Stock Market Investing – Taxable Account Vs. Roth IRA – With Early Retirement Scenario

Updated : Sep 03, 2019 in Articles

Stock Market Investing – Taxable Account Vs. Roth IRA – With Early Retirement Scenario

hello everyone and thanks for tuning
into the financial investor channel my name is Brent and today we’re gonna be
going over the topic of a Roth IRA versus a taxable count I had a viewer
and subscriber leave me a comment saying hey I am 19 years old I want to start
investing in a Roth IRA or a regular taxable count
I want to mainly invest for dividends but I feel like I may want to be able to
tap into those dividends well before I’m 59 and a half and if you know the Roth
IRA in order to get the maximum effect you have to leave your your
contributions you know to take advantage of the tax-free benefits you have to hit
it fifteen and a half so he asked for my opinion so this video is going to be
going towards that the Roth IRA versus the taxable count and a lot of people go
back and forth on this topic so of course I wanted to create a video on
this so taxable count versus a Roth IRA first hour scenario we are 18 years old
we have up to fifty five hundred dollars per year to contribute towards our
retirement we may retire at forty five fifty sixty who really knows we’re
pretty young but we have a goal in mind we want to retire so what is our best
option a taxable count or a Roth IRA well let’s
go ahead and cover some of the taxable account benefits number one your
unrestricted you can deposit you can withdraw your money at any time for any
purpose without having to pay income tax or penalty at that time so if you invest
in an IRA or a Roth IRA and you make deposit and withdrawal deposits and the
capital gains you’re gonna get hit with the ten percent penalty plus you’re
gonna have to pay income tax on those IRA because that is pre-tax money going
in and the Roth IRA is post tax money going in but your unrestricted on a tax
will come if you set up an account over on Robin Hood and one finance Merrill
edge Vanguard Fedele they don’t have any sort of minimum you can deposit you know
some brokers out there give you actual stock when you sign up for them and
others you know you put in 100 bucks you can do that you can begin investing if
you want to fifty thousand a hundred thousand you
have a million dollars you just inherited there’s no restrictions you
can go ahead and deposit it there’s no minimum requirements which we already
sort of covered you know two min and max so we already sort of cover that you can
put it you can start investing with as little as zero Oliver on Robin Hood you
sign up through a referral link they give you a free stock you don’t even
have to have your own money in the game you can still have that emotional effect
as a brand-new investor looking at your investments or you can go ahead and
start with much more so you do end up paying taxes based on how long you’ve
held your investments if you’ve held a stock for less than 366 days you will
need to pay the short term capital gains otherwise if you’ve held it for over a
year 366 days then you get that long-term tax rate so depending on what
your tax bracket is if you fall into the 22% tax bracket for 2018 then you’ll
actually end up paying a 15% tax tax bracket on your long term gains but if
you fall into that 12 percent tax bracket you’ll pay 0% on your long term
capital gains and dividends somewhere along those lines you know you know
disclaimer I’m not any sort of financial adviser or tax professional but you know
always I’d you know talk with your tax advisor on these questions so step-up
they have a program called the step up if you pass away and you have accounts
stocks sitting within your taxable account you had there’s a step-up
program where you’re here’s your beneficiaries if they end up selling
those investments they will get it taxed as if you had bought them at the price
the day you died so today Apple was worth two hundred and seventy nil or
something like that and I pass away and it goes to my child and he decides he’s
gonna go ahead and sell off the stock you know my wife needs the money at the
time she’s gonna go ahead and sell off the stock well instead of paying capital
gains where I bought Apple say at a 1:160
she’ll only get taxed on the capital gains from that point at one two hundred
and seventeen dollars tax loss harvesting you can actually offset up to
three thousand dollars if your ordinary income with investment losses per year
so if you do horrible investing in stock such as Sears General Electric you know
some other ones that have tanked out there say you bought a bunch of these
weed socks growth stocks at their peak you know a Mt
canopy growth when they were all over the media getting blasted and then they
fell by 20-30 percent well you can offset some of your losses by up to
three thousand dollars per year and I believe it rolls over maybe one or two
years you can also decide when to withdraw so if you’ve hit sixty years
old there is a time I know in the IRA you have to begin withdrawing in the IRA
at 70 and a half somewhere in that range but as a taxable account you can
actually leave your money in there if you see that you have to withdraw money
up your IRA and it’s going to be bumping you up into a higher tax bracket say
normally you’re in that fifteen percent tax bracket twelve percent tax bracket
which means that you’re going to be taxed at a much lower bracket but if you
are having to withdraw ten or fifteen thousand dollars automatically out of
your IRA because of your they’re forcing you you can go ahead and hold off from
pulling money out of your taxable account lowering you into that tax
bracket instead of bumping you up into that twenty five percent tax bracket
where your dividends will then get taxed at 15 percent instead of zero percent so
you can actually just kind of decide there there’s a bunch of other those are
the main benefits of the taxable account you will be being basically paying taxes
every single year depending on how long you’ve held the investment if you don’t
sell the stock then you don’t pay taxes that year because you’ve never sold it
but if you earn dividends from that stock and depending on your tax bracket
you will either pay zero percent or a 15 percent tax bracket you no taxes on your
dividends the Roth IRA benefits it becomes you know number one it becomes
100 percent tax-free withdrawals at retirement so once you hit retirement at
fifteen and a half and you’ve had the Roth IRA account open for at least five
years all your capital gains your dividends your interest your MLP
distributions you know capital gain distributions
that all becomes 100% tax-free tax-free also during that whole time that you’ve
been invested in the Roth IRA all the capital gains all those dividends all
the interest that’s being paid out to you and it’s being reinvested it becomes
it’s basically built up much faster it’s tax-free investment growth so if you get
paid dividends you’re not having to pay taxes on those dividends per year you’re
not having to pay taxes if you decide to take a little bit you know the edge off
Apple Apple shut up 40% of your portfolio you sell off a little bit of
Apple you don’t have to worry about paying capital gains on it you can move
Apple you know sell off some of your positions to kind of move your money
into a loss less volatile stock or a company that recently took a huge dip
you can go ahead and do that don’t have to worry about paying taxes that money
would stay within the account building up for you and tell you he hit that age
of 50 and a half or you’ll be able to take advantage of the full capital gains
dividends being reinvested in your portfolio you know compounding effect
much better there number three there’s no requirements on distribution such as
an IRA the the taxable count doesn’t have a requirement but if you invest in
an IRA then there is a age at seventy seventy and a half where you do have to
begin taking with withdrawals and also at 70 and a half you can no longer
deposit towards your IRA whereas a Roth IRA you can continue to deposit so long
as you’re making some sort of income the Roth IRA if it’s been opened at least
five years and you kind of croak at you die
it becomes tax-free to your beneficiary so say over in the next five years I put
in five you know five thousand five hundred dollars that’s twenty seven
thousand dollars after five years and I kind of you know I kick the bucket
my beneficiary my wife my child they’ll be able to take advantage of all the
capital gains the dividends within that portfolio 100% tax-free after five years
cow number five you can withdraw your principal contributions at any time
because you’ve already funded it with after-tax dollars so Roth IRA
you get tax on your money you know your w-2 money you get that income going into
your bank account you move that money into your Roth IRA that’s already taxed
you don’t have to worry about you know if you do withdraw your contributions
you can do it at any time you’re not gonna get penalized on it such as you
would on a RA so if you deposit it you know over five years you deposit $27,000
you decide hey you know I’m gonna go ahead and put this towards a down
payment on our home you can withdraw those contributions at any time because
that’s already after tax money going in and number six you can actually use the
funds penalty-free towards a higher education so if you want to use that
money towards certificates licensing or college you can do so you know make sure
to check with your advisor to see if it actually work towards that program but
you could do it tax-free I’m not sure if you could do it towards your children
but that’s something to kind of figure out there I know you can definitely use
it for yourself so in this scenario going back to our scenario this
individual will say was 18 years old the Roth IRA gets the full benefits being
100% tax-free at the age of fifteen and a half just kind of bumping it up to
sixty that is 42 years of investing in the annual rate of return currently
we’ll say seven to ten percent three percent inflation we’ll just say 7
percent is our annual rate of return we’re gonna be contributing for 42 years
from the age of 18 to 60 that’s we’re also planning to kind of kick the bucket
at 90 you know average lifespan of a human is eighty seven ninety so we’ll
say that we’re gonna be saving up an ambassador at sixty and then have 30
years of withdrawal after we’ve decided to take advantage of a Roth IRA our
current existing balance at the age of eighteen is zero and we’re gonna be
making fifty five hundred dollars every year in contributions these
contributions are going to be frequently every year and once we retire we’re
gonna be withdrawing our money monthly because we want to be able to use that
money you know January we pull out our money we use it towards January February
we pull out our money we use it towards February and so on our current tax
brackets during these contribution you know I just used me for the scenario
I sit at a twenty two percent tax break and go into 2018 in retirement I’m gonna
go ahead and say that we don’t really know we can’t plan for taxes in the
future who knows what will happen with taxes but I went ahead and just
continued to keep it at 22% because in retirement I want to be able to with you
know have the same live the same lifestyle that I’m currently living or a
little bit more and I’m aiming for 22% right now it could be higher you know
tax brackets in the future we could go to a whole different kind of society
where we’re getting taxed at 40% 50% who really knows so I just went ahead and
put 22% there so here is our results oh here’s your tax brackets depending on
how much income you currently make or your future you know are you gonna be
married in future are you gonna be single so here if you’re in the 22
percent tax bracket and you’re married you’re making between 77 and a hundred
and sixty-five thousand dollars if you’re married you’re gonna get in that
bracket if you make more than 38 to eighty two and if you are single which
is over here your tax brackets as well so those are the sort of taxes you can
write it down in your head on a piece of paper okay so here are our results in a
taxable count after you’ve been withdrawing for 42 years from the age of
18 depositing $5,500 every single year at the age of 60 when you decide to you
know because you want to take advantage of having a taxable account you’re gonna
have eight eight hundred and eighty four thousand four hundred and seventy one
dollars and seventy seven cents you are monthly withdrawal because this is
you’re gonna get taxed on this money it’s going to be four thousand nine
hundred and twenty six dollars and eighty seven cents every single month
and after 90 years you know from your total withdrawals taking out taxes from
you know from your start point till your end point at the age of 90 your total
portfolio would have actually have grown to about 1.7 million dollars now if you
invest it in an IRA that’s the tax deferred account you you actually write
off some of your taxes you don’t have to pay taxes on the money going in
you’re still depositing that $5,500 per year your balance at 60 has 1.3 million
dollars that’s gonna leave you with around six thousand eight hundred and
ninety one dollars and 15 cents of monthly money going to you every single
month at the age of sixty your portfolio after you know those 90 years when you
croak the bucket at 90 your total withdrawals from your portfolio would be
2.4 million dollars that’s after taxes because you’d be paying that those
twenty two percent taxes on that money coming out and if you had invested in a
tax-free account you know a Roth IRA Roth 401 K you’ve been depositing $5,500
per year at the age of sixty you’d be at that 1.3 million dollar area same as the
IRA only your monthly income would be eight thousand eight hundred and thirty
four dollars and 81 cents that’s a difference of two thousand dollars just
because you decided to you know put in after-tax money now versus you know
trying to defer some your taxes who knows what tax brackets will be this is
in the twenty two percent tax bracket if you think you’re going to be in a much
higher tax bracket in the future then this is actually going to be much less I
don’t plan on saying that 22 percent tax bracket I plan on going and growing my
income over the next year’s so here your total withdrawal after you’ve been
investing up until sixty and you’ve been making withdrawals all the way until 90
is 3.1 million dollars so that’s a huge difference between an IRA and a Roth IRA
and just about double a taxable account so you can see a huge difference there
in your monthly withdrawals with a taxable account any tax-free account
pretty big difference there now say we want to go ahead woops I went the wrong
way let’s go ahead and say that we’re gonna retire at forty five you know
we’ve done a really good job of investing between the age and 18 and 45
we boss and really set along the way you know we’ve we’ve had extra income we
bought real estate we don’t really need our contributions do you wait
till the age of 60 so we’re gonna go ahead and decide to retire at 45 from
the age of 18 till 45 that’s 27 years of investing in a Roth IRA you’re putting
away $5,500 per year at him you know by 27 years you’d have deposited a hundred
and forty thousand five hundred dollars of your own contributions
that’s the positing $5,500 per year for 27 years
your total balance at the age of 45 is four hundred and thirty-eight thousand
three hundred and thirty-seven dollars and twenty-nine cents a hundred and
forty eight thousand of it is your contributions which remember the Roth
IRA can withdraw their contributions at any time penalty free and no taxes so
yours until the age of sixty to take advantage of the Roth IRA you know the
extra remaining money in the account that’s 15 years so we have 15 years we
have to kind of let some of our capital gains dividend set in the account but we
have a hundred and forty eight thousand dollars of our own money sitting in that
account we divide that by 15 that’s the number of years remaining till age of 60
that’s nine thousand nine hundred dollars for the year you know split it
up per year we divide that by 12 we can actually withdraw eight hundred and
twenty-five dollars per month of our original contributions up into the age
of sixty now I’m not saying you should do this but this is an example giving
you know kind of my opinion if you have rentals and you actually want to retire
you want to take advantage of the Roth IRA because you don’t want to take the
full advantage of the whole compounding of it because you have other stuff that
offsets you you know me you may have gotten like a two million three million
dollar portfolio of real estate you’re pulling a hundred thousand two hundred
thousand dollars there of cash flow this is just extra money that you don’t
really need inside the Roth IRA so you can go ahead and pull eight hundred and
twenty-five dollars per month over the next 15 years of your original
contributions now say you want to retire and set at 50 you know we don’t really
know when we’re gonna retire I’m 33 this individual is 18 I actually want to
retire at 45 as well so here in this example we’re going to age 18 to 50
that’s 32 years inside the Roth IRA that’s $5,500 per year over
two years that’s a hundred and seventy-six thousand dollars of our own
money going in fifty five hundred elves per year over thirty two years are you
know estimated balance at that point is six hundred and forty eight thousand six
hundred and thirty three dollars and eighty two cents when we you know when
we hit the age of fifty how many years do we have until we can take the full
advantage of the account that’s only ten years so we take our original
contributions of a hundred and seventy-six thousand divided by ten
years remaining that seventeen thousand six hundred dollars per year that we can
withdraw of our original contributions if whatever reason we needed to divide
that by twelve to get our monthly rate of one thousand four hundred and sixty
six dollars per month that we can withdraw over original contributions
penalty free tax-free because we’ve already been tax on that income so now
after you’ve hit sixty you know after ten years of taking advantage of the the
we’ve pulled out our original hundred and seventy six thousand dollars of our
own contribution we may still be contribute in there you know we’re not
taking it out completely we’re still allowing money to reinvest in these
accounts so by the age of sixty we will then be able to take advantage of the
capital gains the dividends the interest that was actually made in that account
you know using our contributions plus our capital gains you know from the
account so it would all compounded during that point we may still have a
balance around you know six hundred and forty eight thousand to one million or
1.3 million dollars in that range so at that point at sixty we will still be
able to withdraw money tax-free because that’s the whole point of that account
so that is basically all I wanted to go over in this video is basically kind of
covering the taxable account versus the Roth IRA the whole point that people
make an investment in a taxable account is they don’t know when they’re going to
retire but if you plan on retiring somewhere around 45 or 50 you’re still
putting in a hundred and forty eight thousand a hundred and seventy six
thousand of your money that you can withdraw at any time without penalty
without having to pay taxes on that and if you go through this and you kind of
see your drew you can do your own math of how long maybe you want to retire at
35 or 45 or 40 or 50 or 60 and we’ve already done our 60 scenario you can see
the huge differences here if you decide hey you know my plans didn’t work out
I’m not gonna retire at 45 I’m not gonna retire at 50 if I just let my money sit
there until 60 I’m gonna be retiring with 1.3 million dollars that’s gonna
get me an monthly cash flow of eight thousand eight hundred and thirty four
dollars and 81 cents so that is all I wanted to cover in this video I hope you
guys did like it if you did like it give it a thumbs up if there’s any questions
comment let me know in the comment section below if there’s something I
missed or had an area with let me know in the comment section below and you
know quick disclaimer I am NOT a financial adviser or tax professional
this video is for fun and entertainment I was asked a question of my opinion
between you no taxable count and a Roth IRA I 100% support the Roth IRA as the
main account of investment if that is your current retirement vehicle with a
stock market the Roth IRA is probably your best option to retire either early
or late 100% tax-free you can see how this will work if you actually decide to
end you know retire at 45 you can see if you decide to retire 50 and the whole
advantages of the Roth IRA there if you end up dying at some point your benefits
beneficiaries will actually get all of your capital gains dividends tax-free so
that is it for this video and you guys I hope you guys did enjoy it let me know
in the comment section below if this video did help you in any way share it
with your friends and thank you for tuning in to the financial ambassador
Channel if you are brand new to the channel hit the subscribe button hit the
thumbs up I’m N thank you guys for tuning in I will see you next time bye


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  • i think you should have both a taxable account is good if you need money in a jam or save for a goal you can atleast sell your shares

  • Roth IRAs are the best investment you can make, in my opinion. When I have explained the benefits of a Roth to people I get responses like, "Oh, the governments gonna stop that fast." I tell them how long it's been around and the purpose behind it and they still insist it won't last, because it is too good to be true. LOL People just don't believe that you can invest and not pay taxes. Even if it is limited to $5500 a year contribution.

    The point is, the Roth IRA is the best investment account there is available at this time. Max out your Roth contribution first, then open a taxable account for investing amounts over the Roth contribution limit.

  • Tax deferred investments will win in the long term. Just don't withdraw the money early or you get hit with a withdrawal penalty and pay taxes at the highest rates.

  • So I just open a m1 finance account do u think I should focus on the Roth IRA or individual? And also do u think everyone should have both

  • I turn 30 this year and Im starting my first year with a Roth IRA. Already have been contributing pre-tax to a 401k but now Im doing all three. Reduce my taxable income by 15%, max a Roth, and individual brokerage on what’s left

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