What is an IRA and how do I pick between a Traditional vs. Roth? (Part 1)
Written By: Nick Nguyen | Read full profile
This post contains affiliate links which means if you click on a link and choose to make a purchase I may receive a commission at no additional cost to you. You are not obligated to do so, but it does help fund these blogs in hopes of bringing value to you! See our disclaimer for more information.
Listen to the audio version of the blog:
The world of finance can get really crazy, and you may fall prey to analysis paralysis because there are so many different retirement types to choose from, so in this specific post, we’re going to focus on the two that are most commonly talked about: the Traditional vs. the Roth IRA.
A few months ago in February, I was going to a friend’s party and because I’m super lame, all I ever talk about is money, assets, and personal finance (if you want to know why, check out my about me page and my 3-part series on how to redefine retirement). I know, I’ve got to come up with better things to talk about, especially with a bunch of people between the ages of 22-35 who mainly want to eat, drink, and be merry, but hey - I’m a 50 year-old in the body of a 24-year old.
Anyways, I was talking up the idea of investing and getting personal finances in order to be set by 30 and one friend was saying how she wanted to open a Roth IRA but didn’t really know enough about it. Ho-ho-ho here was my chance to razzle and dazzle!
She started with the usual line that you’ll see if you google or scour facebook groups on investing and money - “I want to open a Roth because I plan on making more money in the future.”
Now what she said wasn’t wrong, but after spending a solid week looking up everything I could about Roth vs.Traditional and planning out my taxes for the 2019 filing year, I realized that this can actually be a pretty tough decision!
So let me summarize for you the SUPER basics about a Traditional vs. a Roth IRA.
So as you can see, it’s not as clear cut as you’d expect! Pending your income, tax bracket, and financial situation, you may find one more favorable than the other! But honestly, long-term, it doesn’t matter which one you choose because there are *legal* ways to manage your money to turn it into a ‘Roth’ or a ‘Traditional’ form.
But to make it easy for you, if you make less than the 12% income tax bracket, which for 2019 is $39,475 for single filers or $78,950 for married filing jointly, it’s probably best to keep it simple and just go with the Roth IRA. Why? Because taxes*...let’s leave it at that.
Check out Part 2 for a more in-depth situation where taking a bit of time to do some quick math will actually be worth it to decide whether a Roth or a Traditional IRA is right for you.
*Eventually, we’ll start going through different scenarios and anecdotes discussing how to understand and navigate taxes in the most efficient way possible (at least for my particular case) - so stay tuned!
*Nguyening Lifestyles is not a registered financial service provider and does not give financial advice. All information in these posts are for entertainment purposes only. Nguyening Lifestyles is not liable for any actions or outcomes that transpired after your reading of the following post.
Posts mentioned:
6-Figure Salary? TOO BAD! You’re not as rich as you think you are!