Roth vs. Traditional IRA – Which One Really Saves You More?

Is a Roth IRA really better than a traditional IRA? The truth is... it depends on your tax situation. In this video, you’ll learn why your current tax bracket versus your retirement tax bracket should drive your decision, not blanket advice.

Most retirees pay less in taxes later in life, which creates opportunities for smart strategies like tax arbitrage and Roth conversions. By contributing to traditional accounts during high-earning years and converting in lower-tax years, you can potentially save thousands (even hundreds of thousands) over your lifetime.

James also covers why neither Roth nor traditional accounts are truly tax-free, and how tax diversification gives you flexibility to manage income in retirement. With a real case study, you’ll see how strategic Roth conversions added more than $100,000 to retirement assets.

Listen now to discover how to choose between Roth vs traditional IRAs and optimize your retirement tax planning.

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Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.

The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.

Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements

Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.

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Episode Transcript

Speaker 0 (00:00):
Everyone always tells you Roth accounts are better
than traditional accounts.
Pay taxes today, put money in,let it grow tax-free, and one
day that money comes out to youtax-free in retirement.
There's a beautiful thing aboutthat, but Roth accounts are not
always the best.
There are many cases when thedecision to put money into
pre-tax accounts could save youtens or hundreds of thousands of
dollars compared to putting itinto Roth accounts.

(00:22):
So, roth or traditional, what'sbest for you?
That's exactly what we're gonnaexplore in today's video and
even show you a case study toquantify the difference and show
you how much this couldpossibly save you.
Let's jump into three mythstoday that you commonly hear to
show you what's actually trueand how you can actually apply
this to your specific situation.
Myth number one is that Roth isalways better than traditional.
Here's the actual principle.

(00:43):
You want to put money intopre-tax accounts if taxes today
are higher than they'll be inthe future.
But what does that mean?
Taxes today are higher.
That's where people actuallyget tripped up.
Taxes today being higherdoesn't mean what are federal
tax brackets today?
What are state tax bracketstoday?
That's one component of it, butwhat I'm actually concerned
about is what is your specifictax bracket, which is a function

(01:05):
of two things.
One is general tax brackets asa whole, federal and state level
.
But more importantly, what willyour actual taxable income be?
So often in your working years,all of your income is subject to
the same tax rates.
It's ordinary income.
It's wages.
You're paying full federal andstate taxes on all that income.
But that changes dramaticallyfor most people in retirement.

(01:26):
In retirement, for the mostpart, you have less income
coming in and you can stillmaintain the same lifestyle.
It's maybe because you nolonger have a mortgage, you're
not supporting children, youhave fewer expenses in general
in your retirement years thanyou did in your work years, so
you need less income to stillmaintain the same lifestyle.
That's part one, but part twois the way income is taxed in
retirement tends to be morebeneficial.

(01:49):
Here's just a couple briefexamples of how Social security.
Social security is a coreincome source for many people.
It has favorable tax treatmentcompared to other types of
income.
No more than 85% of your socialsecurity benefit will be
included in what you pay taxeson.
On top of that, most statesdon't actually tax social
security benefit will beincluded in what you pay taxes
on.
On top of that, most statesdon't actually tax social
security at all, even if you'rein a high income tax state, so

(02:10):
check with your specific statethere.
On top of that, a lot of timesin retirement people might be
living on cash or brokerageaccounts.
With cash or brokerage accounts, that's money that you're
pulling out, much of whichyou've already paid taxes on,
and in the case of yourbrokerage account, any money
that you're pulling from thatisn't what you put in.

(02:31):
Those gains.
If they're long-term, capitalgains are going to be taxed at
lower rates than ordinary incomeotherwise would have been.
Now, on top of this, as youturn 65 and older, you have an
increased standard deduction.
So all these factors combinedto say, on average, your taxes
in retirement for the same levelof taxable income in your
pre-retirement years is going tobe lower.
So don't just say I think taxesin the future are going to be
higher.
Therefore I'm going to do a Roth.

(02:51):
Today.
That could be the case, butreally what we're concerned
about is what will your taxbracket be in the future, based
on your taxable income, and howthat compares to overall tax
brackets?
So there's the myth that Rothis always better.
Roth accounts are wonderful,but they're not always better.
Make sure you understand yourtax bracket today and your tax

(03:11):
bracket in the future to makethat decision.
This ties into the second myth,that Roth accounts are tax-free
and traditional accounts arenot.
Neither are tax-free.
The decision comes down to whendo you want to pay your taxes
With a Roth account?
If I put $5,000 into a Rothaccount today, I pay taxes on
that full $5,000.
What I don't pay taxes on isthe growth and the future

(03:32):
withdrawal from that account.
With the traditional account,I'm not paying taxes on that
$5,000 today.
If I put that $5,000 into mytraditional 401k or traditional
IRA, it's saving me taxes today,but when I pull money out of
that account in the future, I'mgoing to be paying taxes on that
.
Here's where people get trippedup, though, on that is they see

(03:52):
that $5,000 example and theysay that only costs you $1,000
in taxes.
Think of how much you're goingto save over the long term.
Here's a better way to thinkabout it.
Assume that the only income youhave this year is $5,000.
You have the decision Rothaccount or traditional account.
And for simple math, let'sassume that you're going to be
in a 20% tax bracket today and a20% tax bracket in the future.
Well, if you make the decisionto go Roth with that, that

(04:15):
$5,000 comes in, $1,000 of it ispaid in taxes.
$4,000 actually gets investedinto your Roth IRA today.
So $4,000, let's assume thatcontinues growing tax-free as it
will, but you pay $1,000 intaxes versus the IRA.
If you put $5,000 into atraditional IRA, there is no
taxes today, so a full $5,000gets invested.

(04:36):
So that's the trueapples-apples comparison.
Now let's assume a growth rateon that.
Let's just assume, for simplemath, your investment grows by
10 times from now until the timethat you need to spend it.
Well, with the Roth, that$4,000 turns to $40,000.
That $40,000 is all completelytax-free to you.
That's a wonderful thing, awonderful account to have.
With the traditional IRA italso grew by 10x, but you have

(05:00):
$5,000 in that, so that $5,000now grows, grows to 50,000.
Well, if I take that full 50,000out in the future, apply a 20%
tax bracket, that means I'mpaying 10,000 of it in taxes and
I end up with $40,000 after tax, the exact same amount as I
would have had with a Roth IRA.
So sure, the taxes I paid werehigher the 10,000 there versus

(05:21):
the 1,000 with the Roth today.
But we have to keep in mindthere's no difference there.
The only difference is when I'mdeciding to pay those taxes.
So, all else being equal, rothand traditional accounts are the
same, but things are not alwaysequal.
There's always going to be adifference in taxes, whether
it's federal taxes, state taxes,medicare taxes, anything like
that.
Those are the details, thenuances that should determine

(05:44):
where your money.
Now let's do one more mythbefore I actually show you a
case study to show you how youcan apply this to save tens or
hundreds of thousands of dollarswith your specific planning.
But the third myth is that youshould choose one or the other.
Typically, people are all in ontraditional or they're all in
on Roth accounts.
The reality is, having bothgives you a tremendous amount of
flexibility in your retirementyears.

(06:04):
And I'll take a step furthernot just traditional accounts
and Roth accounts, but alsobrokerage accounts.
When you go into retirement witha diversification, not just of
the types of investments you own, but where you own them, it
gives you a huge amount offlexibility to determine the
right tax strategy, or to createthe right tax strategy.
Because what people don'trealize is, in retirement, you
get to manufacture whateverlevel of taxable income you want

(06:26):
.
It's not like your workingyears, where if you earn
$100,000, that full $100,000 istaxed.
Well, in retirement, if youhave social security plus
brokerage accounts, plus IRAs,plus Roth IRAs, plus maybe a few
other random things, what youcan do is you get to decide if
I'm trying to create $100,000 ofincome, how do I want to create
it, how much of that might comefrom social security?

(06:47):
How much of that should I pullfrom my traditional IRA versus
my Roth IRA versus my brokerageaccount?
And with some good, seriousplanning, you can create the
lowest possible tax bracketwhile still generating the level
of income that you desire.
Let's take a look at a casestudy to illustrate what I mean
by this.
We're looking at a sampleclient here.
This sample client's name isJohn, and John has about $1.6
million in his investments andwhat you can see is he does have

(07:09):
that diversification of assets.
Most of his money is in his401k, but he has some in a Roth,
he has some in a brokerageaccount, some in I-bonds, cds,
company stock, et cetera.
And what John's trying to do ishe's trying to come up with the
right tax strategy to say bothwhere should I put money today
in terms of IRA versus Roth IRA,and then what should I be doing
in retirement?
And I'm going to show you avery simple breakdown of how he

(07:31):
should be thinking about that.
What we really want to know forJohn is what is his tax bracket
today?
Going back to what I saidbefore, I'm not just concerned
with where our federal taxbracket is today and where do I
think they're going to be in thefuture, because number one,
that's just a guessing game, butnumber two, that's not even the
most relevant point.
The most relevant point iswhere will John's specific
taxable income put him on thosefederal tax brackets?

(07:53):
And as we look at this righthere, john is working and so
he's in a 24% tax bracket today,but when John retires, he's
projected to be in a much lowertax bracket.
He's expected to be in a muchlower tax bracket.
He's expected to be in the 10%to 12% federal tax bracket for a
fairly long time until requireddistributions kick in and those
required distributions areprojected to push him right back
into the tax bracket he's attoday and actually by the end of

(08:16):
his life, he's expected to bein a higher tax bracket at that
point than he is today, notbecause he's all of a sudden
spending way more money, butbecause required distributions
will push him his distributionamount above certain thresholds
and force him to pay that inincome.
So what can John do?
Well, the first thing he can dois he can look at this Now.
This is already based upon awhole lot of planning and

(08:36):
projections and assumptions, sowe have a good map of where we
expect John to be.
But the first piece of feedbackis let's prioritize pre-tax
traditional accounts today.
At a minimum, we can save 24cents on the dollar for any
contributions today, and when wepull that money out a couple of
years later it might only costus 10%.
So, right off the bat, there'sa 14% tax arbitrage opportunity

(08:59):
right there.
So that's the first thing.
But the second thing is this Now, what we can start to look at
is some more serious taxstrategies.
And for John, what we want toknow is how do we not just say
what is your expected taxbracket to be all the way
throughout retirement?
It's, what can we do tocapitalize on that?
And so, once again, what we'relooking at here, what we're

(09:19):
looking at in the purple, isthis is John's taxable income
before any type of tax planningsimply a projection of what will
your various income sourceslook like when we stack those on
top of the 10%, 12%, 22% taxbrackets.
So we can start to get a sensefor where might you be.
But whenever I see this, this isthat tax planning value, or

(09:40):
that tax planning window ofsaying, john, you're in higher
brackets today, you're expectedto be in higher brackets in the
future, in fact, much higherbrackets in the distant future.
What can we do?
What opportunities can we takeadvantage of in these years
right here to manufacture incomeor to pull some of that income
from future years and evencurrent years into that, so that
we can fill up the 10% or fillup the 12% bracket and, in doing

(10:04):
so, lower the tax brackets onthe edges right here.
How do we do that?
Well, in these years morecontributions to pre-tax
accounts.
That's lowering the overall taxliability today because we're
in a 22 to 24% tax bracket.
Same thing in the future.
So this is what we would look atfor John is, if we go through
this and we simply say can wefill up the tax bracket, what

(10:26):
does filling up a tax bracketmean?
It means, when we look at hisprojected taxable income in
these years.
This green line is showingwhat's the threshold for where
he would meet the 12% federalincome tax bracket, meaning he's
created enough income that hehas filled up every dollar that
could be taxed at a 12% federaltax bracket.
We do that by converting justenough from pre-tax accounts to

(10:48):
Roth accounts, so let's see whatthe impact of that is.
So if we run this at the 12%bracket, I want to see what does
that actually do for him.
That decision alone leads to$100,000 plus of tax-adjusted
ending assets.
So don't just look at this astax savings.
As great I saved money.
Look at this.
What else can you do with$100,000 for your retirement?

(11:09):
What would that mean in termsof other trips you could take,
other things you could do withfamily or loved ones, other
legacy amounts that you couldleave behind when you're no
longer here.
That's the power ofunderstanding whether you should
do pre-tax accounts or Rothaccounts today and then turning
that into a tax strategy duringyour retirement years.
Now, by the way, if you'relooking at this and you want to
be able to use this exactsoftware for your needs, you can

(11:31):
get access to it in theRetirement Planning Academy
below, and that academy actuallywalk you through video courses,
not videos that are already onYouTube, but video courses
step-by-step.
How would we think aboutretirement planning at our firm,
root Financial, so that you canapply the same concepts, even
use the same software, with yoursituation?
So get access, go through thismodule, go through this planning
scenario on your own if youwant to.

(11:51):
Access is in the RetirementPlanning Academy.
But when it's all said and done, the decision that you are
making should I use a Rothaccount or a pre-tax account or
a mix of both very much comesdown to a few core things that,
if you get these decisions right, it could be the difference of
tens or hundreds of thousands ofdollars over the course of your
retirement.