Mark J. Kohler explains the core difference: Traditional IRA contributions are tax-deductible but withdrawals get taxed, while Roth contributions use after-tax dollars and grow tax-free forever. Contribution limits are identical at $5,500 ($6,500 at 50+), but income limits can block both deductions and direct Roth access, which is where the backdoor Roth strategy comes in. Kohler argues Roths win for long-term wealth because of tax-free growth, especially if tax rates rise.
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Have you ever wondered the difference between IRA and a Roth or a traditional and a Roth? And you've heard those terms thrown around? Well, it's important that we know the differences. I think you're gonna love this. Let's break it down. So the first important point is that they're both IRAs. A Roth is not something different than an Iraq. You have really two options. A traditional IRA and a Roth IRA. They're both IRAs, they're just a little different. Now, there's kind of three categories here that I think are pretty cool is that you can say, well, do I get a tax deduction on the way in? And the answer is yes with a traditional. So let's move this over here. This looks probably a little better to go like this. So I have traditional versus Roth. Yes, you get a tax deduction with a traditional, no tax deduction with a Roth. Now, does it grow tax free? Well, that may be a loose term. We'll come back to it. But if you invest with something with a traditional ira, you don't pay any tax when you sell it. Same with a Roth. So if you buy Facebook stock and it goes up and you sell it, there's no tax. If you buy real estate and you self direct, watch some of my other videos. You don't pay any tax when you sell sell that real estate or Bitcoin or a Kentucky racehorse. So you sell it tax deferred, tax free. Well, that's the key word here. When it comes out, you do pay tax with a traditional. So you pay tax here. And I guess you pay tax before you can put money in a Roth. But what's cool about the Roth is it comes out tax free. So it grows tax free and comes out tax free. So is there a difference in contributions and which one's better? Well, let's talk a little bit more. So if we talk contributions, believe it or not, they are the same. I can put $5,500 in a regular traditional IRA and $5,500 in a Roth IRA. And if I'm 50 years or older, I can put an extra thousand in. So that's 6,500, 6,500. Now the tax deduction can phase out because if I make too much money, I don't get a tax deduction, which is kind of sad. And if I make too much money, I can't even put money in a Roth. Those are the general rules. But what I like is with a Roth, you can actually do a non deductible traditional ira and then Convert it to a Roth later. So if you make too much money, I can backdoor it into a Roth. So look at some of my videos on what's called the backdoor ira. They're pretty cool. You can, you can get into a Roth down the road, the backdoor Roth. You just make a non deductible traditional contribution and then convert it. But here's the thing, the question is, which one's better? And on that note, Mark Kohler, I vote for the Roth every time in the long run. And here's why you it's the time value of money. The money grows tax free and it comes out tax free. And some you may see people go, well, you're in a higher bracket now and when you retire you'll be in a lower bracket. Well, my clients, they want to be in the same bracket when they retire or even better. I mean they're working hard so they can make the same money or more when they're retiring. So do you think that tax rates even might go up in the future? Most people do. So I really do think the majority of CPAs and financial type tax attorneys and financial advisors are going to say if you can really build a Roth, that's where you want to be in the long run. Now, I'm not even going to get into the 401k strategy. Watch one of my other videos on 401ks because you can do better than an IRA if you're a small business owner. Let's play with the 401k. And then there's that backdoor Roth strategy. So there's a lot of options out there, folks. I'm glad you're watching this video because you want to know the basics here. If you're young and just getting started investing, you want to know the difference between a Traditional and a Roth. That's really, really important. And I'd like all my clients young especially to start saving now. Put a $25 a month, $50 a month, $100 a month. The more you can do, the better. Just get in that habit of saving, whether it is a traditional or a Roth. Now again, I vote for the Roth every time. Start looking at that. I think you're going to love it as you start to run the numbers and the hypothetical. So start saving now, know the differences and I'd lean towards the Roth and meet with your tax advisor, look at which, you know, method is going to be best for you to save the most for the future. It's important. Thanks. Thanks so much for watching that video. And I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web on Google trying to find answers to complex questions and just clicking a mouse and hoping you got it right. My team and I want to be a huge resource to you at the law firm, accounting firm, my education resources on my site. 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