“It’s possible (to be) disqualified from the Roth in the first place,” said Frazier.
David Johnson is a financial adviser at Modern Horizons Wealth Advisors. He said the pretax contributions to traditional IRA’s can help people save money.
“Pretax contributions are one of the few tax reduction strategies many workers have available. Especially now, since fewer are able to itemize because of the increased standard deduction,” said Johnson.
“With a traditional IRA, you’re at the mercy or uncertainty of what future higher tax rates might do to your retirement savings. With a Roth IRA, you don’t have to worry about future rates, because your tax rate in retirement will be zero,” said Slott.
Young people may also balk at traditional IRAs if they want to make withdrawals before the assigned age of 59 1/2. Slott noted that Millennial account holders may see that requirement as a downside to a traditional IRA.
“That’s a big deal for lots of younger people who are worried, ‘What if I need to get to my money?’” said Slott.
Chris Chen is a financial adviser at Insight Financial Strategists. He said that going from a traditional IRA to a Roth IRA can cause tax liabilities.
“Going from a traditional to Roth is giving up a lot of assets and income. The name of the game is not to pay no taxes on distribution, but to minimize taxes over a lifetime,” said Chen.
Financial experts say Roth IRA has advantages
Some financial experts say that Roth IRAs have a benefit. He said that even though Roth IRA holders have to pay taxes up front when they open an account, they can make tax-free withdrawals in retirement.
“Most people are better off taking a tax hit now,” said Frazier.
Steven Elwell is a certified financial planner and partner with Level Financial Advisors. He believes that as a person’s income increases, the lack of withdrawal taxes make Roth IRA’s more attractive.
“If you expect your income to go up, then something like a Roth might make sense,” said Elwell.
“If they are in a very low effective federal tax rate, or even a negative tax rate, the Roth is very beneficial. Finally, it can be used as a flexible bucket in retirement for high-income, high-net-worth clients,” Fisher says. “We consider all things like: How is the rest of the nest egg saved? Is it all tax-deferred? Are they expecting a pension? Do they need all of their retirement savings or do they intend to pass it to the next generation? Will they need all of their projected RMDs? I’m not exaggerating when I say—especially particular to the 401k—that eight out of 10 times I will recommend a Roth contribution,” said Fisher.
“We illustrate the total growth of the portfolio and what the cumulative account balance could be in retirement. We also educate to how it affects their paycheck. Electing the Roth in the 401k isn’t going to result in a big tax bill when you file your taxes. Instead, the tax withholdings are adjusted on your paycheck, and in most cases, you are seeing only a minor adjustment each pay period,” said Fisher.
“For one, investors always decide how much they want to save first, and then we talk about taxes. I have never, in my 12-year career, had someone walk back in my office with their ‘tax savings’ and ask to invest it. It just doesn’t happen. Also, most people max out the IRA contributions, which completely negates the argument,” said Fisher.
Financial experts say to talk to advisors before converting to Roth vs. traditional IRA
Jennifer Weber is vice president of financial planning at Weber Asset Management. She said that it’s key to consult a financial advisor before choosing a Roth vs. traditional IRA.
“It’s important to understand the following: what your company offers, does your company offer a match on retirement contributions and are you eligible to contribute directly to a Roth IRA (based on income limits),” said Weber.
“Our tax rates today are unusually low because we’re running a massive budget deficit. At some point, those tax rates will increase. That means there’s a good chance tax rates will be higher when you go to spend your nest egg in 25 or 30 years,” said Howard.
“Remember, in general, tax rates are likely to go higher over the years no matter which political party is in power. That means it may make more sense to skip the deduction of a traditional IRA now to avoid tax later with a Roth IRA,” said Howard.
“I think that Suze is concerned that future taxes will be much higher because we cannot continue on the spending parade that we have been on, our deficit is ballooning and, just like someone with a lot of credit card debt, this debt will have crushing consequences at some point,” said Dwyer.
“Does that mean her advice is good? Not necessarily. It just depends on the person,” added Dwyer.
“The tax code today is about as favorable as it’s ever been and the likelihood of that changing (to be higher) in the future is pretty good. Because of that, we look to add to Roths directly or do things like backdoor Roth contributions or conversions where it makes sense,” said Beaver.
Financial experts recommend Roth IRA for young people
Because Roth IRAs don’t have age withdrawal limits, young people can let money grow tax-free. Ryan Marshall is a New Jersey-based certified financial planner. He said young investors should consider a Roth IRA.
“This is an area most young people don’t consider. We have seen a lot of clients who are withdrawing more from their 401(k) account than they actually need to live on in retirement. The Roth IRA currently does not force you to withdraw funds and continues to grow tax-free so long as you leave money invested,” said Marshall.
“It is great to build up those Roth funds when you are younger because you may not qualify when you are older,” added Marshall.
Pete Hunt is a certified financial planner and director of client services at Exencial Wealth Advisors. He recommends Roth IRA’s for most of his clients. However, he doesn’t recommend Roths for high-income clients.
“I recommend it to all my clients, unless they are in a situation where they think they will make significantly less income in the future,” said Hunt.
‘I like having a Roth IRA, if they are eligible for it, just because it gives a lot of flexibility that if they need that money, they can pull the contributions at any time for any reason,” Hunt said.
What are the disadvantages of a Roth IRA vs. traditional IRA?
“Congress can get pretty creative about where they are going to collect taxes from and there is no guarantee that they won’t someday go after Roths,” said Dwyer.
How can a person make a Roth conversion?
Since many people want to save money on their Roth IRA’s, there can be an advantage with reduced required minimum deductions. Maria Erickson is a financial adviser. She said taxpayers can save on taxes without a required minimum distribution.
“This year is an unprecedented opportunity. The numbers are pretty compelling. You can reduce your tax bill by 30% to 40%,” said Erickson.
How can Roth IRA’s help with homeownership?
In addition to Roth IRA’s helping people save for retirement, Roths also can be used for another purpose. If a person meets certain requirements, they can withdraw $10,000 from their Roth IRA’s to purchase a home. Daniel Galli is the principal of Daniel J. Galli & Associates. He suggests that young people can use their Roth IRA’s to buy a home.
“We’ve long suggested that young people use a Roth IRA to save the considerable amount needed for a first-time home purchase,” said Galli.
“As long as we can meet the five-year rule, they can use all contributions plus up to $10,000 of gain, free of tax and penalty,” Galli said.
“This strategy requires some market risk in order to enjoy some gains, but the rewards can balance that,” said Galli.
While Galli is for people using the Roth IRA for buying homes, some financial planners are opposed. Certified financial planner and CPA Jeffrey Levine is the director of advanced planning at Buckingham Wealth Partners. He said that Roth withdrawals should be rare and reduced over time.
“You might want to make it more conservative over time,” Levine said.
Financial experts advise caution witth Roth IRA home ownership
In addition to Levine, there are other experts who think that people should save their Roth IRA funds. Shon Anderson is president of Anderson Financial Strategies.
“These accounts are designed to help people accumulate as much money as possible for retirement,” said Anderson.
“You can obtain a loan for a home, car, business venture, college tuition … but no one will ever receive a loan to retire,” said Anderson.
“But if their only retirement savings is the Roth and they’re, say, in their 40s, I probably wouldn’t,” said Galli.
IRS lets people take more from IRAs
With the current economic volatility, the IRS has stepped in to help IRA holders. The IRS lets people withdraw up to $100,000 from their retirement accounts. The CARES(Coronavirus Aid Relief and Economic Security) Act says that spouses of account holders can also withdraw up to $100, 000 from their accounts. Jeffrey Levine is CPA and director of advanced planning at Buckingham Wealth Partners. He notes that the changes are helpful to account holders’ spouses.
“The spouse thing is pretty big. I had a lot of people in that camp, where the spouse was out of work and didn’t have significant retirement account assets,” said Levine.
“If you experience adverse financial consequences, because a member of your household, related to you or not, had their income adversely affected by COVID-9, you are eligible for the $100,000 coronavirus-related distributions,” she said.
Some financial advisors against extra Roth borrowing
While some financial advisors want their clients to take advantage of the new IRS rule, some disagree. Certified public accountant Ed Slott doesn’t think people should take extra funds out of their Roth IRA’s. He says the withdrawal now will lead to more taxes later.
“Remember, it’s still not a good thing: You’re taking your own money and you’ll owe the taxes,” said Slott.
“The key thing to remember is that you are reducing your future retirement income. Do you have a plan to replenish that?”
Can a new administration change traditional IRAs?
The new election may bring new changes to traditional IRA’s. Presidential candidate Joe Biden has promised to reform traditional IRA’s in a new plan. His website had these details:
“Under current law, the tax code affords workers over $200 billion each year for various retirement benefits—including saving in 401k-type plans or IRAs. While these benefits help workers reach their retirement goals, many are poorly designed to help low- and middle-income savers—about two-thirds of the benefit goes to the wealthiest 20% of families. The Biden Plan will make these savings more equal so that middle class families can enter retirement with enough savings to support a healthy and secure retirement,” noted Biden’s website.
“Don’t assume the private pension tax expenditure would necessarily be a deficit reduction target in a Biden-Harris administration. The private pension system plays a unique role in our economy,” said Iwry.
The Tax Foundation noted that Biden’s plan will “shift some of the benefits of tax deferral in traditional retirement accounts toward lower- and middle-income earners with the goal of encouraging additional saving by those taxpayers.
Would auto-IRA’s replace Roth or traditional IRA’s?
“The Obama-Biden administration made auto-IRA the centerpiece of their retirement proposals, but then Obamacare was enacted,” Iwry continued. “The ensuing divisive politics and toxic partisanship meant it was no longer the right moment.”
However, Iwry believes that the idea can grow with some states enacting auto-IRA’s and have “been steadily acquiring proof of concept as seven states have enacted it; others are considering it, and three of those seven states have begun implementation, which is going smoothly,” Iwry said.
“Congress can achieve nationwide uniformity with a federal auto-IRA that builds on, preserves and integrates the state auto-IRAs”, said Iwry.
Top 5 stocks for Roth IRA vs. traditional IRA
No matter which IRA a person chooses, they can choose these top stocks for investment.
If some people want to invest their IRA, Amazon (NASDAQ:AMZN) is the best stock choice. During the pandemic, Amazon has become the go-to online marketplace. The e-commerce giant’s latest line of products, including its new Amazon Fire TV stick, will bring in new revenue. Amazon’s vice-president, Sandeep Gupta, spoke about the new Fire TV features.
“Today, you can search for comedies, or stuff by Tom Cruise, but we’ve tried to make a landing spot for when you don’t know what you want to watch. This shows you stuff that’s free, movies and TV shows, broader categories, apps and more,” said Gupta.
Financial expert Puja Tayal noted that Amazon’s varied revenue streams like grocery delivery and cloud technology make it an attractive investment for Roth vs. traditional IRA’s.
“AMZN’s biggest win was its entry in grocery. Grocers were reluctant to go online. But the lockdown forced people to buy almost everything online. AMZN increased its grocery delivery capacity by over 160% to cater to the threefold surge in online grocery demand,” wrote Tayal.
“The e-commerce giant also saw a 29% year-over-year surge in Amazon Web Services (AWS), as companies shifted their work to the cloud to facilitate remote working. Moreover, it saw a 29% uptick in its subscription services like Amazon Prime videos,” added Tayal.
“I don’t care that it’s up 50% for the year, it has more catalysts than nearly any other stock under the sun: new revenue streams, great balance sheet, stay-at-home economy exposure and, of course, 5G. Now that it’s come down from its highs … I think you have to buy it,” said Cramer.
Amazon is a top stock for Roth and traditional IRA’s.
Netflix( NASDAQ: NFLX) is a growth stock that is a great investment for Roth or traditional IRA’s. Because of the worldwide quarantine, many people stayed home and binge-watched Netflix shows like Tiger King. Netflix’s chief financial officer, Spence Neumann, spoke about the streaming company’s future.
“So Netflix 2021 is going to be a much better service than Netflix 2020, which gives those newer members and existing members even more reason to stay highly engaged and stick around and also to entice future members to join. So we think that the growth opportunity is as big as ever. There’s just that kind of near-term pull forward that you’re seeing,” said Neumann.
“While the soft third-quarter outlook may put the stock in the penalty box near-term, there is no change to our positive long-term thesis. We view Netflix as a consistent high double-digit growth story with sizable margin expansion over time,” said Giaimo.
Netflix is a top stock for Roth and traditional IRA investment because of its growth.
“So the revenue for the quarter was $58.3 billion, up 1% from a year ago, despite the extreme circumstances from the impact of COVID-19 and a headwind of 100 basis points from foreign exchange,” said Maestri.
“Services revenue followed a different trend with very strong year-over-year growth of 17%. We set a new all-time revenue record of $13.3 billion, with all-time records in many of our Services categories and in most countries we track,” said Maestri.
With its potential bundling of services like Apple TV+ and Apple Music, Morgan Stanley analyst Katy Huberty rates Apple stock a buy.
“We have long argued that bundling services is a unique tool that Apple has at its disposal,” said Huberty.
UBS analyst David Vogt says Apple stock could rise if the revenue increases in the future.
“If several of Apple’s under monetized Services live TV+, and News mature and contribute to a segment revenue reacceleration back to 17% growth the next three year FY23, consolidated revenue could come in $13 billion higher than our forecast,” added Vogt.
With Apple’s new products, Apple is a stock that can be an impressive investment for Roth or traditional IRA’s.
With its established reputation in tech, Microsoft (NASDAQ: MSFT) is a top stock for Roth or traditional IRA investment. The company wants to increase its gaming division with its purchase of Bethesda Softworks’ parent, ZeniMax. Joost van Dreunen, founder of video game investment firm New Breukelen, said the deal will help Microsoft’s stock.
“The ZeniMax acquisition instantly increases the value of GamePass and closes the content gap between Xbox and [PlayStation]. It raises the barriers to entry for aspiring new contenders like Amazon and Google,” said van Dreunen.
Wedbush’s Dan Ives also believes the acquisition will boost Microsoft stock.
“While Xbox and gaming have been successful, [Microsoft] recognizes its need for consumer based revenue growth, which we believe this deal will directly help drive along,” wrote Ives.
“Microsoft has done an excellent job building its Azure cloud services business, while we believe a strong period of semiconductor demand will arrive in the new decade supporting Microchip and Taiwan Semiconductor. Whether the rally starts in 2020 or 2021 remains to be seen but recent signs have been positive,” said Microsoft.
Microsoft is a top stock for Roth and traditional IRA investment.
In the music streaming world, Spotify (NYSE:SPOT) is king. The streaming service’s growth during the COVID-19 pandemic helped the company increase its subscriber growth. Spotify spoke about its Q2 2020 results.
“After making adjustments to help us weather the pandemic in Q1, consumption returned to normal levels this quarter. Monthly active users increased to 299 million, and subscribers grew to 138 million, both exceeding our expectations. Advertising revenue, which took a significant hit in Q1, improved notably throughout the quarter, and we feel good about our momentum as we enter Q3,” said Spotify.
Financial analysts say Spotify could be top stock for Roth or traditional IRA
Bernstein analyst Todd Juenger said Spotify’s stock should rise with the addition of popular podcaster Joe Rogan. His Joe Rogan Experience podcast will be part of Spotify’s podcast collection.
“The market has added $20B of value to Spotify since the Joe Rogan podcast announcement…However, the analyst continue to believe it is unlikely that Spotify will generate much earnings from podcasts. He sees 37% potential downside in Spotify shares at current levels,” said Juenger.
In addition to Joe Rogan and former first lady Michelle Obama’s podcasts, Spotify’s ad revenue should drive its stock up as well.
“The stock is up sharply since the Joe Rogan podcast deal in mid-May, but there is further upside as podcasts help Spotify drive ad revenue on owned and licensed content, premium subscriptions and gross margins,” said Juenger.
Spotify is a stock with great potential in a Roth or traditional IRA.
Roth vs. traditional IRA’s can be good choice for investors
Whether a person chooses a Roth vs. traditional IRA, investors can sure that either retirement account will help increase wealth. If a person wants to choose the best stock for retirement account investment, they can practice trading those stocks on TradingSim. TradingSim’s blogs and charts can help people find the best stocks for their Roth or traditional IRA investments.