How to Use Roth Accounts
Prefer to listen rather than read? Pair this post with Deliberate Money Moves Podcast: How to Use Roth Accounts.
I like to call Roth Accounts the “Never Taxed Again” account because you are taxed on the money you put in, but you are not taxed when you take it out nor are you taxed on the earnings. The fact you are not taxed on the earnings is huge because it is so rare that you can create income and pay absolutely no tax.
Sound too good to be true?
Most of us have heard of a Roth IRA, but many employers offer a Roth 401(k) as well and may allow you to contribute to both a Roth and non-Roth 401(k) in the same year. Contributions to Roth accounts are not tax-deductible, so in effect, you are paying tax on the deposited funds today when you received them in your paycheck.
If you also have Taxable and Traditional investment accounts, you can optimize the investments you own in your Roth accounts. These accounts should typically hold your investments that are likely to have the greatest growth because you are never taxed on that income.
Imagine compounding at the highest rates for 20 or 30 years and never having to pay tax on that growth!
Once more, your tax strategy should never overrule your risk tolerance, so you may end up holding some lower growth investments here, but they should be minimized.
And again, investment allocation is more an art than a science.