0:00:00 - Speaker 1
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Securities offered through registered representatives of Cambridge Investment Research Inc. A broker-dealer member, finra, sipc Advisory services through Cambridge Investment Research Advisors Inc. A registered investment advisor Cambridge and Greenway Wealth Advisory are not affiliated.

0:00:20 - Speaker 2
It's time to dive into some insider secrets of investing and retirement planning to make your retirement as smart and as elegant as possible. This is Money Chic with Sherry Rash. Hey, welcome into another edition of Money Chic. Thanks for tuning into the podcast with Sherry Rash and myself. As we're talking investing, finance and retirement, and on this week's edition we're going to talk about traditional versus Roth A lot of questions around this and so hopefully you will find this useful, get a couple useful nuggets of information and if you have questions along the way, you should always check with a qualified professional like Sherry from Greenway Wealth Advisory. You can find her online at GreenwayWealthAdvisorycom. And don't forget to hit the subscribe button on the Apple, google, spotify, whatever platform you like to use, so you can get new episodes of the podcast as they come out, as well as check out past ones.

0:01:08 - Speaker 3
Sherry, how you doing, doing great, how are you?

0:01:10 - Speaker 2
Doing pretty good hanging in there, looking forward to today's conversation. It might seem like a simple chat about this because it's been around a while. These things have been there, we all know these terms, but a lot of times people don't really understand the differences and some of the little nuances to it. So I thought it'd be a nice simple way to kind of go through this conversation this week with you and see if we can help folks get a clearer picture of whether they should be contributing to a traditional IRA or to a Roth and some of the options that are available for folks. There's been a lot of conversation around Roth over the last couple of years, really, with tax rates being what they are, and we'll get into that in just a second. So first do me a favor and just kind of explain the differences of the two types of accounts to folks.

0:01:54 - Speaker 3
So IRAs traditional IRAs that's what everyone generally thinks of when they think of retirement money. It's pre-tax money, meaning you've never paid taxes on this money before the money. Once it enters your IRA and it can be invested in different types of investments, it grows tax deferred, meaning as the account is growing and getting larger, you are not paying taxes on that money yet you only pay taxes on the money you withdraw. So once you're in retirement you want to start taking income from your IRA, you make a withdrawal from that. You pay taxes on that money that you withdraw. The other assets stay in the account and continue to grow tax deferred. Another difference there's not as much liquidity with IRAs If you make a withdrawal because, again, this is an individual retirement account. The intention is for it to be used in retirement. So if you were to make a withdrawal prior to age 59.5, not only would you pay taxes on it, you'd also pay a 10% penalty.

0:03:00 - Speaker 2
Okay, so those are some of the simple differences, the quick differences between the traditional versus the Roth. The traditional has been around for a very long time. The Roth's been around since 97. A lot of folks don't realize that it was part of the Taxpayer Relief Act of 1997 and its name for Senator William Roth. I guess he must have brought that up. And so why do you think we spend so much time with the traditional? Just because it's been around longer and that's kind of the tried and true, or what's your thoughts there?

0:03:26 - Speaker 3
I think so and I think that it's not talked about that much. If you were to do research on your own, it may be hard to understand the differences between the two, because there is a lot similar. But the biggest difference with a Roth IRA versus a traditional IRA is that the Roth IRA you fund it with after tax money, so money you've already paid taxes on, but like an IRA it grows tax deferred. But the best part of a Roth IRA is, once you make withdrawals, you do not pay taxes on that money, assuming you follow the rules of the withdrawals and you don't withdraw it prior to age 59 and a half. But if you make a withdrawal at 65, you're not paying taxes on that money, which is a very powerful thing to have in your portfolio.

0:04:16 - Speaker 2
Yeah, and really that was my next question was going to be why can a Roth be so powerful? And you kind of touched on that, so we'll expand on this a little bit more. And, as I mentioned, people have been more interested in converting to Roth, so I'm going to have you explain that a little bit as well and just utilizing those because no-transcript, the tax environment to me that seems to be the big ticket over the last little bit. We know it's the devil that we know right. We know what our tax rate would be now if we're paying the, the taxes on the money going in like a Roth, versus waiting to pay it when it comes out later with a traditional and who knows what the tax rates might be.

0:04:49 - Speaker 3
Right, and I think that one of the hesitations people have with contributing to a Roth is that you're funding it with after tax money, meaning you have to pay the taxes right now, where people like to defer and not pay the taxes now. But we're in a low tax environment right now, so it could make sense for a person to pay the taxes now. Swallow that pill, suck it up and do it knowing that it can grow and be potentially withdrawn tax free in the future.

0:05:23 - Speaker 2
Yeah, let's say you're in the 22% tax bracket. Now, right, you're paying that going in. Versus let's hypothetically you know all the spending we're doing taxes go up on that. Certainly on the possible radar. Now you might be in the 25 or 28 or maybe 30, right? So when you're taking it out and you've got to pay that money later on, 30 years from now, let's say, right, so that's the idea. And have you had a lot of folks asking you about conversions and kind of tell us what the conversion is too as well? Kind of explain that for listeners.

0:05:51 - Speaker 3
Yeah, so conversion. So, first, not everyone can contribute to a Roth IRA. If you make too much money, you can't contribute to a Roth IRA. And too much money is defined as, right now, $125,000 for a single person, $198,000 for a spousal couple. So if you make more than that, you cannot write a check and say this is my 2021 Roth IRA contribution.

So what some folks do is they, if they make more than that 125 or 198, they want to have the benefits of the Roth because of the max advantages, but they can't contribute to it. So what they would do is called a Roth conversion. So what that is, it's taking your IRA money that you have, or your contribution, and you're contributing to the IRA and then you essentially convert it. So I always think of it. The money goes from the left hand to the right hand, so you're not withdrawing anything.

Nothing's coming out of any of the counts. It's flipping a switch. It's going from an IRA to a Roth and with that there are some taxes that you have to account for. So really working with your advisor in your CPA is the best thing to do when talking about a Roth conversion or thinking about a Roth conversion to see if it makes sense for you, but it could make sense for a lot of people because you're getting that tax free money in retirement. So again you're paying the taxes now for the potential of having no tax liability on that money in the future.

0:07:26 - Speaker 2
Yeah, and another component that a lot of times people think about when you're talking about this is especially conversions is you don't want to do it all at one time because it could knock you into a higher tax bracket. So you definitely want to make sure that you're talking with your financial advisor, your CPA, and you're working with a financial team to help you do this efficiently so that you don't kick yourself into a higher tax bracket. Another different sharing in these two is the fact that you will have an RMD with a traditional later on and you will not with a Roth.

0:07:56 - Speaker 3
Yeah, so the RMD required minimum distribution. It used to be at age 70 and a half, and last year the required minimum distribution age was increased to 72. And required minimum distributions is exactly what it's called a required minimum distribution. So you have to take money from your IRA each and every year and if you think about why, the government's pretty much saying hey, mark, we let you have this IRA for all of these years. You haven't paid a single dollar in taxes on it for 30 years. It's time for us to get our money back.

0:08:35 - Speaker 2
And we've waited long enough. Exactly.

0:08:37 - Speaker 3
Exactly, exactly. So. There's a calculation based on your age and it tells you how much you have to withdraw from your IRA each year. So that now occurs at 72. And I've had lots of conversations with clients, one not understanding what this distribution is, not wanting to take it, I don't need it, I don't want this money. Well, you have to, you have to take it. Or, conversely, if they don't know about it at all, if you're doing it yourself or not working with an advisor, if you don't take the required minimum distribution, you also have to pay a penalty.

0:09:13 - Speaker 2
And it's hefty. Yeah, it is, it is, yeah, it is a big five zero, it's 50% correct.

0:09:19 - Speaker 3
Exactly yes.

0:09:21 - Speaker 2
And then you're still paying and you're paying the taxes as well. So it behooves you to definitely do your RMDs. And yeah, they did make that change with the Secure Act. They moved it to 72. And there's been some changes as well to the elimination of the stretch and how that's going to affect some things the stretch, IRA and we'll get into that on another show, but there'll be a lot of other things for us to talk about in that arena.

Right now We'll just kind of keep it between the traditional versus the Roth. So I think that's a lot of the major points of these two different types of accounts. You mentioned the amounts of somebody making a certain amount of money they may not qualify. They make too much to do a Roth. If somebody just kind of walks in for the first time, can you give us an example of who would be good for a Roth I suppose is the way I want to look at it versus a traditional? Give us one of each, because I hear a lot of people saying, a lot of advisors saying, Roths are great for younger folks, maybe not so good for folks that are closer to retirement. Can you expand on that a little bit?

0:10:14 - Speaker 3
Yeah, I'm just starting with someone and they are below the income requirements Again 125,000 for a single person, 198,000 for spousal. I'm encouraging them to contribute to a Roth, and not even talking much about the traditional IRA, because, in my opinion, contribute to the Roth for as long as you can do it for and then if you're over the income, we can look at the traditional IRA or potentially a conversion. Again, that's a bigger conversation to have with the CPA, but you brought up the point earlier with your income and what tax bracket you can be in. And so part of the conversation of should I contribute to a Roth or a traditional? Well, what do you expect your income to be in retirement?

That's a hard question. But also, if your income could be the same today as it will be in retirement, you could be in a higher tax bracket. So just because your income is the same doesn't mean the taxes are going to be the same. So if you expect your taxes to be higher in the future, go with the Roth. If you think your taxes will be lower, contribute to the traditional IRA, get the tax savings today while you're hopefully in a lower tax bracket. But again, it's a crystal ball conversation. So my rule of thumb is if you can contribute to the Roth, do it, and if not, contribute to the traditional IRA and we'll figure out conversion options, if applicable, later on.

0:11:44 - Speaker 2
Okay, when do you fall on the age thing? Is there an age kind of cutoff that makes sense for one versus another, or is it truly just an individual situation?

0:11:53 - Speaker 3
Rule of thumb is, in order to get the power of the Roth IRA because, remember, you're paying taxes on the money now and then it's growing tax deferred and being withdrawn tax free you need at least five years to really feel the power of that. Otherwise, if you're opening up a Roth today or contributing to a Roth today and you're retiring tomorrow and expecting to withdraw that money, you're not going to feel the benefit of it. So you know, usually five years five years prior to when you plan on accessing that money is usually the cutoff that I recommend stopping the Roth IRA contributions.

0:12:28 - Speaker 2
Okay, that's good to know, certainly. So there's a lot of little pieces and and caveats of these different things that you want to make sure that you're having these conversations around and really share. That's what it comes back to working with a money coach, right? Working with someone like yourself so that you can get the proper information for what you need and the best strategy. And it's not just. You know, I got my job and I've got my 401k and they gave me a traditional IRA or I converted it or whatever. You know it's like finding the right.

There's so many financial vehicles out there and under. You know, we don't all have to know, like, how the car operates right. I mean, we don't have to know how the internal combustion engine works, but we all want to know how the vehicle drives right, so how we can get in there and just basically operate the thing. And a lot of times I think that's what happens with folks when it comes to planning for retirement. We have so many financial vehicles at our disposal and it's overwhelming to think, well, I don't want to know all the nuts and bolts of all of these things. So I think just having a decent knowledge base and then working with a professional. That's where the synergy happens.

0:13:27 - Speaker 3
That's right. Know how to drive the vehicle, but then have a trusted mechanic If you have an issue or have a question.

0:13:32 - Speaker 2
You did that much easier than I was trying to do. Thank you, yes, I think that's a great way of putting that. So anything else that we might want to touch on with traditional versus Roth before we wrap up this week I think we just might have forgotten to mention that Roth's do not have required minimum distributions.

Right, correct, yeah, which is a nice benefit as well. And of course, like we talked about the traditionals, there's a hefty penalty if you don't take them. You do have to take them, so that's another little perk that can be in that situation. So everybody's different. If you've got some questions about traditional versus Roth, or if maybe you're contributing to both, a lot of people do have both and they want to figure out the best way to continue moving forward, whether it's, like we said, whether you do some conversions or not, from traditional to Roth. A lot of different pieces.

So if you have questions, as always, please check with a qualified professional before you take any action on anything you hear on our show or any other, and you can reach out to Sherry at 703-255-2808. That's her number, 703-255-2808. Or you can also stop by the website GreenwayWealthAdvisorycom. That's Greenway WealthAdvisorycom. And don't forget to hit the subscribe button on Apple, google, spotify or whatever platform you like to use for your podcasting needs. Money Chic is the name of the show. You can type that in the search box and, again, you can find all of that information at Sherry's website, greenwaywealthadvisorycom. Sherry, thanks for hanging out with me this week. I always appreciate talking with you and look forward to our next upcoming chat.

0:14:53 - Speaker 3
Thank you.

0:14:54 - Speaker 2
We'll see you next time right here on Money Chic with Sherry Rash from GreenwayWealthAdvisorycom.

0:15:05 - Speaker 1
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Security is offered through registered representatives of Cambridge Investment Research Inc. A broker-dealer member, finra SIPC advisory services through Cambridge Investment Research Advisors Inc. A registered investment advisor. Cambridge and Greenway Wealth Advisory are not affiliated.