🌟 STEP 6aab — HOW TO CHOOSE BETWEEN ROTH VS TRADITIONAL

The Ultimate Tax Decision That Determines How Wealthy You Become

Master This Choice → You Optimize Lifetime Taxes, Not Just This Year’s Refund

⭐ INTRODUCTION — The Tax Choice That Controls Your Future Wealth

Most people think choosing Roth vs. Traditional is simple.

It isn’t.

This single decision:

Changes your lifetime taxes
Changes how fast your money compounds
Changes your Social Security taxation
Changes Medicare premiums
Changes whether your retirement income is tax-free or taxed forever
Determines whether the IRS or YOU end up wealthier

This lesson teaches you:

How to choose the correct type at any income
How to integrate both accounts strategically
How wealthy people use them
How the IRS rules affect your future wealth
How your future tax bracket matters more than today’s
How real estate and business ownership change the equation
How to use Roth + Traditional to retire early
How to protect yourself from RMDs and tax traps

By the end, you'll know EXACTLY which one is right for you — every year, every income level, every situation.

🔍 SECTION 1 — 🧩 The Core Difference (You MUST Know This)

🟥 Traditional (Pre-Tax)

“Pay taxes later.”

Contributions LOWER taxable income today

Entire account is taxed at retirement

Withdrawals taxed as ordinary income

RMDs (Required Minimum Distributions) are mandatory

Employer matches always go here

Tax Philosophy:

Reduce taxes NOW, accept taxation LATER.

🟪 Roth (After-Tax)

“Pay taxes now. Never again.”

No deduction today

Growth is tax-free

Withdrawals are tax-free

No taxes on gains, ever

No RMDs if kept in Roth IRA

Contributions accessible anytime

Tax Philosophy:

Pay taxes ONCE → lifetime tax freedom.

🧠 SECTION 2 — 🧮 The Key Question: “Will My Tax Rate Be Higher or Lower Later?”

This is the ENTIRE decision.

✔ Choose Traditional if:

Your tax rate now is higher than your future tax rate.
You expect to earn LESS later.
You want a deduction TODAY.

✔ Choose Roth if:

Your tax rate now is lower than your future tax rate.
You expect income to RISE.
You want tax-free retirement.

⚠ Why this is hard

Statistically, MOST Americans will be in a higher tax environment 15–40 years from now because:

National debt
Social Security shortfalls
Medicare costs
Inflation pushing incomes to higher brackets

This is why wealthy people lean toward Roth the earlier they are in life.

🔢 SECTION 3 — 📊 The Tax Bracket Rules (Your Quick Guide)

🟥 Traditional (Pre-Tax) Makes More Sense When:

You’re in the 32%–37% tax bracket today
You have large business income this year
You received a big bonus
You’re expecting lower income within a few years
You need to reduce taxable income for ACA subsidies
You want to qualify for real estate professional tax rules
You want to reduce AGI for child tax credits or college aid

🟪 Roth Makes More Sense When:

You’re early in your career
You expect tax rates to rise
You expect your income to rise
You want a large tax-free bucket in retirement
You plan to retire early
You want to pass wealth to heirs tax-free
You want to pair Roth with high-growth investments
You want complete freedom later with no RMDs

🛠 SECTION 4 — 🏗 The Wealth-Building Math Behind Roth vs Traditional

People underestimate this:

🟧 Roth compounds more efficiently because the IRS never takes a slice.

Every dollar in Roth is:

100% yours
100% compounding
100% protected from future tax increases
100% transferable tax-free to heirs

Meanwhile, Traditional accounts are:

Partly yours
Partly the IRS's
Forced into withdrawals
Taxed using future tax rates, not current ones

🔥 The Hidden Truth

Your Traditional account has an embedded IRS silent partner share growing with it.

Roth does not.

💼 SECTION 5 — 🧾 How Businesses Change the Roth vs Traditional Decision

Business owners can CONTROL their taxable income using:

Depreciation
Section 179
Bonus depreciation
Real estate losses
Home office deduction
Mileage deduction
Write-offs
Salary vs distributions

This means:

👉 Business owners can often get their taxable income VERY LOW.

When taxable income drops:

Roth becomes the superior long-term choice.

This is why entrepreneurs often have:

Roth IRA
Roth Solo 401(k)
Mega Backdoor Roth
Backdoor Roth conversions during low-income years

And they use Traditional ONLY when necessary for short-term tax planning.

🏠 SECTION 6 — 🏡 How Real Estate Changes the Decision

Real estate gives:

Depreciation
Bonus depreciation
Cost segregation
Paper losses
Passive activity losses
STR loophole
REP status
1031 exchanges

These reduce taxable income, sometimes to zero.

Meaning:

Real estate investors often choose ROTH because their taxable income is artificially low.

Example

A real estate investor making $200k but showing $0 taxable income due to cost segregation should NEVER choose Traditional — it gives no benefit.

🧮 SECTION 7 — 🧾 The Mathematical Framework (Your Quick Formula)

Use this set of rules:

✔ If tax rate now > tax rate later → Traditional

✔ If tax rate now < tax rate later → Roth

✔ If tax rate now ≈ tax rate later → Roth usually wins because:

No RMDs
Heirs receive tax-free
More liquidity
Tax diversification
Future tax rates uncertain

✔ If you're unsure → Split 50/50 (tax diversification)

This protects you against tax uncertainty.

🧰 SECTION 8 — 🛢 Roth vs Traditional Based on Age

🟢 Age 18–29

Roth dominates.
Low taxes now, high growth ahead.

🔵 Age 30–45

Depends on income and business deductions.
Generally still Roth-heavy unless income spikes.

🟡 Age 45–55

Tax planning years.
Often a mix of both.

🔴 Age 55–70

Traditional often takes priority due to higher income years —
BUT must plan ahead to avoid massive RMD taxes.

🧮 SECTION 9 — 📈 Case Studies (4 Levels)

🟢 Case Study 1 — Beginner (Age 24)

Income: $42k
Future Income: Expected to double

Best: Roth IRA + Roth 401(k)
Why: Low taxes now, higher income later.

🔵 Case Study 2 — Mid-Career (Age 40)

Income: $140k
Current bracket: 24%
Expected retirement bracket: 22%

Best: Traditional 401(k)
Why: Higher taxes now → lower taxes later.

🟣 Case Study 3 — Entrepreneur (Age 35)

Income: $220k
Taxable income: $10k after depreciation + write-offs

Best: Roth Solo 401(k)
Traditional gives no benefit because taxable income is already low.

🟧 Case Study 4 — High-Net-Worth (Age 55)

Income: $400k
Heavy real estate + business

Best: Combination strategy

Traditional for current tax reduction
Roth conversions during low-income years
Large Roth bucket for later-life tax freedom

⚠️ SECTION 10 — Common Mistakes to Avoid

Only After Retirement Accounts Are Optimized

🚫 Choosing Traditional just for a bigger refund
🚫 Assuming future tax rates will be lower
🚫 Ignoring how business deductions affect taxable income
🚫 Forgetting that Roth avoids RMDs
🚫 Not planning Roth conversions in low-income years
🚫 Using Traditional when taxable income is near zero
🚫 Not splitting Traditional/Roth for tax diversification