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10 sats \ 5 replies \ @nullcount 22 Jan freebie \ on: Spot BTC ETF in your Roth IRA ? Personal_Finance
ROTH IRA may not be the "ultimate tax hack" you think it is.
Suppose you have $1000 to invest and your portfolio appreciates 10x and the tax rate is 20%.
In a ROTH IRA, your money is taxed when it is invested. So you invest $800 (after paying $200 in tax) which becomes $8000 after the 10x. You managed to turn $1k into $8k for a gain of $7k.
In a traditional IRA, your money is taxed when you widthdraw. So you invest $1000 which becomes $10,000 after the 10x. Then you pay 2k in tax to withdraw. You managed to turn $1k into $8k for $7k gains.
Your gains are the same either way. In the ROTH, you paid less tax to the state, but by paying tax "early", the state has interrupted your compounding.
Additionally, ROTH IRAs have strings attached like maximum contributions limits, inability to self custody, and inability (or increased interest rates) to borrow against before retirement.
The choice of whether to go ROTH or traditional is more of a bet on what you think the tax rate will be when you retire. If you think taxes will be higher in the future, go ROTH.
One benefit of the Roth over a traditional is for higher income earners. Once you reach a certain income threshold, you no longer qualify for a tax benefit upfront. And, if you leave it in the traditional instead of converting to a Roth, you'll also pay taxes when you withdraw.
So the choice is pay taxes upfront and on withdraw with a traditional IRA vs pay taxes only upfront with a Roth IRA.
Also, traditional and Roth IRAs have the same contribution limits.
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Thank you for this feedback @nullcount !
I agree with you classic or roth depends on your views on what could happen in the future…
My intuition is that the future for fiat economy isn’t really bright and I could totally see an increase in taxes to pretend our government is trying to do something about this evergrowing debt… would would think taxes would decrease in the future? The only way to decrease it would be debasing money even more to give the impression that taxes decrease. So one way or the other, we might be screwed, so instead of gambling on the future, i made the choice to control the taxes upfront ( and crossing my fingers the actual rules won’t change about these IRA’s 🤣)
Anyway, I very much appreciate your contribution my friend
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Maybe consider a traditional IRA in addition to ROTH. So you can borrow against, and self custody sats, art, or anything you want in the traditional IRA account.
The real tax hack is to start an LLC or Corp and create a self-funded 401(k). It works like a traditional IRA except you "the employer" pay no tax on any matching contributions made to you "the employee".
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I am thinking of creating my company at some point in the future… but it is not my priority at that point of my life…
I thought you couldn t have both IRAs and the aggregate contribution pass the limit… 🤔
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You're correct about the contribution limits applying to both. I thought that ROTH was the only one with contribution limits for some reason. I'm not an expert lol
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