- CNBC’s Jim Cramer explained to investors the pros and cons of opening a Roth account.
- “If 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 more sense to pay income taxes now with a Roth or to wait and pay “Income tax once you’re retired, with a regular account,” Cramer said. “In short, you’re trying to figure out whether you’ll end up in a higher tax bracket or a lower one when you retire.”
CNBC’s Jim Cramer offered guidance on how investors can decide whether to place savings in Roth accounts. He explained that this decision largely depends on what your income is expected to be and whether you want to tax your savings now or in the future.
He focused on Roth accounts because they relate to two different retirement accounts: 401(k)s and individual retirement accounts, or IRAs. The main difference between Roth and non-Roth accounts is that money in a Roth account is taxed when you contribute it to the account, not when you withdraw it years later, Cramer said.
“If 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 more sense to pay income taxes now with a Roth or to wait and pay “Income tax once you’re retired, with a regular account,” Cramer said. “In short, you’re trying to figure out whether you’ll end up in a higher tax bracket or a lower one when you retire.”
Cramer emphasized that there is no one-size-fits-all approach to this question and some investors may be bound by their employer’s retirement plan policies.
However, as a good rule of thumb for anyone whose marginal tax rate is less than 22%, he recommends accepting the burden upfront and letting the account compound tax-free until retirement. Cramer also pointed out that Roth accounts allow you to withdraw invested money after five years without incurring a 10% penalty.
“The lower your current income, the lower your tax rate is,” Cramer said. “The less money you make, the more likely you are to have a Roth. It’s that simple. And when you’re saving for retirement, don’t worry about what could go disastrously wrong 30 or 40 years from now – just worry about making the best decisions now.
Jim Cramer’s Guide to Investing
Click here to download Jim Cramer’s Guide to Investing Free to help you build long-term wealth and invest smarter.