford to at this time and have some cash in bank I wanted to start private brokerage index fund portfolio. Do you advise in combination of my choices I do that or instead invest more into 401ks and start an ira? They will all be purchasing similar mutual funds anyways the diversity will come from the private index funds and liquidy. I'm afraid of putting all my money in places I cannot touch for a long time due to age limits of 59.5 I am only 35 and can retire(if I can afford to) in my 50s.
Heritage Wealth Planning (1 year ago)
Do you know if you will be affected by the Windfall Elimination Provision (WEP) on your Social Security benefits because of your pension? https://www.ssa.gov/planners/retire/wep-chart.html Hugely important to answer this question.
Everett Calhoun (2 years ago)
The only time the 5 year holding period in a Roth IRA is used is when you do a rollover from a traditional IRA or 401k into your Roth IRA. Hope that helps. If I had a do over I would fund both equally till the Traditional IRA and 401k hits about $250,000 then just fund the Roth IRA. Work backwards from 70.5, that the point  where RMDs kick in. You do not want a million dollars in your Traditional IRA.
Everett Calhoun (2 years ago)
I was talking about my own personal experience. Every situation is different. I am now realizing the tax consequences of a tax deferred account as it relates to taxes, RMD and my social security. I tried to keep my AGI while working to not creep into the 25% bracket. Now if you are making a lot more than that a different strategy might be appropriate. I have rolled quite a bit of my IRA into a Roth IRA before applying for S.S. cognizant of the fact that I will be forced to withdraw at 70.5. Al Rocky I hope this addresses your concerns
Al Rocky (2 years ago)
"I would fund both equally till the Traditional IRA and 401k hits about $250,000 then just fund the Roth IRA." What is the rationale for waiting to fund the Roth IRA? Wouldn't it be better to fund it sooner when you're at a lower tax bracket? And why stop funding the 401(k) after reaching $250k??
Jeff Thayer (2 years ago)
making more money off pot than any stock pick in 30 years.....try 13,000 dollars a day !!!!!!!!
Chris Banana (2 years ago)
does the camera man need some pills for his ADHD?
Oswaldo Rabanal (2 years ago)
Great advice
Kevin Bergey (2 years ago)
If the recent 2014 graduate is in the 28% tax bracket, this means one of 2 things: His income is at least $89,351 (single) or $148,851 (married) -- based on 2014 rates. The issue with doing a Traditional IRA, is that he is not eligible for a deduction. In either single or married cases, he is over the phaseout ranges. He can only do the Roth IRA (or do the Backdoor Roth using the Traditional as a conduit to do nondeductible conversions). He could do either one the following: 1) Traditional (& deductible) 401k & a Roth IRA; 2) Roth 401k & a Roth IRA; or 3) some blend of Trad/Roth 401k & a Roth IRA. 2017 phaseout rates (for Deductible Traditional IRAs): Single: $62k-72k Married: $99k-119k
BlingMeRee (2 years ago)
I have a TSP account. Should I put more in the TSP or the ROTH? They match up to 5%?
pat (9 months ago)
Do Both, you have that option with tps
Al Rocky (2 years ago)
If you are military you don't get the match although next year is the start of the new military Blended Retirement plan and military will get a choice if they want a 5% match. If you aim to retire with the full 20 in the military you probably don't want the match. If civilian you get a 5% match that goes toward your traditional TSP account. You should contribute at least 5% in your TSP account (either 5% toward traditional TSP or 5% Roth TSP or any 5% combo thereof) to get the 5% government match. After that you it's your choice to contribute to a Roth IRA or more to your TSP account. You eventually want to max out both your TSP account @ $18,000 a year and an IRA @ $5,500 a year.
Al Rocky (2 years ago)
Jim Cramer says @ 3:25 "Roth ... after 5 years you can withdraw the money you've invested" Google Roth IRA contribution withdrawal without penalty lists: Investopedia: "Roth IRA contributions can be withdrawn at any time tax-free and penalty-free regardless of age." RothIRA: "If you are under 59½, you may withdraw the exact amount of your Roth IRA contributions with no penalties." Schwab: "You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free." Forbes - A. Ebeling: "Roth IRAs...you can withdraw the amount you’ve contributed at any time penalty-free and tax-free." Money.CNN: "You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason." H&R Block: "You've already paid tax on your Roth IRA contributions. So, you can withdraw your regular contributions at any time and at any age with no penalty or tax."
jaime rodarte (1 month ago)
the dollar amount you put into a roth won't ever be taxed regardless of your age or circumstances. But the earnings/growth that the money acquired could be taxed if you're under 59 1/2 and haven't had that roth ira for at least five taxable years. After those 5 years and being 59 1/2, you take the money out and you won't face taxes on anything. I'm doing Roth 401k contributions through my employer and also contributing to a Roth IRA on my own, the conribution limits for both acct types are separate from each other so you can max out both as long as you MAGI allows it.
Al Rocky (1 year ago)
googes, no those earnings from a Roth IRA will not be taxed.
goosecouple (1 year ago)
Nicole Ickes So the earnings from a Roth account will be taxed when withdrawn after 59.5?
Nicole Ickes (1 year ago)
You CAN access your contributions anytime in the ROTH. A really neat feature of the ROTH is that funds come out of the ROTH on a FIFO basis. Should you want to access the earnings without satisfying the 5 year rule and reaching the age of 59.5, then you pay the penalty. I hope this helps.
Dave Smith (2 years ago)
I have my Roth IRA with Vanguard VTI (total stock market) ETF and I reinvest the dividends.
Edge HODL (1 month ago)
Nice, excellent choice sir! You did really well by now!
Texas Owl (3 months ago)
K B if you think this is rude you need to grow up
K B (8 months ago)
I don't understand that rude responses!
2 4 (8 months ago)
why are people bothered by this
passive101 (1 year ago)
Mine is with vanguard in a set date retirement account
Al Rocky (2 years ago)
Gives wrong info @ #:3:25 - "Roth ... after 5 years you can withdraw the money you've invested..." There is no 5 year wait for a penalty free withdrawal of contributions.
John Bowerman (2 months ago)
A Roth 401K has a 5 year wait.
Al Rocky (7 months ago)
gee, Dirt, you can go ahead and google about Roth IRA and Contributions on your own. If you find that you cannot withdraw Roth IRA CONTRIBUTIONS (penalty and tax free) go ahead and post it.
Heritage Wealth Planning (1 year ago)
Nice job, Al.
Matthew Freye (1 year ago)
This whole topic is rather simple to understand. Here are the basics. The money contributed to a ROTH IRA should be post-tax. Meaning, you are contributing money from a paycheck, which has already had income tax levied. Therefore, contributions to a ROTH IRA are already taxed and therefore can be withdrawn tax (i.e., income tax) and penalty free at any time. However, if your contributions have made money (i.e., earnings) then those monies will have income tax levied on them upon withdrawal IF you withdraw the earnings prior to age 59.5. So for example, you contribute $1,000 and it grows to $1,200. You have $1,000 in contributions that can be taken out penalty and tax free at any time at any age. However, the $200 in earnings will be taxed as ordinary income and have a 10% early withdrawal penalty if taken out prior to age 59.5. The five year clause. So, if you reach age 59.5 and contribute $1,000 while you are age 59.5 you can withdraw that $1,000 anytime. As before, let’s assume at 59.5 you contribute $1,000 and it grows to $1,200 and you are age 62 now. Well, those earnings will still be taxed and have penalties applied to them because you have not had your ROTH IRA opened for at least five years. So even though you have reached that “magical” age of 59.5, if you haven’t had the ROTH IRA opened for at least five years, those earnings could see income tax and penalty taxes. I just wrote a book about the basics of investing and this is a topics of a few chapters in my book. Please feel free to check it out and let me know if you have any questions! http://a.co/cXZIkaq
Break From The Herd (1 year ago)
Roth contributions can be withdrawn, penalty free, at any time. That money was already taxed, so there is no reason for the gov't to issue a penalty on it. Thus, many people use a Roth as an emergency fund, though I am not recommending that.
Jesseg0815 (2 years ago)
how much should one be contributing to a Roth IRA a month? any recommendations?
Heritage Wealth Planning (1 year ago)
Yes, you can do BOTH. But remember all your employer contributions to your 401k are going to the pre-tax account. So, consider putting YOUR deferrals into the Roth 401k side that way BOTH sides of the tax plans, the pre-tax and post-tax, have assets in it. Basically, a tax hedge for the future.
Lloyd Hughes (2 years ago)
Love Animals-6 yes...ur correct.
Jesseg0815 (2 years ago)
thanks!
Synapse2k (2 years ago)
Jesseg0815 you can contribute up to 5,500 a year. you can split that up however you want
xiaochicash (2 years ago)
So, where the heck do I go to start shovelling cash into a roth IRA?
Yg Bodybuilder (2 months ago)
@Tom Wallen is Fidelity better?
Tom Wallen (1 year ago)
Vanguard's a great place. It's extremely low cost, it's super easy to set up and account, and setting up a roth is as easy as "Transfer $x into ROTH IRA account".
Nate Moyer (1 year ago)
xiaochicash Vanguard
Al Rocky (2 years ago)
Pick a low cost brokerage or Fidelity or Vanguard. If your company offers a match in their 401(k) plan you want to start there.
Joe Orabona (2 years ago)
Why aren't we taking this kid's age into account? If he's right out of college he's got 30-40 years until retirement. At 8% per year 10,000 would turn into over $140,000 in 35 years. That's $130,000 of tax free growth. That's huge compared to a potential tax benefit of $2,800 today that you'd still have to pay tax on when it's withdrawn during retirement.
Sultan Jahangir (2 years ago)
Joe Orabona Iowa
Al Rocky (2 years ago)
+Joe, no the $13,888 is NOT IRRELEVANT. It can be the "actual money that winds up in his account." He has a choice of either $13,888 in a traditional 401(k) or $10,000 in a Roth 401(k). If you want to make a valid comparison between his options then those are the correct 2 numbers he and you should use. If you insist on your example that means he has an extra $3,888.89 of pre-tax income. He will have 2 different take home pay depending on if he goes traditional or Roth in your unfair example. And what happens if he invests that $3,888.89 in a traditional IRA @ 8% and 35 years? You should only use comparable numbers ($13,888 vs $10,000) if you want to make a valid comparison.
Joe Orabona (2 years ago)
I understand how you came up with the $13,888 number, but it's irrelevant. That's not actual money that winds up in his account. This person is contributing to a plan at work, regardless of what other impacts this has, he's still going to contribute the same amount into the plan no matter which type of plan it is. You should only use how much he contributes to the plan in your calculation.
Al Rocky (2 years ago)
You are still using an unfair and unbalanced comparison: $10,000 in a traditional 401(k) vs $10,000 in a Roth 401(k). The correct comparison is $13,888.89 in a traditional vs $10,000 in a Roth. The 3 online calculators I used all resulted in $147K assuming $10k, 8% and 35 years. And $205k for $13,888. So the question becomes is $205k in a traditional 401(k) better than $147k in a Roth 401(k)?
Joe Orabona (2 years ago)
You're thinking short term, I'm talking long term. We're assuming that he's in the 28% bracket and wants to contribute $10K. If that's the case then his tax benefit "today" is a reduction in his taxable income of 10K. The net result of that 10K deduction at 28% is $2,800. Since it's a traditional account and not a Roth these taxes are just differed. The initial 10K plus the $130K in growth that it will see over the next 35 years will all eventually get taxed. Let's assume that in retirement he finds himself in the 15% tax bracket so this means that he's saving (10K x 28%) $2,800 in taxes now to later pay $21,000 in taxes ($140K x 15%). In the roth scenario he pays $2,800 now and gets $140,000 tax free in retirement.
Financial Hacks (2 years ago)
ROTH is my pick.
Ashley Taylor (5 months ago)
@Break From The Herd what kind of job do you have?
Shane Baumler (1 year ago)
No
Al Rocky (1 year ago)
goose, no the investment gains in a Roth account DO NOT get taxed when withdrawn at retirement. Money invested in a traditional IRA / traditional 401s are not taxed going in but are taxed when withdrawn. The opposite occurs with Roth IRA / Roth 401k - the money is taxed before going in and not taxed when withdrawn at retirement.
goosecouple (1 year ago)
Will the investment gains in a Roth account get taxed when withdrawn during retirement?
Break From The Herd (1 year ago)
A Roth is good if you're in a fairly low tax bracket. For me, a 401(k) is better, as I am in a high tax bracket.
TIB1973 (2 years ago)
Cramer said you can withdraw money, tax and penalty free AFTER 59.5 years of age.  how come everywhere else says "Direct contributions to a Roth IRA (principal) may be withdrawn tax and penalty-free at any time.[3] Earnings may be withdrawn tax and penalty-free after 5 years if the condition of age 59½ (or other qualifying condition) is also met. Rollover, converted (before age 59½) contributions held in a Roth IRA may be withdrawn tax and penalty-free after 5 years. Distributions from a Roth IRA do not increase Adjusted Gross Income. This differs from a traditional IRA, where all withdrawals are taxed as ordinary income, and a penalty applies for withdrawals before age 59½. (Even capital gains on stocks or other securities held in a regular taxable account–so long as they are held for at least a year–are generally treated more advantageously than traditional IRA withdrawals, being taxed not as Ordinary Income, but at the lower Long-Term Capital Gain rate.) This potentially higher tax rate for withdrawals of capital gains from a traditional IRA is a quid pro quo for the deduction taken against ordinary income when putting money into the IRA."Its seems that if I put 2000 in a ROTH IRA and I make 200 off of it, I can still at any point take out the 2000 tax and penalty free but the 200 would be taxed unless I am 59.5 years of age?
Al Rocky (2 years ago)
@ CW. TIB and I were talking about Roth IRA CONTRIBUTIONS. There is no tax and no penalty for withdrawing CONTRIBUTIONS. You're referencing "Gained Income." There is a difference. Go back and ask your brokerage again.
clarence wallace (2 years ago)
wrong, ive checked and he is correct, u will be taxed on gained income . and im with a brokerage and they same the same thing ive called them over your comment
Al Rocky (2 years ago)
Cramer is mistaken. You can withdraw direct Roth IRA contributions without paying any tax or penalty. This is not the first time he's wrong and won't be the last time either. IRS site will direct you to Form 8606, Part III. Assuming Line 22 (Your Contributions) is greater than or equals Line 19 (Your Withdrawal) then you OWE NO TAX.
Quoc Bao (3 years ago)
lol retirement programs are scams. Why do you think the government keeps the interest rate too low for too long? It's to push you to the market. Buy high dividend stock with low forward multiple. You can easily outperform 401k losers WITHOUT waiting to 59 and 1/2. Wallstreet can change the rule any time. THEY OWN CONGRESS, wake up people.
Johnny D (1 year ago)
Quoc Bao you can access half of it without penalty in a loan… yes there is a limit i think up to 50k but that is still better emergency fund while getting company match than having nothing …
lagflag (3 years ago)
+Quoc Bao no no forget about the 30 years, what I am saying is that the employer match (free money) mathematically can be a way higher than the 10% penalty you pay if you want to get your 401K money after a couple of years "your freedom". But why you insist on using the word "freedom" so extensively? You won't go to "jail" if you take out your 401K early! just 10% dude! Could much lower than what you are already paying in the opportunity cost for non-matching!! Example: if employer matches 100% of your first 4% contribution on salary. assuming that you are making 50K a year. that is a $2000/year free money (plus your $2000=$4000). assume you needed that money after 2 years ($balance is $8000 though you only paid only $4000), and that all the money is vested and no gain or loss to simplify. You would pay 10% ($800) penalty, however you already got $4000 free money, so it is like: You paid: $4000 + Free money: $4000 - Penalty: ($800) Net amount to withdraw before taxes: $7200 (Since you are paying taxes anyways so I will not consider it in this example) You paid $4000 over 2 years and cashed out $7200 after penalty! What if you needed the money earlier? Say after 1 year? you would pay $2000 and get out with $3600 after penalty (Thanks to your employer who is doubling your money). How can your model challenge that? Honest advice: Just think about it, read and educate yourself.. Drop the word freedom from your dictionary, you won't go to jail anyways, and you still can take your money anytime. Just do the math..
Quoc Bao (3 years ago)
@lagflag I'm not going to endorse employer's match and give up the freedom I have over the contribution. If you're willing to wait for another 30 years before you can touch that money, feel free to do so.
lagflag (3 years ago)
+Quoc Bao Just correct me if I am wrong, so you prefer to give away your employer contribution (usually it is 50% to 100% on top of what you contribute, "i.e if you buy 100 shares, employer usually buys at least additional 50 to 100 shares for you at no extra cost") + another 15% to 35% in taxes to uncle Sam, just to avoid 10% penalty in case you desperately needed the money? You sure about that? If so, then good luck :)
Matthew Alistair (3 years ago)
Could they decide to tax the Roth later on? That'd obviously be theft but I mean.. could they not decide to just do that?
Me Too (2 months ago)
In theory the govt could do what ever they want...they do it in Ca all the time
murray1575 (2 months ago)
The tax laws could be changed to modify the contribution amount and income limits and reinstate restrictions on conversions which were removed in recent years. However I can't see Congress putting taxes on existing Roth accounts that would not make sense.
Matthew Freye (1 year ago)
Congress could change the laws, sure. Would it be popular? I certainly imagine not so. Plus, the contributions to a ROTH IRA have already had income tax levied on them. It's highly unlikely, in my opinion, but also possible. I just wrote a book on the basics of investing. Feel free to check it out and leave a review or shoot me some questions on here! http://a.co/cXZIkaq
K S (1 year ago)
They can but it would be stealing and a lot of backlash.... I still use a Roth ira
Nate Moyer (1 year ago)
Matthew Alistair No
Joe Dirt (3 years ago)
So what would the penalty be if I cashed out my Roth IRA to pay off my mortgage in 15 years.?????? I will be 48 years old
Al Rocky (1 year ago)
Love Animals-6, "CONTRIBUTIONS" are the deposits you place into your Roth IRA. Your IRA custodian (the place where you have the Roth IRA) sends you Form 5498 (IRA Contribution Information) that in Box 10 shows how much you've contributed for the year. Form 5498 includes the notification that: "This information is furnished to the Internal Revenue Service." To withdraw you simply contact your IRA custodian.
Al Rocky (2 years ago)
If you only withdraw your Roth CONTRIBUTIONS, then you've got nothing to worry about regarding tax or penalty.
ATLFUNKCARTEL (2 years ago)
Joe Dirt that's the dumbest move ever. But the penalty is 10%. Your IRA is exempt from creditors, depending on your state your home may not be.
CBellamy (3 years ago)
I appreciate you Jim!
Rodion Mark (3 years ago)
truly good advice and helpful advice to make it simple for everyone
Chinie Chin Chen 陳小城 (3 years ago)
one of the all time greatest videos
TalesFrom Satan (3 years ago)
this guy is a dumbass and anyone who follows him will inevitably lose all their money
K B (2 years ago)
he could be wrong on stock picks but right on how IRA's work
Stephen O Neill (2 years ago)
That can not be true , if he was not successful then he wouldn't be there, if he loses and then again, and then again he would be gone. How did he get the job in the first place? , common sense.
Missy K Shep (3 years ago)
Louie Louie louie
trkoby (3 years ago)
Keeping money in stock, whether in a IRA or an individual account, during THIS month, is FOOLERY. Everyone is LOSING MONEY right now.
big Holliday (1 year ago)
Daniel Feldman lol
Daniel Feldman (1 year ago)
trkoby how did that work out for you lol
ATLFUNKCARTEL (2 years ago)
If you are investing for your retirement, the horizon of your investments are long term so it doesn't matter.
Nate G01 (2 years ago)
That's why you should invest now, because you can buy stock at a lower price. Buy low, sell high, invest for long term.
Chinie Chin Chen 陳小城 (3 years ago)
+StBernardy i divorced my put when i found it naked in bed with another stock
Curtis H (3 years ago)
"Great Explanation"
Gentry J. Pitts (4 years ago)
I learn more everyone I watch and listen to this guy. He answers my questions and prompts me to ask more. Very informational!!!
Stephen O Neill (2 years ago)
Does he give good advice?.
Monique Jones-Carraway (4 years ago)
i love this guy he is very good
angelatokwok (2 years ago)
Monique Jones-Carraway b
Stephen O Neill (2 years ago)
If he was to tell you to invest in something would you?.