How Do I Move to a Roth?

Lynnette starts off this hour in Raleigh North Carolina hi Lynette how are you hey Dave are you doing better than I deserve what's up in your world well my son actually suggested that I give you a call because I have about $90,000 in a traditional IRA which that to me is a foreign language right there and I've been hearing over and over that I need to put it in a Roth IRA I have absolutely no idea how to do that I mean I'm earning virtually nothing on dividends for this I don't know what I'm doing and I need your help okay well the a Roth nor a traditional are not an investment they are how the investment is treated for taxes so you can have a bad investment in either one or a good investment inside of either one an example of a bad investment in any kind of an IRA inside of a Roth or traditional would be just buying it at the bank and putting it in the equivalent of a CD and it earns nothing right okay in the example of a good investment inside of either one that I suggest is growth stock type mutual funds and I personally spread my type of investments across four of those categories a growth a growth in income and aggressive growth and then international and I spread it across like that so but it's all mutual funds in other words and and so it's going to get more like returns more like what the stock market does which is a whole lot more on average than the CD world is okay so now how the investment is treated for taxes is the difference between traditional and Roth or not being in there at all now if you bought mutual funds not inside of either one as they made money and paid the money to you you would pay taxes on that gain okay okay since it's inside under the coat of under the tenth of an IRA you're not going to pay money in either case as it grows until you take it okay now the difference difference is the traditional IRA you get a tax deduction on the money when you put it in so it's what we call before tax dollars going in okay and so like if you put five thousand five hundred dollars into a traditional IRA this year you would take that as a deduction on your taxes so you would not pay taxes yet on that five thousand five hundred dollars you follow me okay yes then it grows tax-deferred in a traditional meaning you don't pay taxes until you take it out so the whole thing when you take it out is taxable okay if you take it out early its taxable with a penalty so let's play pretend for a second and let's look into the future because it's a great question not only for you but for our listening audience okay you got nine thousand bucks in there if you add nothing to it and you had it in mutual funds and it made twelve percent it might make that much it might make less it might make more how old are you now I'm sixty okay and if you did that for 10 years until seventy okay then that would grow to about four hundred and seventy thousand dollars in that ten year period of time okay let me do that again cuz I'm not sure I did that right I didn't do that right I'm not I'm okay I think I think that is a while yeah yeah Wow yeah let's see here you know I did no I think I did it wrong I'm gonna put them up I'm gonna check my numbers here yeah that's more like it's about three hundred thousand okay so it would about triple okay give or take the whatever the rate of return is but let's say it made it went from 92 to 290 all right okay then that'd be a $200,000 gain you're going to pay taxes on the ninety because you haven't paid taxes on what you put in there already and you're going to pay taxes on the growth inside a traditional IRA okay now yeah jump over to the other one the Roth our oth is named for the senator that passed the bill senator William Roth that caused this to be in effect that's where the name comes from it is after-tax dollars going in no tax deduction on the money that goes in it grows tax-free ow so you would not pay taxes on the money you would pay taxes on the money you put in but you would never pay taxes on the growth okay so in our example if you put if you put ninety thousand in there and if it grew to two hundred ninety thousand you would have no taxes on the two hundred thousand growth okay you waited ten years to take it out okay and if it grew to that now so that's in our example now the ninety thousand however has not been taxed so if you roll it from a traditional to a Roth that money is taxable now so you pay taxes on 90 grand now to keep from paying taxes on 200 later if you put it in an investment and leave it alone at the time we talked about Wow does that make sense so your tax your pratt taxes probably be like thirty thousand bucks do you have any other money yes you have an extra thirty thousand you could lay your hands on say that again you have an extra thirty thousand you could lay your hands on to pay the taxes with that are caused by rolling this from a traditional right probably not okay then you have to use some of this money to do that okay and you could do that but it is no real benefit much so if you can and you could do some of it this year and some of it next okay so I mean that that makes great sense so you're saying yeah see that's the thing is paying taxes on ninety thousand dollars you're going to only leave it alone three years or five years it's not gonna be worth it I just leave it where it is other than I would roll it from a traditional bad investment traditional IRA to a good investment traditional I read where you got it it didn't work and you need to move it into something else but right yeah I would not move to a Roth unless you're going to leave it alone about ten years which I probably will okay so if I didn't have sir what would you do if I had the thirty if I don't have this much do you have extra not counting your emergency fund gosh isn't this awful because I don't know my husband and I are both retired we both have tension okay well let let's pretend let's pretend you two how much what's your income um I got two hundred maybe okay so you could easily you could easily cashflow fifteen thousand this year and 15,000 next year okay so if you want to move half of it one year half of it another year and good cash flow and just cash flow the taxes that way the whole ninety goes to work for you and you've already paid the taxes on that any so you won't pay taxes on it later when you take it out and you'll never pay taxes on the growth oh I love it okay oh I love it that is yeah oh wow that's going to make this and leave it in there for ten years or more and other than making what was my dividend my dividend was something like oh I don't even know yeah well you need to have it invested in something better whether you leave it in a traditional or whether you move it to a Roth that's the thing so get in touch with one of our endorsed local providers our LPS at the front page of Dave Ramsey com click on ALP for investing they'll sit down with you and teach you like I just did how all this works and then you'll know what you are doing that's very important with investing and then you decide based on that what you're going to do but that's how it all works this is the Dave Ramsey show hey guys thanks for watching if you enjoyed this video click the subscribe button to get the latest content and check out these other great clips from the show you can do this you know that really is a message whether you've got two hundred seventy thousand dollars in student loan debt or 27 thousand well you've got a fifty thousand dollar income a five hundred thousand dollar income Oh

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Views: 698,816

Keywords: how do i move to a roth?, roth ira, roth ira vs traditional ira, roth ira for dummies, roth ira vs 401k, roth ira dave ramsey, roth ira vanguard, www, youtube, com, dave ramsey, dave ramsey financial peace university, dave ramsey baby steps, dave ramsey budgeting, dave ramsey live, the dave ramsey show, dave ramsey show, money, ramsey solutions, debt, show

Id: tf6Lhyw9H0I

Length: 8min 28sec (508 seconds)

Published: Fri Jul 29 2016