Roth IRAs | Finance & Capital Markets | Khan Academy
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- Опубліковано 7 вер 2024
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Introduction to Roth IRA's. Created by Sal Khan.
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Finance and capital markets on Khan Academy: The government apparently wants us to save for retirement (not always obvious because it also wants us to spend as much as possible to pump the economy going into the next election cycle). To encourage this, it has created some ways to save that avoid or defer taxes: IRAs and 401ks.
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Assuming 4x Growth and 32% ordinary income tax
Traditional IRA: $5000 (pre-taxed principal investment) x4 growth = $20,000 - 6,400 tax (32%) = $13,600 at age 59.5
Roth IRA: $5000 - 1600 income tax = $3,400 invested principal x4 growth = $13,600 at age 59.5 tax free
Looks the same to me.
Traditional IRA is better if you belong in a lower tax bracket at retirement. Roth IRA is better if your tax bracket is lower at investment age than retirement.
Even though you can withdraw principle tax free in a Roth, doing so would cut into your growth, which negatively impacts your potential returns.
You seem to know your stuff. May I ask you this: lets say someone makes 150k a year and puts the maximum amount in their traditional IRA every year until the age 60. Assume no inflation or income changes. If this person was to quit his job at age 60 and take out his traditional IRA at 61, thus having no income and pushing himself down to the lowest bracket, which tax bracket would his IRA be subject to?
Dany namou Depends on how much he pulls out. Most likely the lowest tax bracket would apply.
What I take from this is that if there is any possibility of needing the money prior to retirement then go Roth. If you are sure that your tax bracket will be lower (or as insurance that it could be) then take Traditional instead. But if your tax bracket remains the same then there is little benefit in traditional as the penalties for early withdrawal are more severe than with roth...
dude, 3,400 x 2 is 6,800. not 7,800. Messes up everything.
He just picked better investments in the Roth ;P
Bro fools us like never ever
I’m 7 years late. But now I understand. Thank you for providing such information!
one thing I don't like in this video is you make it appear as if you have to pay taxes on money you put into a Roth as soon as you put it in. Roth is after tax dollars, regular IRA is with pretax dollars. You aren't gonna care about taxes on the Roth cause you already paid them in your paycheck before you even got it.
what about the extra earnings you get with your investment?
it's a special kinda account
+Mohammad Moghimi I think they are taxed at a capital gains rate rather than ordinary income. You have to do this in both Roth and Traditional IRAs
+Anthony Sipes i think anthony is right about Roth is after tax dollars. it is unfair to double tax on the money withdraw again .. if this is the correct case. why should we use roth IRA instead of regular investment account.
Mohammad Moghimi Lov'A Alford So I looked it up just to make sure. This is the way that it works:
In a traditional IRA you put your money in tax free and it grows. When you take the money out the original amount is taxed at ordinary income rates and the growth is taxed at capital gains rates.
With a Roth IRA you put your money in AFTER you pay regular income tax but here is what makes the Roth option awesome, when you withdraw your original balance it is not taxed AND the growth you have is also not taxed. So the biggest advantage of a Roth IRA is that you pay only income tax but with a traditional IRA you pay both income and capital gains taxes.
3400x2= 6800x2= 13600 :(
$6,800 :/
I'm just happy Khan has a video on this.
Because of the 7800 mistake, the traditional IRA would give you $15,000 after 60 years and the Roth IRA would give you $13600 after 60 years so the traditional IRA is still better for you in this example.
Conceptually we can think that Traditional IRA is basically a Roth IRA but you can also borrow money from IRS, interest-free, and invest in the account with the money. (You pay back as income tax when withdraw.)
Roth IRA contributions are not tax-deductible. However, eligible distributions are tax-free. This means, you contribute to a Roth IRA with after-tax dollars, but as the account grows, you do not face any taxes on capital gains, and when you retire, you can withdraw from the account without incurring any income taxes on your withdrawals.
nice theory. very helpful to understand the logic clearly. Thanks
Really should take this down and fix it.
Principal. Principal.. Principaaaaaaal....
Thank You! Excellent video.
Thank you for making this video! However there are errors that need to be fixed. My understanding is that the principal should be the same in both cases to start with even if there's tax upfront for Roth IRA, which should be considered separately from the principle. Please correct me if I am wrong.
The end value of Roth IRA only amounts to 13600$ in actual(your final amount is wrong in this video, since you made multiplication errors initially), compared to 15000$ in Traditional IRA. I do not get the point why Roth IRA is better, when the final return are less? Can you please elaborate on that?
Binh Le You're only taxed at the end. Doubling again would turn 20k into 40k - 10k in taxes would leave you at 30k in the traditional compared to 27.2k in the Roth.
If you expect to be in a higher tax bracket in retirement than when you are investing, or if you think you might need to withdraw money for some reason before retirement, then Roth IRA is better.
in this example, if you did stay in the same tax bracket then you would get the exact same money. It really all depends on the tax bracket you end up at and how much earnings you get.
Usually, one's net result with the logic in this video will be of similar earnings between a traditional and a Roth I.R.A. (despite the math errors herein). What is not often enough mentioned is, the Roth will much outweigh the traditional if the initial principal between the two accounts is the same (rather than the Roth's being relatively reduced by taxes).
Ideally people would have both to level out the playing field. The only real advantage 401ks and traditional IRAs have is it's a great way to lower your taxable income and you have to pray taxes will be lower by the time you retire.
Unless your 401k has a company match like mine. With a 401k, it pays to at least match the company match since no rate in the world beats free money.
you missed some key points. you have personal deductions on your traditional tax that was not factored in. You also didn't keep the accounts equal in growth. you went from 3400 to 7800 when it should have gone up to 6800. then you would have only gone up to 13,600 that you could take without taxes. And if you were still in that 32% tax rate, those amounts would be equal. Except for like I said, you have personal deductions and then you pay 10 and 12 % before you get close to the 32%. So again, you missed some key points.
Do some of both.
Hey, can do you a video on "life insurance?" Term vs. Permanent...
So hard to watch after the 7,800. AHHHHH!!! OCD moment.
Roth seems better intuitively, maybe because it feels good to handle costs upfront, but considering inflation will lower the value of money over time it also makes sense to defer payments to the future, but then taking into account that all of the investment gains will be taxed makes it so that some math is involved. I suspect it's a wash that could go either way.
The end balance largely depends on the tax bracket when contributing vs when withdrawing.
It is very likely that taxes will go up in the future, so go with a Roth.
Both are tax-advantaged vehicles. My understanding is that for professionals who will be more valuable when old, they should 1st max out Roth, then Traditional, then taxable. For laborers and artisans who will be earning less when old, they should 1st max out Traditional, then Roth, then taxable.
Not only that, money devalutes in the future, better tax now than latter.
you end up paying taxes on all 401 related dollars (either principal or bonus) anyways. I think traditional IRA sits well with Mr. Mind only if you are sure not to mess with early withdrawals and you are sure to be in lower tax bracket when you retire. Provided in lower tax bracket when you retire, why would you ever get your IRA $s taxed at high tax bracket when you are young.
how investment with IRAs ,I don't understand ? can I put the money and that is ? or need invest
better than traditional?
paulceltics Depends on how you earn your earned income and if you think you will be taxed at a higher tax rate after retirement.
No matter what, when you file tax returns each year, you may qualify for the Retirement Savings Contribution credit. Check the IRS publications on retirement for more details.
I find the most problematic thing is that the Traditional IRA and Traditional 401k have too many limitations on withdraws. It's very tax- and paperwork-intensive when you try with withdraw the money if you are sick, unemployed, want to buy a house, or need money to pay your kids' tuition.
Is it me, or does he always drag the explanation like 5-6 minutes of unnecessary bla bla bla. Straight to the point. I love his knowledge, don’t get me wrong, but he looks like the professor who knows the subject but the class gets bored when he over explains it.
These videos always give me anxiety because I always feel like he's goimg to run out of space on the page
Hahahaha! I thought Roth was short for Rothschild...
Questions if the market is bad
1) If you contributed lets say 2000$, what happens when your balance at the end of the year is 1800$, less than your contributions? Would you only be able to withdraw 1800$ or the full 2000$ that you contributed?
2) Also with the same scenario, will the earnings next year be based on my total contributions of 2000$ or the current balance in the roth IRA of 1800$?
Answers:
1. You would only be able to withdraw the $1800
2. Earnings is based on percentage. Your account value dropped 10% from $2000 to $1800. When it goes back up 10% the account value will only be at $1980. The net % change is -1%. The max amount you can withdraw is 100% of your account value, and it depends on Traditional or Roth if you have to pay taxes and fees at withdrawal.
Why would you not place $5000 in the Roth account? It is already taxed. For his illustration purposes it would have been better to show both of them growing and starting from $5000.
Why... $7800... :( come on.
Does Roth IRA makes sense in California with 9.3% state income tax plus 25% federal tax?
Sure it likely makes sense at the 25% federal tax rate. But if you're hesitant then go traditional IRA. And then move to a no or low tax rate state when you retire.
Wish I could find a video with someone explaining this without putting me to sleep.
Wow, math mistake screws everything up, also logical mistake screws it even more.
Let's say we doubled the money, 10k vs 6.8k.
You need to get 3400, not to withdraw 3400.
So in traditional you have to withdraw
5862.07 this yields you 3400 after .32+.10
Leaving 4137.93 in account to earn interest, while in Roth you get 3400, leaving 3400 earning interest.
Math is wrong. Traditional is better if you never withdrawal.
Well the math in the video is wrong, but traditional is not always better. Roth is better if you expect to have a higher tax rate in retirement as opposed to the tax bracket when you make the contribution.
If you never withdrawal there isn't a point to either IRA..
so everytime I put let's say $100 into my Roth IRA out of my paycheck I have to pay tax on that $100 or since those earnings are already subject to income tax I do not need to pay let's say 32% on that $100 post income tax money I want in my roth?
If you are in the 25% federal tax bracket (making about $40k - $90k), you need $133.33 of income to invest ($133.33 * .75 =) $100 in a Roth IRA. The $100 grows to a hypothetical $5,000 at retirement when you start to withdraw from the Roth IRA. That $5,000 is all tax free.
Al Rocky You're not very clear. You didn't answer the question. Is the income taxed already or not?
Hello EB. You invest pre-taxed (not yet taxed or tax deferred) income into a traditional IRA and post-taxed (already taxed) income into a Roth IRA. At retirement, the Roth money is NOT subject to being taxed again at withdrawal.
Hopefully this answers your question. But if not, go ahead and describe a hypothetical situation and what you think happens and I'll tell you if you're right or wrong.
6800
he clearly did the math wrong. if he did it right. after retirement with the ROTH IRA you would have 13,600 not 15,600. that makes the traditional IRA better after retirement.
could you please change and remake the video.. its tricky and misleading . thank you :)
The numbers don't relate!
$6,800 not $7,800
He already has, look it up. watch?v=uGpLS_pr7oc
Dude you made multiple math errors. The 6800 and when you minus, minus without (bracket) you subtract the second minus from the the first minus.
Why the hell would you feel the need to repeat every other word 3 times just to write it in a board..
LOL. I find it helpful as I'm following along. Your comment did make me laugh out loud.
I guess if you retire in a tax free state it changes things ?
You still have to pay FEDERAL Tax regardless of which state you reside. If you wish to invest in a Roth IRA it's better to reside in a tax free state while you contribute. Moving to a tax free state after you contribute doesn't help you.
worst video ever XD his math is wrong and that makes the difference on the IRA comparison. 3400 x 2 = 6800 not 7800 lol, how did he never notice that. the Roth IRA gives out less money upon retirement in this scenario, if the retiree is in a lower tax bracket XD you don't even need math to figure that out
This is a great video