Probably getting two far in the weeds, but non-qualified brokerage accounts will tax you annually on dividends, short term and long term capital gains (whether or not you take distributions and/or if the account value goes up or down - losing stocks that pay dividends or virtually any mutual fund). For clarity, the stocks that pay dividends will create current yr income and the funds will likely have a combination of both shot and long term gains based on the turnover rate in the fund. It’s just how it works. For that reason I own most of my funds in tax deferred accounts. I do own stocks in non-qualified brokerage and get my 1099 every yr. Happy to get it as the portfolio is accumulating more shares via dividends. Amazing how that grows over 25 yrs.
Also, a little discussed MASSIVE benefit of a Roth IRA is NO distribution requirement ever! Can’t tell you how many seniors I work with that have to take their annual RMDs from their IRA’s and don’t want / need to. And when they pass, the balance is fully taxable (distribution can be spread out to control taxes but taxable nonetheless). With the Roth, no RMD requirement or income tax on passing. Very strong benefit.
Also not having to include income tax in your general equation when in retirement is pretty cool. That’s the benefit most speak about. But as someone already said, just a function of math. Provided the rates are the same, the IRA v Roth IRA income tax battle is neutral. Good to fund both Qualified and Roth when you’re young and build tax diversification.
Along with all this great savings, your daughter needs a Will. I have a daughter who is also a great 401k/IRA saver. She just bought a house with her boyfriend and I’m sure the house is with a ‘tenants in common’ deed (because why would they ask my opinion when their realtor knows everything!), there are car titles to worry about, etc. I’ve tried to explain that while things she has a choice of beneficiaries for would pass to those beneficiaries, the rest would go to me under law. Same with the things her BF.
My friend’s daughter was murdered last year. Even though she’d only worked for about 2 years, she had several small accounts, a car, an apartment lease. There were claims to be made for some victim assistance funds. My friend said it would have been a lot easier to settle things if D had had a will. No one expects to need a Will for a 23 year old, but it makes things easier for those having to deal with the paperwork to just have the right papers to show. With covid, it was difficult to get documentation.
Didn’t a recent law update change the inheritance rules for ROTH IRA distributions? 10 years to empty the account? (IRA s as well.) A few exceptions, of course.
Yes but still NO RMDs for contributor and no taxes for the inheritor provided the account meets the 5 yr rule (was in place for 5 yrs prior to death - which essentially is the same as the owner receiving all the tax benefits if they hold for at least 5 yrs prior to distributions). At death the beneficiary can spread it out over 10 yrs, lump sum, etc but it’s still tax free (again provided 5 yr rule is met).
So I leave my Roth to my kids - say spouse predeceases me - and they can spread it out for 10 yrs or take lump sum, provided I owned it for 5+ yrs, tax free. All that growth, tax free. Also avoids probate because it’s a beneficiary arrangement (same as any other beneficiary).
I think it is impossible to know what the laws will be when your 22 year old actually retires. The laws have changed quite a bit over the years for these accounts (IRA, 401K, etc.) They will most likely change dozens of times in the coming 40 years before she retires.