Home Personal Finance I Lost $400K of My Retirement Savings in a Roth 401(k) — If You’re Not Careful, You Could, Too

I Lost $400K of My Retirement Savings in a Roth 401(k) — If You’re Not Careful, You Could, Too

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Finance and retirement planning Expert It’s usually a good idea to save your money immediately. loss account. And the majority of Americans seem to agree with them.

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A new survey hosted by Derek Sala personal finance expert and founder of. life and my finances, 92% of Americans think they should invest in a Roth IRA. Mr. Sall wasn’t surprised by how many people believed Mr. Ross was financially vital.

“I estimated that 95% of people would say they should invest in Ross. I was not far off,” Sal told GOBankingRates. “But why? Why would you expect that percentage to be so high? Simple. That’s what I’ve heard all my life — from all smart investors and influencers.” Dave Ramsey Even himself, he’s telling millions of listeners to invest in Ross: “It’s tax-free growth,” they say. It’s a common saying that “you can get tax-free money after you retire”. [and] “With taxes likely to rise in the future, it would be wise to invest in Roth now.”

It all sounds very smart, but the insight comes from smart people in the field of personal finance. But in Sal’s opinion, this is terrible advice. Speaking of his own personal experience, he said, he estimated $400,000 in lost retirement income This is due to investing in a Roth IRA rather than a traditional 401(k). What did he discover?

Current tax rates likely won’t stay the same after retirement

The root of the problem, as Sall thinks, is that if you’re paying 22% tax on money sent to Ross today, you’ll likely pay at least 22% tax on your other income after retirement. It’s about what people think. But it probably won’t work.

“It is much more likely that your retirement income will be lower than you are now, so you are more likely to be placed in a lower tax bracket in the future,” Sall said. “You can see that by looking at current retirees. Their household income is only $47,620 instead of $70,784 (median household income). After standard deductions, they only pay $1,992 in taxes each year, The effective tax rate will be 4.2%.You are currently paying 22% in taxes to save 4.2% when you retire.

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Current tax savings are not the same as future tax savings

The second reason why a Roth IRA is not a good choice for most Americans is a little harder to understand, but ultimately the amount of money you can currently save in taxes (by investing in a traditional IRA) is not enough. comes down to the fact that Compared to the tax savings you can save in the future (by investing in Roth today) it’s comparable to apples.

“It ends up being a relationship between the marginal tax rate and the effective tax rate,” Sall said. “The effective tax rate is the average tax you pay. So in our tax ladder system, you pay 10% on some income, 12% on the next step, and if you have enough income. If you make $122,000 in income a year, your effective tax rate is 9.8%.You pay $11,980, which is 9.8% on your $122,000 in income. ”

But wait, that’s not all. It gets pretty complicated, so take a deep breath.

“The marginal tax rate is the tax rate for the tier you are in. So, with an income of $122,000, you are in the 22 percent tax rate tier and the marginal tax rate is 22 percent,” Sal explained.

“By depositing funds in a traditional IRA, you are deferring the marginal tax rate (maximum tax rate) and will be able to pay the effective tax rate (average tax rate) in retirement. In other words, you will pay 9.8% tax when you retire. If you agree to the , you can currently save 22% in taxes (assuming the same income and same tax rate).Hmmm…yes, taxes will be deferred!But if you invest in Roth, you will currently save 22% in taxes. and save 9.8% in retirement.

How to tell if Roth is right for you

I could go on and on about the complexities that make investing in a Ross IRA an economically inappropriate choice for so many Americans. However, there are situations where doing so is a wise choice. A simplified question of whether to choose Roth is: Use this free Roth calculator.

“Possibility [you] Los Angeles should be avoided,” Sall said. “But if [you’re] If you’re young and have plans to heavily fund your retirement and generate a huge income later in life, Roth may still be for you. [you]”

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This article was originally published on GOBankingRates.com: Lost $400,000 in retirement savings with Roth 401(k) — you could be too if you’re not careful

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