Roth IRA: A No-Brainer for Younger Investors?
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What is the main topic discussed in this episode?
This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whalen in New York. Ah, to be 20 again. The Roth IRA turned the sprightly age of 20 this month. And while that might seem like a footnote in coverage of the financial industry, it's a good opportunity to refresh our knowledge of Roth and other types of IRAs and why a Roth IRA might be a good opportunity to for younger investors, including those in their 20s. Ed Slott is a CPA and founder of IRAhelp.com, and he joins us to discuss. So, Ed, let's start with the difference between a Roth IRA and a regular IRA.
Yeah, they're mirror opposites. With a Roth IRA, the key is the income in retirement is tax-free. That's a big deal. With an IRA, it's tax-deferred. That's a big difference, tax-deferred versus tax-free. Tax deferred means you won't pay tax on that money yet, but you will when you take it out. With a Roth IRA, it's tax-free. You'll never pay tax on that money. The difference is with an IRA, you get a tax deduction up front. That's why you have to pay the tax on the back end. With a Roth, you don't get a tax deduction. In essence, the tax is paid up front, but all the growth and the distributions in retirement are tax-free to you.
So there is some tax up front?
Oh, yeah. Well, there's two kinds of Roths. There's Roth contributions. Those are annual contribution amounts. Those are lower amounts. But the big money is in the Roth conversions, where you might convert $100,000 IRA or 401k, and you'd have to be okay paying the tax up front.
Okay. And then after that, you're in the clear.
Yes.
Okay. Now, Roth IRAs are held by about 22 million households. Can you take us through some of the benefits of a Roth IRA specifically?
Well, the big benefit is tax-free retirement income. But one of the more subtle benefits people don't realize, with a Roth IRA, there are no required minimum distributions, known as those RMDs after 70 1⁄2. With a traditional IRA, you're forced to start taking the money out and paying tax after 70 and a half. So with Roth IRAs, not only is the money growing tax-free forever, income tax-free, it never has to be withdrawn.
What is the Roth IRA and how does it differ from a traditional IRA?
So you have total control. So if you don't need the money after 70 and a half, you can just keep accumulating and compounding tax-free. And tax-free money always grows the fastest because it's never eroded by taxes.
And distribution, just so people know, that's money that you take out for your own use. Withdrawals, yeah, when you need the money.
How does tax treatment of Roth contributions versus traditional IRAs work?
And there are some drawbacks as well.
Well, the drawbacks is you have to pay the tax. You have to pay to get into the program. And that's probably the biggest stumbling block for a lot of people. But you get what you pay for. Once you pay the tax, it's tax-free all the way through, including earnings.
And then... It's not like it's a contract. I mean, the government could change rules governing them going forward, right?
That is the number one question I've received for 20 years since the Roth has been around. It usually goes like this at a seminar. Can I trust the government to keep its word? And normally the answer is, of course not. But now I've changed my tune. I'm saying absolutely yes. And we've seen it over the years, little by little, the government, Congress has expanded Roths. Why? Because they like people to have tax-free income? No, because it brings in money for the government. And if you noticed, in the wrangling and the negotiations of this latest tax bill, there were some ideas of what they called full Rothification, where they wanted more people to go with Roths and to take away deductions for 401ks. And there was a big uproar.
Why did they want that? Because they realize Roth IRAs bring in money. It's a revenue raiser. It's the golden goose. It's the magic provision our legislators have been looking for for over 200 years. Something that brings in money and people like it.
Uncle Sam's always around the corner with his hands out, isn't he?
Yeah.
So for that reason, I believe the Roth is here to stay.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:02–2:33
2
What is the Roth IRA and how does it differ from a traditional IRA?
2:33–2:55
3
How does tax treatment of Roth contributions versus traditional IRAs work?
2:55–8:25
4
What are the main benefits of a Roth IRA, including no RMDs?
8:25–9:53
Speakers
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