Lesson 4.5

Differences Between Brokerage and Retirement Accounts

  • Brokerage accounts are used to buy and sell stocks and mutual funds. These accounts have NO tax advantages.
  • There are two types of Individual Retirement Accounts (IRA)
    • A Traditional IRA
    • Roth IRA
  • Both the Traditional and the Roth IRAs are needed going forward since pension plans from employers are becoming extinct!
  • Traditional and Roth IRAs each have there pros and cons.

Traditional IRA Pros

  • Save on taxes now, alright for individuals with higher incomes. But must pay taxes on the return made when taken out.
    • Example: 30% tax rate on $2,000,000 = $600,000 lost in taxes. 
      • Dollars contributed to this IRA are tax Deferred. They reduce a persons Adjusted Gross Income and their tax liability to the government annually. These are called Before or Pre-tax dollars.
      • Investment dollars grow tax free while in this account. Taxes will be paid when the dollars are withdrawn from the account.

 

Roth IRA Pros

  • Pay taxes upfront, pay no taxes when you take out.
    • Example: 0% tax rate on $2,000,000 = $0 lost in taxes. 
      • Max amount each year you can put in = $5,500
      • Must be earned income. W2 not needed though.

There is no impact on and individuals taxes. After-tax Dollars contributed to this IRA are deferred.

  • Investment dollars grow tax free while in this account.
  • No Required Minimum Distributions (RMD) when you reach 70 ½  year old
  • Dollars contributed by you can be withdrawn anytime
  • There is no penalty for withdrawing the funds you deposited
  • There are no taxes to be paid because the dollars contributed to this account are after tax dollars.

A Roth IRA is a fantastic tool for becoming a Millionaire! 

https://www.suzeorman.com/blog/why-you-should-seriously-consider-a-roth-401k
 

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