It’s never been explained so simply!
We’ve all hear our HR department or friends try to explain the difference between traditional and Roth accounts, but no one could clearly say which is better. Well here it is, in simple terms.
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I figured I will help explain the difference between a traditional and a Roth account with simple numbers, things that we can easily understand since we’re already real estate investors. And the end goal is to use our retirement for investments that we know which is real estate. All right. So for this first example, we’re going to look at a flip. All right. So our, we’ll say our initial contribution will be at your current tax bracket, which is probably 32%. If you’re a single captain and over here, we’re looking at traditional versus a Roth. Okay. So for both of these examples, we’ll say that you use the cares act and you’ve got a hundred thousand dollars in both self-directed accounts. Now you bought a property for a hundred thousand dollars and within a few years you sold it for one 50, as you know, and you’re just looking at the past five years, the appreciation, right?
That is an easy number to get. So we’ll say that we’ll sold it for one 50. So a profit is 50,000. All right. Those numbers are easy. All right, now let’s say that you’re going to retire. As you mentioned, you wouldn’t be at a lower tax bracket is 24%. And roughly that’s between, I believe 84 and 162,000, which is modest. And especially by the time you retire with inflation, that’s really modest, but we’ll use this for an example. All right. So our total is going to be 150,000 for both, right? Well, first we’ll look at the traditional as you know what the traditional nothing is tax, but it’s tax deferred, which means when you pull it out during retirement, that amount is taxed. So 150 minus. Now you’re going to be at the 24% tax bracket of one 50, and that’s $36,000. That gives you a total of $114,000.
Now this is just looking at federal taxes, but as I confirmed a month with my accountant, if you live in a state that also has state income taxes, you’re also going to get knocked, but depending on your state. So this is going to be less than $114,000. Now the Roth, as you note, the Roth, the profits over here are never taxed. What is tax is the initial contribution of a hundred thousand at your 32% tax bracket rate? Well, that’s easy. So 32% of a hundred thousand is 32,000 giving you a total of $118,000. Now I also confirmed with my accountant that this is immune to state income tax. So as you can see over here, it’s easy to see that the Roth produces more with this flipping example. Now let’s look at another example. I mentioned on the chat yesterday about if you have a self-directed IRA, you can lend that retirement money to a deal that rich has.
Maybe it has something very lucrative you’d like to get in on it. And of course he can agree would appreciate the, uh, the initial funds. So now let’s look at this lending example with rich, okay. Again, your initial contribution is at your current 32% tax bracket, and that’d be a hundred thousand and the Roth also 100,000 now. And as I mentioned, you are going to be lending to rich, and we’ll say it’s 7% for 10 years. Well, how much is that going to be? Well, if we do an interest only loan, which is very possible and very easy with real estate, and I could show you that later using the rule of 70, 70 divided by seven is 10 years by the rule of 70 says in 10 years, we can double our initial investment and you can check this with your financial calculator too.
All right? So that means in 10 years you just made a hundred thousand dollars. Again, you’re going to be retiring at 24%. As you mentioned, you, you will probably be in a lower tax bracket yourself. So those numbers are easy, right? 200,000, both sides. All right, now let’s apply the tax. First in the traditional land. Now traditional you’re going to be taxed $200,000 at 24%. So 24% of 200, that’s easy. That’s $48,000. Let’s do a math, $152,000 again, less because depending on your state, if you have state income tax, that’s getting knocked down even more. For example, in my state of Colorado, that’s another five and a half percent. Now the Roth. Now the Roth, you mentioned that it’s the initial money is taxed at the initial tax bracket. The profits are never taxed with the Roth. So it’s simply 32% of 100,000, right? Which is equal to that’s easy $32,000 giving us a total of $168,000. Again, the Roth winds and it’s immune to state income tax. Wow.
I wish HR would have explained it to me. That’s simply 20 years ago with numbers. It’s easy to see now, if you’re ready to grow your retirement plan with real estate, just like this example, let’s get you on my schedule and lay over money.com/chat with Mike. And let’s get you started with a self-directed IRA plan that works perfect for you and good news. Next week, I’ll be grading and ranking four of the best self directed retirement custodians. So you don’t have to subscribe to my channel and have a great holiday.