Should you have a Roth account?

Should you have a Roth account?
  • CNBC’s Jim Cramer tells investors the pros and cons of opening a Roth account.
  • “When you’re trying to decide between a Roth IRA or 401(k) and a regular IRA or 401(k), you need to decide whether it makes sense to pay income tax now with a Roth, or wait and pay income tax once you retire with a regular account,” Cramer said. “In short, you’re trying to figure out whether you’ll be in a higher tax bracket after retirement, or a lower one.”

CNBC’s Jim Cramer provided guidance on how investors can decide whether to put their savings into Roth accounts. He explained that most of this decision has to do with how high you expect your income to be and whether you want to tax your savings now or in the future.

Focus on Roth accounts as they relate to two different retirement accounts: 401(k)s and Individual Retirement Accounts, or Individual Retirement Accounts. The primary difference between Roth and non-Roth accounts is that the money in a Roth is taxed when it is placed in the account, not when it is withdrawn years later, Cramer said.

“When you’re trying to decide between a Roth IRA or 401(k) and a regular IRA or 401(k), you need to decide whether it makes sense to pay income tax now with a Roth, or wait and pay income tax once you retire with a regular account,” Cramer said. “In short, you’re trying to figure out whether you’ll be in a higher tax bracket after retirement, or a lower one.”

Cramer stressed that there is no one-size-fits-all approach to this issue, and some investors may be limited by their employer’s retirement account policies.

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However, he said a good rule of thumb for anyone whose marginal tax rate is less than 22% is to take the hit upfront and allow the account to accumulate tax-free until retirement. Cramer also noted that Roth accounts allow you to withdraw money you invested after five years without suffering a 10% penalty.

“The lower your current income, the lower your tax rate,” Cramer said. “So, the less money you make, the more likely a Roth will be right for you. It’s that simple. And when you’re saving for retirement, you don’t have to worry about what could go catastrophically wrong 30 or 40 years in the future — you just worry about making the best choices now.” “

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