The Sugar Daddy Podcast
Ready to normalize talking about money? Then welcome to The Sugar Daddy Podcast. Every episode will get you one step closer to your financial goals. Whether that is learning how to invest, budget, save, retire early or talk about money with your partner, Jess & Brandon have you covered in a way that's easy to understand, and easy to implement. Tune in as they demystify the realm of dollars, so it all makes cents, while giving you a glimpse into their relationship with money and each other.
Brandon is an award-winning, licensed financial planner, and owner of Oak City Financial, with over a decade of experience and millions of dollars managed for his clients all over the United States.
New episodes published every Wednesday.
The Sugar Daddy Podcast
108: Which IRA Is Best for You? Roth vs Traditional Explained Simply
Confused about Roth vs Traditional IRAs? You're not alone.
In this episode, Jess and Brandon break down the pros, cons, and real-world impact of choosing a Roth IRA versus a Traditional IRA for your retirement game plan.
Learn how taxes, income levels, and long-term growth factor into the decision, and why the right choice could save you thousands down the road.
We cover:
– How Roth and Traditional IRAs actually work
– Which one fits different income brackets
– Tax implications now vs later
– Real-life scenarios to help you decide
– Common myths and costly mistakes
Whether you're just getting started or rethinking your retirement strategy, this episode gives you the clarity to move forward with confidence.
Head over to our YouTube channel to catch this episode in full video form.
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Money, relationships, and the mindset to master both. Hosted by financial advisor Brandon and his wife Jess, The Sugar Daddy Podcast breaks down how to build wealth, unpack old money beliefs, and have real conversations about love and finances. Our mission? To help couples and individuals grow rich in every sense of the word: emotionally, relationally and financially.
In today's episode, we're breaking down the differences between traditional and Roth IRAs in plain English. We'll talk about how each one works, the tax benefits, the income limits, and how to figure out which one makes the most sense for you. Because the truth is, choosing the right account today could mean thousands of dollars more in your pocket tomorrow. So whether you're just starting to invest or you've been putting money away for years, stick around. This conversation could change the way you think about your retirement.
SPEAKER_00:Sugar Teddy podcast, yo. Learn how to make them pockets grow. Find mental freedoms for a week, bro. Smart investments, money flow.
SPEAKER_02:Hey babe. What are we talking about today?
SPEAKER_04:Today we are talking about the traditional traditional versus Roth IRA and what it means. And what to do and which one to choose and all the ins and outs.
SPEAKER_02:I do find that a lot of people do get kind of the specifics of each one mixed up. So I think it's definitely important that we're having this conversation so you have a clear idea of what each one is and the pros and cons of each one. So it helps you make a better determination of which one would be best for you to use, or maybe you know, you can utilize both of them.
SPEAKER_04:Okay. Well, why don't we just hop right in? What do you want to talk about first?
SPEAKER_02:Well, first we do want to kind of break it down with the basics, like what is an IRA? What does IRA stand for?
SPEAKER_04:Individual retirement accounts.
SPEAKER_02:Correct.
SPEAKER_04:Ding ding ding ding.
SPEAKER_02:And it's basically a tax advantage um account for retirement savings.
SPEAKER_04:Okay. But it's one that you start by yourself, not typically one that your employer gets you.
SPEAKER_02:Correct. That's the individual part.
SPEAKER_04:Okay.
SPEAKER_02:So the benefit of that is, you know, when you have it as an individual, if you're since it has no association with your employer, when you leave your employer, there's no need to roll it over or anything of that nature because it's your account and it has no attachment to your 401k plan.
SPEAKER_04:So this is also if you're leaving your employer and you don't want to roll your old 401k into a new 401k.
SPEAKER_02:You're jumping ahead.
SPEAKER_04:But I'm just like I'm thinking about things that I've done. This is something that you could then do.
SPEAKER_02:Yes. But let's start with the basics of what it is.
SPEAKER_04:Okay.
SPEAKER_02:All right. So for 2025, the maximum amount that you can contribute to an IRA, whether that be a Roth IRA or a traditional IRA, is$7,000 if you're under the age of 50.
SPEAKER_05:Okay.
SPEAKER_02:Now, the IRS does allow you, if you are 50 years and older, to contribute an additional$1,000. So you have$8,000. You can actually contribute to the account.
SPEAKER_04:Okay. I know people on social media often will say, like, you have to max out your Roth IRA, right? And then the other thing that a lot of people say is they will put the$7,000. Again, considering you're under$50, that our target audience is under$50, that they put the$7,000 into their IRA right at the beginning of the year. So it has the most amount of time to compound. What do you think about that?
SPEAKER_02:Well, first, in all honesty, um, it kind of depends on your situation.
SPEAKER_04:Now if you have it, if you've been planning for it.
SPEAKER_02:Yes. Putting$7,000 into the account at the very beginning of the year is going to allow you to have more time in the market so you have more potential for growth.
SPEAKER_03:Okay.
SPEAKER_02:Now, do I think that you necessarily have to do it that way? No, because you could also um break up the$7,000 over the course of a year, six months, whatever it may be, and do some dollar cost averaging.
SPEAKER_04:$583 a month. I just did it. Because I was like, ooh, what is that? It's$583 a month if you wanted to do it for all 12 months.
SPEAKER_02:Yeah, and like I said, you could do the lump sum of the beginning and invest the entire amount, or you can do dollar cost averaging on a monthly basis. Honestly, I've looked at the data behind both, and there is no conclusion as far as one is necessarily better than the other.
SPEAKER_03:Okay.
SPEAKER_02:So it's kind of up to you as far as what you know works for you. I would say, no, honestly, majority of people don't necessarily have$7,000 to dump in. So the reality is that more than likely it's going to be putting in a little bit each month.
SPEAKER_04:And the reality, reality, is anything's better than nothing.
SPEAKER_02:Oh, 100%.
SPEAKER_04:So even if you can't max it out at the$7,000, if you can do$3,500, a thousand, whatever you can do, do it.
SPEAKER_02:And I would also preface this that first and foremost, I would, you know, even though we're talking about IRAs here, I would focus on at least doing your employer match through your 401k plan first. So if you have like a 4% match at your employer, I would contribute at least 4% there before you start trying to divvy money out to an IRA because you do want to take full advantage of that employer match because it is essentially free money. All right.
SPEAKER_04:Let's get into the most important part of the IRA, which is what you always get so angry about because I feel like social media, like, you know, people are on social media for the clicks and they often leave out a really crucial piece of information when it comes to the IRA. Yes. You want to talk about that?
SPEAKER_02:So the one that I would say that you do hear about somewhat is that there is an income limitation to being able to actually utilize a Roth IRA to uh contributing the normal way.
SPEAKER_03:Okay. What do you mean by that?
SPEAKER_02:Well, once you do actually reach an income as a single individual of$161,000 per year, or if you're married and you're filing jointly, once you have$240,000 worth of annual income, you cannot contribute directly to a Roth IRA. And what I mean by that is that you cannot open a Roth IRA and then put money directly into it.
SPEAKER_04:Okay. Does it is this the Roth part that's the important part, or is it any IRA?
SPEAKER_02:Well, we're talking about the Roth right now. That is important for the Roth. These are the income limitations for a Roth IRA.
SPEAKER_04:Okay.
SPEAKER_02:So once again, once you make a certain past a certain amount of income, you cannot simply open up a Roth IRA and put money directly into it.
SPEAKER_04:What happens if you do?
SPEAKER_02:You'll be penalized.
SPEAKER_04:Okay. All right. So we don't want to be penalized. Correct. I'm assuming what monetarily? Yes. Okay. Yes. All right. So we have to know our income limits in order to contribute to a Roth IRA.
SPEAKER_02:Yes.
SPEAKER_04:Okay.
SPEAKER_02:Now, with a traditional IRA, this is the one that I think a lot of people don't talk about on social media. So I think a lot of people aren't under the impression that there are no income limitations to a traditional IRA. And there are.
SPEAKER_05:Okay.
SPEAKER_02:All right. So to kind of take a step back with the Roth IRA, didn't explain how it works. You're putting money into the Roth IRA that you've already paid taxes on. While the money is sitting in your Roth IRA, you are not paying taxes on any of the growth. And then when you pull it out in a retirement, you're also not taxed on any of the growth. So the main benefit of the Roth IRA is that you don't have to pay taxes on the growth.
SPEAKER_04:That's really nice. And you're hoping, because it's a retirement account, that it's going to sit there for a longer period of time to actually grow. And so if you started with$10,000 or$7,000 and now you have$50,000, you're not being taxed on the$43 that you gained.
SPEAKER_02:Correct.
SPEAKER_04:Okay. Got it.
SPEAKER_02:All right. Now with a traditional IRA, you're putting money into the traditional IRA and you have not been taxed on any of the money that you're putting in. While it's in the account growing, you are not paying any taxes on the growth. However, when you do get to retirement and you start pulling money out of the traditional IRA, you are going to be taxed on the amount that you pull out based upon the current tax brackets during that time.
SPEAKER_04:So that's a little bit more risky then.
SPEAKER_02:What do you mean by risky?
SPEAKER_04:I mean we don't know what the tax brackets will look like by the time I'm ready to pull that money out.
SPEAKER_02:Yes. That's an accurate statement.
SPEAKER_04:Okay.
SPEAKER_02:So one of the draws I would say to a Roth IRA is that you have a little bit more control in regards to you know what taxes are now and you're able to take that out of the equation. So you don't have to worry about paying any type of taxes in the future because you're already paying the taxes now. With a traditional IRA, what you're actually doing is you're not paying taxes now on that money. So it lowers your taxable income for the given year. So for example, if you make$50,000 and you contribute$7,000 to your IRA, instead of being taxed on$50,000 worth of income, you're now going to be taxed on$43,000 worth of income. So instead of, you know, taking the tax break in the future, with it like as you're doing on the Roth IRA, you're taking advantage of that tax break now. All right. Now, with a traditional IRA, kind of getting back to what I said a lot of times is not actually mentioned on social media, is that there are income limitations to actually being able to take advantage of that tax deduction when you contribute to a traditional IRA. So as a single person, once you make more than$87,000 a year, and as a married person filing jointly, once you make more than$143,000, then you can actually not take that tax deduction.
SPEAKER_04:So you can put the money into the account, but you can't lower your taxable income like we just talked about.
SPEAKER_02:And that kind of defeats the purpose.
SPEAKER_04:Right. Because then what does it end up being? Like a savings account almost?
SPEAKER_02:No, it ends up being a non-tax deduction IRA.
SPEAKER_04:Okay. But that is the part that people don't talk about on social because everybody's like, you know, make sure you max out your IRA, max out your IRA. But then like if you're over here making X amount of dollars and you don't actually get the tax advantage, then yeah, like you said, what's the point?
SPEAKER_02:Yeah. And there's also one little caveat that I kind of point out here is that um for the traditional IRA, these income limitations are based upon you having access to some type of workplace retirement account. Whether that's a 401k plan, 403B, they're kind of once you have those in place, this is when these income limitations come into play. But however, if you are employed and you don't have access to a workplace retirement plan, then this doesn't necessarily apply.
SPEAKER_04:Okay. So if I have a 401k through work, then I don't need to worry about an IRA.
SPEAKER_02:That is not what I said at all.
SPEAKER_04:That's what I heard.
SPEAKER_02:If you have a 401k plan through work, what they're saying is that now these income limitations come into play. So let's just say hypothetically you're someone who you're single and you're the only person you're worried about, you're a single individual, and you make$90,000 a year, and you also have access to a workplace 401k plan. You cannot take advantage of traditional IRA deduction.
SPEAKER_04:Oh, why do they do that?
SPEAKER_02:I'm not the IRS. I have no answers for you there.
SPEAKER_04:Okay. But I could do a Roth.
SPEAKER_02:No.
SPEAKER_04:I can't do any IRA.
SPEAKER_02:So oh so let me take a step back. Sorry. You can do a Roth. I apologize. You can't do a Roth. But you just keep jumping back and forth when I'm trying to stay one type of one.
SPEAKER_04:Okay. I'm sorry.
SPEAKER_02:Yes. You can do a Roth though.
SPEAKER_04:Okay.
SPEAKER_02:But you cannot do a traditional IRA and take the tax deduction, which is the main benefit of contributing to the traditional IRA.
SPEAKER_03:Okay.
SPEAKER_02:Does that make sense?
SPEAKER_03:Yes.
SPEAKER_02:Because if you if you have a question, ask me so I can because obviously other people would have the same question.
SPEAKER_04:Well, I'm just making sure most people have access to a 401k, right? Unless you work for yourself. So if I am contributing to my 401k, but I And if you work for yourself, you might have a solo 401k plan. Okay, sure. But I also want to put$7,000 into my IRA or my Roth IRA, I can still do that. Yes.
SPEAKER_02:So the big thing is that you have to make sure that if you have, as a single individual, if you have access to a 401k plan through your employer, you have to make sure one, if you want to contribute to a traditional IRA, that you do not make more than$87,000 a year.
SPEAKER_05:For 2025.
SPEAKER_02:Yes, if you want to contribute to contribute to a traditional IRA IRA. And as a if you want to contribute to a Roth IRA, you just have to make sure that you don't make more than$161,000.
SPEAKER_04:I mean, but out of the two options that you presented, I feel like I would want to utilize the Roth IRA and make sure that I'm not getting taxed on any growth, right?
SPEAKER_02:So, you know, I often think that the Roth IRA can be more beneficial. Now, there also could be depending on your situation and what you're trying to do in a given year. So there are some nuances there. However, I would say that if you're looking at taxes from a historical standpoint for the past 100 years, we are at an all-time low for taxes. And in my mind, I would much rather pay taxes now on, you know, the seed rather than waiting to the future where I believe taxes will go up in the future and then having to pay taxes on the harvest.
SPEAKER_04:So what happens? I put my money into the IRA and then when Which IRA? The Roth IRA. And then I file my taxes. Correct. And then that's where I'm charged my taxes.
SPEAKER_02:Correct.
SPEAKER_04:Where I pay. Yes. Okay.
SPEAKER_02:And the ideal scenario is so, like, for example, with your Roth IRA accounts, you are going to receive with either account, Roth IRA or traditional IRA, because even with the traditional IRA, you're contributing to that, your tax deduction comes at the end of the year.
SPEAKER_03:Okay.
SPEAKER_02:So you are going to receive a tax form from the whatever brokerage that you decide to open the account with, and you file that with your taxes. And that's how the IRS knows, hey, you contributed$7,000 to a Roth IRA or you contributed$7,000 to traditional traditional IRA. And based upon your income, you actually qualify for the benefits of either account.
SPEAKER_04:Okay. Do you have any uh brokers that you prefer for either account?
SPEAKER_02:Well, you well, honestly, first and foremost, I tell individuals, especially if you're doing this yourself, keep it simple for yourself. So for example, if your 401k plan is that fidelity.
SPEAKER_04:Then open another Fidelity.
SPEAKER_02:Open it, open another Fidelity account.
SPEAKER_04:Okay.
SPEAKER_02:It makes it easy from a consolidation standpoint so you don't have accounts at all these different places.
SPEAKER_04:Yeah.
SPEAKER_02:Now for me personally, all of you know, all our accounts were Charles Schwab people.
SPEAKER_04:Charles Schwab. Well, my Fidelity is my 401k is with Fidelity.
SPEAKER_02:But any accounts that we have the option of choosing where we open it, we choose Charles Schwab.
SPEAKER_04:Yeah. Charles Schwab, if you'd like to sponsor the podcast, holla at your girl.
SPEAKER_02:Like I said, if you already have accounts at one, you know, one brokerage, make it easy for yourself and just keep it all in one place.
SPEAKER_04:Yeah. Okay. Um what else do you want to say?
SPEAKER_02:I mean, as far as like the basics, because you kind of jumped around.
SPEAKER_04:Yeah, sorry. You know how my mind works.
SPEAKER_02:That is the basics of like how the difference between the Roth and uh the traditional IRA as far as they how they work, and how you also have to be careful as far as making sure that you're following the rules so that you can actually contribute to them.
SPEAKER_04:Yeah. So Roth IRA pay taxes now, traditional IRA to pay taxes later.
SPEAKER_02:Correct.
SPEAKER_04:I do have a big question since these are retirement accounts. Do we have to wait until a certain age to access our money?
SPEAKER_02:You do well, so with a Roth IRA, since the money that you're putting into it has already been taxed, you do have access to the contributions that you put into a Roth IRA.
SPEAKER_04:So any money I've put in, I can take it.
SPEAKER_02:So let's, you know, just say you've contributed seven thousand dollars to the account, but it has growth on it to eight thousand. You have access to the seven thousand that you put in, but you cannot access the additional one thousand of growth prior to being fifty-nine and a half years old without having without incurring a 10% penalty, potentially.
SPEAKER_04:So I still technically, if I don't want any penalties, have to wait until 59 and a half.
SPEAKER_02:That's not what I said.
SPEAKER_04:Except, I mean, any of the growth. Oh my gosh. Do y'all see what it's like being married to this man? That's not what I said.
SPEAKER_02:You have access to the 7,000 that you put in.
SPEAKER_04:Yeah, okay.
SPEAKER_02:But you don't have access to the additional 1,000 of growth.
SPEAKER_04:Any growth, I need to wait until my retirement age of 59 and a half if I don't want penalties.
SPEAKER_02:Correct.
SPEAKER_04:Now is that for both of the accounts?
SPEAKER_02:No, that's just for a Roth IRA. For a traditional IRA, you cannot access any of the money in there prior to being 59 and a half years old without incurring a 10% penalty. Because you haven't paid taxes on any of it.
SPEAKER_03:Okay. Man. Okay.
SPEAKER_02:Well, that's also why, you know, taking a step back, that's why I always say it's also important to make sure that you have adequate savings. You have an adequate emergency fund because the ideal scenario is that you shouldn't have all this money built up in an IRA or 401k plans and not have money in a savings account as far as a high-while savings account for emergencies. Like if you have two or three hundred thousand dollars in, you know, between IRAs and your 401k plan, but you don't have 10,000 in your savings, that's a problem.
SPEAKER_03:Got it.
SPEAKER_02:We call that a liquidity problem as far as where your money is and how easily you can access it without any penalties.
SPEAKER_04:Well, I'm just thinking, I mean, for you and I, we don't want to wait until 59 and a half to quote unquote retire, right? But if our money is gonna be in these types of accounts, then where else should we be putting our money besides savings?
SPEAKER_02:Okay, so you are jumping to a completely different topic. And that's not what this episode's about.
SPEAKER_04:Okay. I'll let you have that. What else do you want to say about do you dare I ask about the back door?
SPEAKER_02:We will get we can get to that.
SPEAKER_04:Okay.
SPEAKER_02:But as far as like, you know, the breakdown, as far as like the pros and the cons.
SPEAKER_04:Okay, let's go. Brandon wants to talk about the pros and the cons.
SPEAKER_02:I think it's funny. We do uh we do outlines obviously for these episodes. And just never I do it, I do the outline. And just never tends to actually follow the outline.
SPEAKER_04:I listen, I'm giving the people what they want and I'm asking the questions that I think people's like people's minds are popping in the same place as mine is.
SPEAKER_02:So that's how you know this podcast is real and we're not scripted, and we're just going with the flow.
SPEAKER_04:Off the cuff.
SPEAKER_02:But um, as far as with the traditional IRA, uh, once again, we said you're putting in money that you haven't paid taxes on. It stays in the account and it grows and you don't pay taxes on it while it's in the account, and then you pay taxes on it when you pull it out in retirement. All right. So one of the pros of that is that you do have that immediate tax deduction. So it does lower the amount of taxes that you would pay in the year that you were contributing to it.
SPEAKER_03:Okay.
SPEAKER_02:All right. And that can be useful for certain people, but it really depends on your situation. So I'm not going to say it's good or bad. It really depends on your individual situation, to be honest with you. All right. Um, one of the things that we also have to talk about here is that there are there is something called an RMD. Require RMD. Okay. Require minimum distribution. All right. Now, what we're thinking about here is because we are talking about retirement planning. So we have to think about what is our life going to potentially be like when we get to retirement. So an RMD is basically the IRS's way of saying, hey, you have all this money in an account that you haven't paid taxes on. We want you to start pulling some of that money out because we want our money. We want our taxes. All right. So at the age of 73, you have to start paying these RMDs. And it's calculated. I'm not, there's a specific calculation that they do based upon how much money you have in the account and stuff of that nature. But just know that at 73, even if you don't need the money out of that account, the traditional IRA, they are going to require you to start pulling money out. And it's a specific amount that you need to pull out each year based upon that calculation. And if you don't do that, then they will penalize you a hefty penalty on it.
SPEAKER_04:So what I'm hearing is I should pull all my money out at 59 and a half.
SPEAKER_02:That's not what I said again.
SPEAKER_04:Well, I don't want somebody to force me to take my money.
SPEAKER_02:So the re okay, I'm going to address your question. All right. Thank you. So let's just say that you have a million dollars in an IRA by the time you reach 60.
SPEAKER_03:Sure.
SPEAKER_02:All right. If you don't need a million dollars, you don't want to pull a million dollars out of your IRA and pay taxes on that all at one time. Considering, for example, like to say you only needed$100,000 to live off of.$100,000, a million. Two very different tax brackets.
SPEAKER_04:Okay, okay. Valid.
SPEAKER_02:So that's why you wouldn't do that.
SPEAKER_04:Got it. But that makes perfect sense. Thank you for saying that.
SPEAKER_02:But it is something to keep in mind when it comes to the planning aspect. And that's what I say, that's why I also tell people that it's really important to work with a professional when you're starting to do these things because RDs really aren't something on someone's radar. And it could end up being that you know, there are things that we can put in place to help mitigate. You know, I'm not gonna say if you have a substantial amount of money, you're probably not gonna maybe eliminate all of the RMDs, but you can definitely mitigate it. Okay. And that's one of those things that as an individual, when people are kind of DIYing it, it's often not on their radar.
SPEAKER_04:Until you get fined.
SPEAKER_02:Well, well, until you just get to the point and then you're like, oh, I gotta take out this money. I don't want to pay. And what happens with the DIY person is like, I don't need this money, I don't want to pay taxes on it. Sorry. That's just the way the IRS works.
SPEAKER_03:Got it.
SPEAKER_02:All right. Now, moving on to the Roth IRA, one of the benefits here is that you are now paying taxes on the money that's going into the account. So you don't have to worry about paying taxes later because the money goes into the account after you've already paid taxes on it. While it's in the account, it grows without paying taxes. And then when you pull it out, you don't have to pay taxes on any of the growth. So that is a huge benefit, you know. Now, granted, one of the cons of that is that you're not getting a tax deduction today.
SPEAKER_05:Right.
SPEAKER_02:But in all honesty, you have to kind of weigh out your own personal situation. Does it make is it more of a benefit to have a you know tax deduction now or in the future? Now, one of the reasons that sometimes you may hear, like, hey, go ahead and take your tax deduction today, because you'll actually be in a lower tax bracket in the future and they pay less taxes in the future, is a common thing that you'll hear. I don't know if that's true.
SPEAKER_04:Yeah, we don't live in the future.
SPEAKER_02:Yeah, so we're also or also we're in a historically low tax environment. So I don't think that we can continue in this low tax environment and you know, without adding more, obviously, to the national debt of the US.
SPEAKER_03:Right.
SPEAKER_02:So I think things are going up to change. You are going to see taxes go up and kind of give you a frame of reference, you know, like in the like 50s and stuff like that, 40s and 50s, you know, the highest like marginal tax bracket was like in the 90s.
SPEAKER_04:That's insane.
SPEAKER_02:But I mean, like, that's the marginal tax bracket. So you're making that only a certain portion of wealthy people's income is taxed at that amount. But that just lets you know that like right now, the highest tax bracket is 37%.
SPEAKER_03:Right.
SPEAKER_02:Huge difference.
SPEAKER_03:Big.
SPEAKER_02:So, like I said, I prefer to, whenever I'm doing whenever I'm doing planning with a client or with our own money, if there's things that I can control, I want to control as much as possible because so much of planning is the unknown because it's in the future and we don't know what's going to happen. We don't know how things are going to change. But if I have something that I can control, I like that. And so I really prefer the Roth. So I like utilizing that aspect because I can I know today exactly what taxes I'm going to pay, and I could take that part off the table.
SPEAKER_05:Yeah.
SPEAKER_02:Now, one of the benefits with the Roth IRA is that we were talking about with the RMDs to require minimum distributions for a traditional IRA. That doesn't exist for a Roth IRA because you've already paid taxes on the amount going in and you're not taxed on any of it coming out. So the government's gotten all the taxes that they're going to get from that account.
SPEAKER_04:I just had a question.
SPEAKER_02:Okay.
SPEAKER_04:Can I have a Roth and a traditional IRA?
SPEAKER_02:You can. Now the thing is that you only have the maximum contribution amount of$7,000 for the year. That could be$7,000 into the Roth IRA and zero into the traditional.
SPEAKER_04:Oh, it's$7,000 total. Total. Total. Regardless.
SPEAKER_02:So you could do$7,000 into one account and zero into the other. You could do$3,500 into each, but between the two accounts, you cannot contribute more than$7,000 in total.
SPEAKER_04:Oh, interesting. Okay. All right. So I guess the same pros and cons then apply no matter how you split up the$7,000.
SPEAKER_02:Correct. And like I said, um, one of the cons, obviously, with the Roth IRA is that it does have income limitations. But now we can't talk about there are ways to get around that.
SPEAKER_04:Ooh, okay.
SPEAKER_02:All right. So we can talk about it. One of the things that you mentioned was a backdoor Roth. And before I even go into this, why does this backdoor Roth option exist? I don't know. I don't know why they do it this way. But basically what it is is that once you reach that, you know, max once you have make more than that maximum income limit to contribute directly to the Roth IRA, you have to do an extra step. So the extra step is that you would have a traditional IRA opened up. So let's just say we're contributing$100 a month. You put$100 into the traditional IRA. You don't invest it though. Don't invest in the traditional IRA. What you'll immediately do is then convert from the traditional IRA that$100 to the Roth IRA.
SPEAKER_03:Okay.
SPEAKER_02:All right. So it's going from your bank account to the traditional IRA, convert it to the Roth IRA, and then you can invest it in the Roth IRA. And what you'll do at the end of the year is that you'll have to pay the taxes on the$100 that you can you converted. So what's the benefit of doing that instead of just that's the same thing as a well, it's the that's the only way if you want to utilize a Roth IRA. So it's the same, it's gonna be the same benefit. Because you've already paid that$100 once you're because like I said, you're gonna be taxed on at the end of the year. So you're putting money in that you've already paid taxes on. The IRS just makes you do one extra step if you make a certain amount of money.
SPEAKER_04:But you still can't contribute more than the$7,000.
SPEAKER_02:No, everybody, no matter how much money you make,$7,000 is the is the max for the backdoor Roth IRA.
SPEAKER_04:Okay. Interesting.
SPEAKER_02:Why is that interesting? That's your brain going.
SPEAKER_04:I know, but I don't want to confuse the people.
SPEAKER_02:It's okay. Ask the question because it might be the same question that they have.
SPEAKER_04:Well, so I'm I'm trying to make sure that I understand that the reason you do the back door is because you are exceeding the income limit for the Roth.
SPEAKER_02:That's the only reason you do the backdoor.
SPEAKER_04:Okay.
SPEAKER_02:That's what a backdoor Roth is for. The purpose of the backdoor Roth is for people who make too much money to contribute directly to the Roth. To a Roth IRA.
SPEAKER_04:Got it. So then they open the traditional.
SPEAKER_02:And you have one extra step to do.
SPEAKER_04:And then they move the money. Okay.
SPEAKER_02:And why does that why do you have to do that? I don't have a reason for you. I have no idea.
SPEAKER_04:Okay.
SPEAKER_02:I think I unless they don't even I don't know.
SPEAKER_04:Well, people make it sound so complicated, but it really doesn't.
SPEAKER_02:Um, well, here's the thing is that people can mess it up.
SPEAKER_04:Okay. What part would they mess up?
SPEAKER_02:All right. So what I've seen people do is that they sometimes forget that they contributed the money to the traditional. Oh, and then so it comes to the end of the year, they actually didn't do the conversion.
unknown:Okay.
SPEAKER_02:So they just didn't do it. So now you have um a certain amount of money, you you have like, say, you max it out. You have$7,000 sitting in a traditional IRA that more than likely you didn't invest. But then also you can't even take the deduction because you pro if you're doing a backdoor Roth IRA, you make too much money to even take the deduction of a traditional IRA. Um, another one I've seen is that unfortunately sometimes people get confused and they invested in the traditional IRA, and now they have growth on that. And then just make a long story short, now you have a bunch of issues in regards to trying to convert that over and making sure that you're doing everything right to satisfy the IRS's um, from the IRS's view, paying taxes on things. The most clean way is to contribute the money to the traditional IRA and immediately convert it over to the Roth and then invest it on the Roth side.
SPEAKER_04:Okay.
SPEAKER_02:All right.
SPEAKER_04:Okay. What what else do you want to say about these?
SPEAKER_02:Um well do you have any questions? Because like I know how it it can be difficult to understand at some point. And I feel like you have a much better, you know.
SPEAKER_04:No, I think Roth, I pay the taxes now and not on the growth. Traditional, I pay the taxes later. They're both retirement accounts. So I need to wait until 59 and a half to access all the money, but I can access anything that I've contributed ahead of my 59 and a half. So it seems pretty basic.
SPEAKER_02:So for those people out there, how do you decide which one is for you? And I'm gonna kind of like stray from like the rule of thumb. I'm gonna tell you what the rule of thumb is, but then I'm gonna explain to you why I don't think that you should always follow the rule of thumb. So the normal rule of thumb is that if you are in a higher, if you have a higher income, go ahead and um you're in a higher tax bracket, go ahead and actually do the traditional IRA.
SPEAKER_04:At which point in the tax bracket.
SPEAKER_02:But the funny part is that which tax bracket.
SPEAKER_04:Like if you're in which tax bracket would you recommend that the traditional?
SPEAKER_02:So the funny part is that like the funny part is that that's a rule of thumb when it comes to just pre-tax money. But it doesn't even necessarily apply to the IRA because you can't even take the deduction once you have a high income.
SPEAKER_04:Yeah. Hmm. Fishy, fishy.
SPEAKER_02:And then you have the other the opposite is that when you're a Roth, like if you're in a lower income tax bracket, then go ahead and pay the taxes now because more than likely, even in years later on into the future when you're still in your working years, you'll be in a higher tax bracket, and maybe you don't want to do it then, because once again, you're falling into that same rule of thumb that they use for the traditional. Now, I'm gonna also elaborate on this kind of to the 401k plan for a moment, only because that has no income limitations. All right. So some the rule of thumb being like, you know, if you're in a high income, so let's just say you're in the highest tax bracket, let's say you make$500,000 a year. All right. Um may believe that you should do traditional, the pre-tax because it lowers your taxable income.
SPEAKER_03:Okay.
SPEAKER_02:So you you don't have to pay taxes for it then. But the idea is that when you're in retirement, that you'll probably be taking in less money.
SPEAKER_03:Right.
SPEAKER_02:All right. So in retirement, you'd pay less taxes because you're making less money. I honestly don't think that's the case for our generation. I honestly believe that, you know, like I said, I'm 42, you're 40. I think if you're making$500,000 right now and that's what your family's really living off of, I find it hard to believe that you're not going to be living off of$500,000 20 years from now. Especially given, you know, how Tax brackets and might cost of living, yeah, stuff of that nature. So I I don't necessarily think that's the case.
SPEAKER_04:Well, because people are saying, like, oh, you usually need less in retirement, right? Because like your kids are out of the house, you're not paying for extra.
SPEAKER_02:Historically. So all that conversation is based off of previous generations. Previous generations. We are seeing, you know, people not nearly as many people are owning homes. So the idea of like, hey, my mortgage is going to be paid off and I have to worry about it. You might still have rent because you have a lot more people renting now because the housing prices are ridiculous.
SPEAKER_03:Yeah.
SPEAKER_02:So you got to take into account a lot of things. Like we're in a really weird time frame because a lot of the, you know, kind of the tried and tested truths of the previous generations don't apply. Aren't going to apply to us.
SPEAKER_04:Well, great. So like I'm we need a lot of money in retirement, is what I'm hearing.
SPEAKER_02:For me, once again, I like to everything that I can control, I want to control that. So I know what my tax um um obligation is today, I'm going to take care of that. So I don't have to worry about it in the future.
SPEAKER_03:Right.
SPEAKER_02:And you like I said, with the 401k plans, um, a lot of people now with 401k plans do have access to Roth within their 401k plans, and there's no income income limitations there. So these income limitations that exist for IRAs, Roth and traditional, do not exist at all when it comes to your 401k plan. So if you make a lot of money and you normally can't contribute to a Roth IRA and you don't want to have to worry about maybe the extra step of the uh backdoor Roth IRA, use Roth 401k contributions.
SPEAKER_03:Okay.
SPEAKER_02:All right. And then also I'm gonna like give like one more extreme. I know this is an extreme scenario, and like all of us wish that we could be in the scenario, but I do have clients that make a lot of money. You know, I have a client that makes over$800,000 a year. And even if you cut his income in half, he's still gonna be the highest tax bracket.
SPEAKER_05:Yeah.
SPEAKER_02:So it doesn't even make sense for him to try to even like it doesn't make sense to save money now. Like go ahead and take care of the taxes because you're just gonna have a larger tax obligation in the future, also, because now you're paying taxes on the contributions and the growth.
SPEAKER_03:Yeah.
SPEAKER_02:So I was like, like you really gotta like, I honestly believe like if you're working, if you're like around our age, 100% there are advisors that are older, you know, 60s, maybe even 70s, that can think this way. Because I listen to them, I know some you know resources where there's people that are older and they're thinking this way because things are changing for our generation and it's not gonna be the same as it was for our parents and our grandparents. But there can be a benefit to working with an advisor that's closer to your age. Reason being is that they have a better understanding of exactly what you're going through as an individual and how you're going to plan for the future that is very different than how your parents or your grandparents had a had a plan.
SPEAKER_04:Mm-hmm. Yeah, our parents and grandparents who have pensions after working at the same job for 30 years and all the things. Yeah. Okay. Well, I think I'm gonna stick with Team Roth. Um, but y'all do you, you know, you do you, boo. I'm gonna do me, I'm gonna do the Roth.
SPEAKER_02:Yeah, like I said, there are scenarios where it 100% makes you know sense to do, you know, if you make a certain amount of money to do the traditional IRA over the Roth, but it really depends on your specific situation. You really gotta look at one, like what are you trying to achieve in a given year, and also take into account the entire planning that you're doing for the future.
SPEAKER_04:Okay.
SPEAKER_02:Well Oh, I do want to point out one more thing that we were talking about, and you know, far from a planning standpoint, one of the things that's the benefit also, once again of the Roth IRA, is that you do have access to the uh contributions, the principal that you put in. And that could be beneficial for people who want to retire before 59 and a half years old. Because if you're wanting to retire early, but all your money's going into a pre-tax for a tradition for a pre-tax for a 401k plan, and then you know you have uh traditional IRAs, I hate to tell you, you're gonna you could run into some problems. Now, there are some other things that you can, you know, kind of do to help mitigate some of those things, and that's not the focus of this episode, but overall, you would be you would it would benefit you to start to build a bucket that you can ask access prior to 59 and a half without any issues and not have to worry about penalties on that bucket.
SPEAKER_04:Yeah, I want all my money.
SPEAKER_02:Well, yeah.
SPEAKER_04:As quickly as possible, please. Thank you. Okay, great. Hopefully this was helpful. Um, if you do want to dive into your 401k options as well, since you did touch on that, we will link our episode that was all about 401ks and making sure that that's set up properly because as Brandon stated, you have Roth pre-tax and after tax options. Those are not the same, it's three different options. So we detail that in that episode. So dive in there. Uh, but hopefully this was helpful in helping you understand the Roth and traditional IRAs. Share with a friend and then go check your stuff so that you can actually see where you're putting your money and making sure that you're following the rules. Cause I don't know about you, but orange is not my color. So all right, we'll talk to y'all soon. Don't forget, Benjamin Franklin said an investment in knowledge pays the best interest. You just got paid. Until next time.
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