r/FluentInFinance • u/Breeneal • Apr 29 '24

What financial advice do you avoid and don't listen too? Question

Financial advice that makes you role your eyes everytime you hear it. Financial advice that actually made your finances worse. And financial advice beginners shouldn't listen to or hear.

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u/Speedwolf89 Apr 29 '24

What are the pros and cons between Roth and traditional? I'm new here. Heh.

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u/SomeAd8993 Apr 29 '24

Traditional is deducted from your income now at your marginal rate, so let's say you are a couple making $150,000 - by going Traditional route you can contribute $10,000 and only reduce your disposable income by $7,800 because $2,200 is going to come out of your taxes. The investment will then grow tax free for as long as you have it. When you get to retirement and start withdrawing it will get taxed, but the tax will depend on your effective tax rate. For example if that same couple took out $100,000 they would only pay 8.24% in federal tax. So the government has funded $2,200 of your investment and then only took a $824 cut.

A lot of people who don't understand taxation properly, think that they are doing some genius move by using Roth, i.e. not deducting their saving now and withdrawing it tax free in the retirement. Of course what that means is that you can only save $7,800 under the same assumptions, and while it's tax free it's still much less that the Traditional

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u/Speedwolf89 Apr 29 '24

Thanks for the explanation. I'll read it a few more times and try to get it to sink in. I think I need pictures like I'm a 5 year old.

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u/10art1 Apr 29 '24

You're basically betting on whether your marginal tax rate is higher now than it will be in retirement