CNBC’s Jim Cramer Provides Insight on Roth Accounts for Investors
In a recent segment on CNBC’s show, Jim Cramer discussed the advantages and disadvantages of opening a Roth account for investors. Cramer emphasized the need for investors to determine whether it is more beneficial to pay income tax now with a Roth account or wait until retirement to pay with a regular account.
The decision to choose between a Roth IRA or 401(k) and a regular IRA or 401(k) largely depends on an individual’s expected income level after retirement. If an investor anticipates being in a higher tax bracket during retirement, it may be wise to opt for a Roth account. On the other hand, if their tax bracket is expected to be lower in retirement, a regular account may be a better choice.
Cramer particularly focused on Roth accounts in relation to two common retirement accounts: 401(k)s and individual retirement accounts (IRAs). The key distinction between Roth and non-Roth accounts is that with a Roth account, taxes are paid when funds are contributed, rather than when they are withdrawn years later.
While Cramer acknowledged that there is no universal approach to this decision, he offered a general guideline for those whose marginal tax rate is below 22%. In such cases, he suggested taking the tax hit upfront and allowing the account to grow tax-free until retirement. Additionally, Roth accounts allow investors to withdraw their invested funds penalty-free after five years.
“The lower your present income, then the lower your tax rate,” Cramer explained. “So, the less money you make, the more likely that a Roth is for you. It’s that simple. And when you’re saving for retirement, don’t worry about what could go catastrophically wrong 30 or 40 years in the future — just worry about making the best choices right now.”
Cramer also highlighted that some investors may be limited by their employer’s retirement account policies, which can influence their decision-making process.
To help investors make more informed decisions and build long-term wealth, Cramer offered his Guide to Investing, which can be downloaded at no cost.
Ultimately, the choice between a Roth account and a regular account depends on an individual’s expected income trajectory and their preference for paying taxes now or in the future. It is essential for investors to carefully assess their financial situation and consult with financial advisors before making a decision.