Exposing the TRUTH About Roth vs Traditional Accounts | Financial Conversations
ฝัง
- เผยแพร่เมื่อ 13 พ.ค. 2024
- If you want to know whether you should be using a Roth or Traditional Account watch this video!
Be sure to go to Zacc's free Financial Education Platform here:
www.thefinancialcall.com/guid...
Need help? Email me!
Erik@TheRetirementNerds.com
Visit our website: www.TheRetirementNerds.com
Join our newsletter:
theretirementnerds.com/newsle...
=============================
This video is NOT sponsored.
The Retirement Nerds is the no-cost educational platform and serves to offer information around Medicare, Social Security, Financial Planning, and Estate Planning.
=============================
Send me a message!
=============================
Erik@TheRetirementNerds.com
⏰ TIME CODES ⏰
0:00 Bad Math Intro
0:45 New Financial Series
1:26 Be Aware, Not Afraid
3:53 Why an IRA?
6:29 3 Major Utensils
7:33 Roth vs Traditional Tax Status
11:30 Bad Math
13:23 Better Math
18:14 When to Choose Roth vs Traditional
25:30 Degrees of Freedom
30:45 4 Reasons Recap
31:41 Using Both Roth & Traditional
32:22 Contribution Rules
39:32 Spousal IRA
41:50 Marginal Tax Bracket Management
47:13 Why an Advisor vs Index Fund
52:23 Fear Tactics to Watch Out For
57:43 Talk vs Act
1:00:53 The Financial Call
=============================
#rothira #90daysfromretirement #rothvstraditional #retirement #retirementplanning #retirementinvesting #retirementadvice #retirementincome #finance #financialfreedom
Federal Disclaimer:
We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all your options.
Disclosure:
This podcast is intended for informational purposes only, and is not a substitute for personal advice from Capita. This is not a recommendation, offer, or solicitation to buy or sell any security. Past performance is not indicative of future results. There can be no assurance that investment objectives will be achieved.
Different types of investments involve varying degrees of risk, including the loss of money invested. Therefore it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or proposed by Capita will be profitable. Further, Capita does not provide legal or tax advice. Please consult with your legal or tax professional for advice prior to implementing any strategies discussed during this podcast.
Certain information discussed during this podcast is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Capita believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information, and opinions. Registration with the SEC does not imply a certain level of skill or training.
![🔴 [TRỰC TIẾP] Tứ Xuyên (Trung Quốc) VS BCTT Trường Tươi Bình Phước | Cúp VTV9-Bình Điền | JET STUDIO](http://i.ytimg.com/vi/5nF-PCh_Ojw/mqdefault.jpg)
You talked about everything except the tax trap for a surviving spouse. If you have a large amount of money in a 401k or IRA the RMDS will eat you alive, your tax bracket will double and you pay more for Medicare, by converting to a ROTH early all money is tax free with no RMDS and no increase on Medicare insurance.
Zacc here. Thanks for watching. Erik does a great job with this channel. You are absolutely right. Single tax filing is brutal. A couple silver linings, 1. often single people withdraw less because they spend less than 2 people (not half, but less). This helps. 2. A lot of retirees pass away with Traditional assets meaning they never pay taxes personally on the Tradiational IRA/401k assets anyway. Their beneficiaries do. 3. Lastly, RMDs start at 3.65% withdrawals and climb each year. By time you reach 90 you are withdrawing 8.19%. Sometimes the RMD concern can feel worse than it is in your tax return. Meaning, a lot of retirees were taking about 4% from their portfolio anyway so the RMD doesn't affect them for a few years and when it does, it makes them increase their withdrawals a little. But I am with you!!! More Roth means more flexibility. Just don't pay too high of a tax price to get it there.
The premise of the discussion was misleading but they did cover most of the pros and cons of both. Roth is going to be the superior of the two for pretty much every case, but there is nothing too wrong with traditional, it does accomplish a tax benefit, but not the best tax benefit for retirement savings.
Roths are almost always better. But if you donate to charity, use traditional IRA/401k money for that after age 70.
@@zacc_callbut you also need to factor in the tax implications to your social security if you are taking Roth/IRA distributions while collecting social security. Bottom line should be what tax path will generate the largest after tax total of your investments when you die. The variables that generate this IS the answer.
What Zacc fails to mention is that taxes 25 -35 years ago are much lower than tomorrow with all this inflation and government spending and that alone will actually put you in a higher tax bracket when you are in your retirement years Taxes always go up and never down as the government keeps printing and spending more and more Please correct me if I am wrong!
I’m a CPA and did this same calculation a few years ago, I’m glad to see this get some attention.
It was explained really clearly, I always felt I didn't really understand the tax difference, but intuitively I felt that in retirement I will likely have a lower tax bracket, and if that's not the case, hey, good for me.
i see some factors they got in error. for one, the person putting in the 5k or 7.5k into a Roth IRA may not be paying any or very little percentage of that in taxes, because of their other deductions and level of taxable income. Additionally, there is no guarantee that the tax rates will be the same when a person is ready to pull money out of the ROTH IRA. The tax rates could be higher or potentially lower. So there is the risk you would be paying a higher tax rate when ready to withdraw. Additionally, the amount withdrawn from the traditional becomes part of overall taxable income during the year withdrawn. This could bump up a person's tax rate to an even higher tax rate. Additionally, the person assumed an 8% growth rate. the person could see 15% or higher. Additionally, With a ROTH IRA, there is more flexibility on when a person can pull money out, which at this time, can be at a much higher age than a traditional IRA which has a strict age when a person must begin pulling money out of a traditional IRA. And if the person does not put those minimal amounts there are penalties they must pay. What are your thoughts on what I said in this comment?
@@manp1039 It was a pretty long video, I think they covered all that. Tax rates may go up or down, but all else equal your expenses will be lower in retirement, so your tax liability will be lower. scenarios are if your tax bracket will be the same it doesn't really matter, if you want to maximize your investments the best way is to fund both to the max, as 6500 in roth with the top bracket at 22% is like 8300 in traditional.
anyway you slice it it would be foolish to have only roth, as the first 115k or so for a married retired couple is taxed very low, 10-12%. you really don't need roth unless you have almost 3 million in traditional, that's about the spot where RMDs start to kick your butt as well.
But it's still nice to have the flexibility.
@@supermills03 by having all your income during retirement be taxable you are losing all flexibility in when you want to take money out of a retirement account.
You miss the point. By having $1 million in a Roth you will never reach $100k in taxable income if all you have is social security and Roth accounts as a married couple. You could take out $60k per year out of the Roth’s and combine with 30k of social security and never pay a dime in taxes from $90k in income….. forever. That beats paying $12k or more in taxes per year…. Forever due to RMDs.
@@supermills03 I'm 26. If I start an IRA now, I will definitely hit 3 million by the time I'm 72. In my situation, Roth IRA is a no brainer simply because of the RMDs right?
Thank you. I appreciate that you are addressing my demographic of 18-65.
Thank you so much for watching!
Lol whoooosh
I just contribute to my roth as a hedge. Taxes are historically low and gov spending in the last 25 years is exponential. I keep roth around 20% of my retirement; hopefully thats enough. Enjoyed the video
Thank you for watching and sharing your thoughts!
They're taxing you though inflation--which is at a record high.
Also: Taxes are at a historic high in America considering before 1913 income tax was ZERO.
The idea that the US government needs income tax to operate is a lie propagated by economically illiterate boomers.
The majority of Boomers I talk to don't even know the difference between mandatory and discretionary spending nor have any idea what the difference between the General Fund and the CAFR are but still have the audacity to tell me we need more taxes to help run society.
I gradually moved Traditional IRA money into my Roth over the years while I continued to contribute to the Roth, so now 98% of my retirement funds are in a Roth. Tax rates are at historic lows now, and I’m certain they’ll have to rise in the decades ahead. It’s great knowing that a chunk of my future retirement income will be mine, tax free.
I think you missed the main message of this video. Basically it is irrelevant which method you save if your tax bracket stays the same as your spendable amount will be the same.
You basically invested with the assumption your tax rate will be higher in retirement than while working.
I am doing the opposite. I am paying 30%+ today, and assume I will be paying max 25% in retirement.
but if my income drops sometime in the future I will switch to Roth, or if I believe I will creep into a higher tax bracket, I will switch.
It’s a dynamic equation.
@@jacquie212 agreed, the key thing to keep in mind is you can bring in about 100k per year if married and stay in what is currently the 10/12% brackets, and what conservatively won't likely ever get past 15% so if that's what you're paying in taxes now it's a wash, if you earn more now, traditional is better, if you earn less it's nearly a moot point because you probably don't have all that much to contribute in the first place unless you're already sitting on a pile of cash, which isn't many people.
I agree with you. The assumption that tax rates will remain low is unrealistic looking at national debt rates. Particularly if the Roth funds are used last and are part of your estate and your children having 10 years to take the funds tax free. I am moving funds to my Roth accounts while the tax rates are at relatively low rates compared to 2026 and probably higher beyond. I think your strategy is wise.
The spoon is definitely the most useful of the three utensils
Until you need a knife...lol
@@gwenshannon-wright4341 oh you can cut with a spoon lol
You drink soup from your bowl. Fork is best.
@@cunninghamb1 spoon can scoop liquid and hold and cut solids. Fork can only hold and cut solids
@@richardl1708 if only we could combine the fork and spoon. Lol what would they call it? 😂
the guy in the white shirt is an excellent communicator.
We agree wholeheartedly!
He sure as heck was. Dude in black shirt was a good interviewer as well.
The number of people in the comments who think they're experts but don't understand the difference between marginal tax rates and effective tax rates is frightening
what is the difference?
Marginal tax rate is the top rate of taxes you pay. Effective is the average of the rates you pay based on the tax teirs.
If you make $100, and pay 10% of taxes on first $50 and 50% taxes on 51-100 of those $100 income, you'd pay $5 and $25 respectively. You're effective would be $30/$100 or 30% taxes and marginal would be 50% tax bracket.
Even though I understand the difference it’s very hard to hold the understanding in mind while talking or thinking about taxes.
Also, so very rarely do people (even experts) reinforce the concept while discussing finances and/or taxes.
Years ago when I used TurboTax it would always give an ‘effective’ tax rate once the return was done. Always looked at that value as the real rate I paid.
We all have to do better with effective AND marginal tax concepts.
@@Nighthawk30722 uhhh… what 🫨
So then in the end, to me, effective tax rate is really the only thing that matters, no?
I've known this fact for years now but it's SO GOOD to see someone explain it to the public THIS WELL! THANK YOU SO MUCH, ZACC!!
Zacc does such a good job! Thank you so much for watching!!
That was very kind of both of you. Funny how confused everyone is about “please excuse my dear aunt sally” math order of operations isn’t it? 😂
I might have missed this but another big advantage to Roth IRAs is they do not have Required Minimum Distributions (RMDs). This gives you better control over how much money you must withdraw (heavy liquid) and declare as taxable income, after age 72. For anyone with a large traditional IRA, they might end up in a higher tax bracket when RMDs kick in. I've heard it called a Tax Bomb.
Very much this! Also Roth allows for you to withdraw your contributions before age 59.5, allowing it to function as an extra super-emergency fund in all the shit hits the giant warehouse fan. This can provide additional flexibility to help mitigate risk. I personally use both (max out traditional IRA and max out Roth 401k) and feel this will give me enough flexibility later in life.
@@iandrayer6029 you may want to look at income limits to see if you’re actually getting a tax break in your IRA (or ask your accountant), since you’re maximizing your Roth 401k via work. I don’t get a tax break on the IRA due to this, but I still contribute and then do a backdoor Roth conversion on it since there is no tax benefit. In Other words, if you contribute to a 401k (traditional or Roth) you can still create an IRA, but won’t get the tax benefits if you’re above a certain income level. In that case it still makes sense to create it and do a Roth conversion. Otherwise an after tax brokerage account is the better way to go after you max your 401k than a traditional IRA when your above a certain income.
Or, the flipside, if you need to pull an extra 100k for craaaaazy surprise expenses for a year... I don't want that to be taxable income for that year
Another advantage of ROTH is that investing post-tax dollars vs pre-tax dollars means you are investing more. People tend to spend the money that isn't invested, so this forces more investment.
@@Joenzinator "means you are investing more" that is the fallacy if you can invest more you can do it in either. In the Roth if you invest 100 you need the extra to pay the taxes that year (i.e. 120), meaning you can invest more in the pre-tax (120).
As a Tax Preparer who is also a CFP(TM), it is so refreshing to see discussions like this. There's such a lack of financial education in schools, and many people never get to hear how the various financial fields (taxes, retirement planning, investments, estate planning, etc.) all interact (or should) in making financial decisions. In terms of Roth vs Traditional IRA's, throw in considerations like age, likelihood the funds may be left to an hier, possible use for something non-retirement related (like buying a house or covering a temporary job loss or disability), reducing income to obtain a larger ACA health plan subsidy, the fact that a normal brokerage acct defers taxes by simply not selling, and more. Great job guys!
Props for discussing the split Roth/Traditional strategy and why you should also have non-retirement advantaged investments in your retirement mix. Too many Roth vs Trad comparisons omit those.
But you still missed the other thing that all of these from industry insiders miss. The form 8880 tax credit can matter a lot for some savers. And it's a great example of how the deduction for traditional IRAs can lower AGI in order to qualify for tax credits with income limits or phase outs. Because marginal tax bracket is not always the only thing that matters for tax efficiency -- for savers of more modest incomes, credits can be a bigger part of the tax picture.
Good interview. Thank you for letting your guest talk - not many people know how to interview.
Thank you! I'm no expert so I'd rather let the expert talk 🙂 thank you for spending some time with us!
Great Video! When doing the math calculation on Traditional vs Roth. One thing to remember is that Traditional IRA RMDs can increase the tax on your social security benefits
100% Great comment!
We had a follow-up video on this topic that you may enjoy that goes into RMDs a bit more based on questions in the comments of this video you watched.
th-cam.com/video/-U_su7Ak7QE/w-d-xo.html
Bingo your Trad IRA withdraws or RMDs could easily take you into a higher tax bracket while the Roth draws do not. HUGE consideration.
Nice discussion. We’re in the 24% bracket, have about 18 years of work left in us, and are 100% Roth. I have a company stock plan as well that will behave like a traditional IRA and be quite significant. I never thought about switching to traditional, but might do that as we get closer to retirement as the taxes on the growth aren’t as much of a consideration on that money.
For me, the freedom of not having a government speed limit when I get to finally spend my savings is worth A LOT to me right now. That’s why I choose Roth, knowing it’s costing me more in taxes now. I don’t want to have to ask the tax question every time I pull my own money out.
I'm living it now, I wish I had biased way more towards my Roth
I’m the same way . I’m not wealthy , making an average wage and will hopefully have a modest retirement . But, I decided that I can afford to pay taxes now and can work more if needed. When I’m old , I need things to be as simple as possible and may need to keep every dollar .
These guys are right. You want to look in your account - see the number in there, and just know that is what you have to spend on. No calculations, no mis-steps, penalties, that's the number. And I disagree with them saying there is a person out there that will do the math and put less in a Roth than Tradisional. No one thinks like that. They make a call on what they think will work andit's the same number for either. Regardless of the number when it comes out of your check you make it work. So they leave out human nature. Always go 100% Roth. You will have more money. And that is regardless of tax rates, even if you pay more tax on Roth at reitrement you'll have a $500k for example. And in the tradisional you'll have $500k minus tax, and possible penalties for screwups. Oh and if you plan on leaving some behind for inheritance, the traditional will be gone forsure. Your company match has to go traditional anyway.
Great video, great reads in the chat, too. The ONE item that I don't think can be overlooked is that Congress, and the President CAN, and HAVE changed our tax codes MANY TIMES over the years. Personally, I don't trust the folks on Capital Hill (regardless of which political party they represent) to keep their word regarding no taxes on ROTH distributions EVER.
Congress could just as easily roll back some rules, tweak the laws to income test ROTH and Traditional IRA distributions, etc.. Nothing is certain with those folks!
I was just entering the workforce in the 80s and I remember the implications of the Reagan tax cuts (which overall I think benefitted many). However, gone was the ability to write of interest on a car loan, or some student or personal loans, or the interest on credit cards. Gone also were the very low limits on
medical expenses before you could deduct them, and the ability to immediately write off some types of business expenses...(I believe)...The biggie, for high income earners, were those Tax Structured Partnerships which generated phantom depreciation tax losses. Congress enabled legislation that allowed the IRS to "claw back" deductions that were no longer allowed, and some individuals were indebted to the IRS for YEARS as they clawed their way back from this tax-deduction hell hole. But....this did make for some great discussions in some of the classes I took as I worked towards getting my MBA.
Wow! I started this video thinking I would skip through a lot, but watched from beginning to end. Great video. Terrific job guys.Thanks Erik & Zach.
Thank you for watching! Zacc does such a good job of making it entertaining! Be sure to check out thefinancialcall.com
Roth's also have other advantages. When you withdraw those funds in retirement it does not count towards your taxable income. This could be the difference between the 12% bracket and the 22% bracket. This is huge jump for a lot of retirees because they have dividend income. If you are in the 12% bracket, LT dividends are taxed at 0% (tax free). If you are in the 22% bracket, LT dividends are taxed at 15%. That's a HUGE difference in taxes.
I have an employer matched 401A with heavily restricted investment options. I put in 4% to get a 13% employer match (chose this over a pension for obvious reasons)
If I keep at it for the next 25 years I'll have $3-5 million in there depending on returns. If I don't transfer money out or do rollovers it will force me into the highest tax bracket when minimum distributions hit in my 70's.
I also have access to a Roth 457b where I invest 15%.
And a Roth IRA I max out. My plan when I retire is to roll the Roth 457b and My Roth IRA together and start rolling money from the 401A into the Roth as I can at a lower tax rate to knock down the mandatory distributions at 73.
Have to calculate everything out to figure out the best amount.
401K's are definitely a tax trap. Can't say no to free money though.
@@getinthespace7715401K's are only a tax trap at investing rates well beyond what most Americans reach. Look at the median savings rate
At the rates at which the majority contribute, the 401k/IRA are vastly superior to Roth. The contributions will be tax free, it'll grow tax free, and they'll get the income tax free up to the standard deduction. Triple-tax advantaged. Even the money that comes after that will still be in the lower tax brackets- matching or lower than the tax brackets they contributed from
Roth is basically only a good choice for the demographics that watch this kind of video haha
@@getinthespace7715yeah. 401k for tax is meh. That employer match is a free pay raise though, and not necessarily even a small one
And who’s to say you didn’t also invest that $2,500 tax deduction from IRA/401k or buy a mountain bike or kayak during your youth when you can have maximum utilization and enjoyment.
Waiting til you retire to get it into a Roth is too late. I speak from experience. You will be paying the tax to convert from your nest egg, because you will no longer have a salary.
Finally! somebody addressing the very logic I had about Roth vs Traditional. I put some money in the both Roth and Traditional to give me options later with taxable income. I see the Roth portion as a tax management strategy should I incur a large(r) expense in retirement that would push me to a higher tax bracket for a given tax year. Nice talk about this Zacc!
I am trying to get a deeper understanding of retirement accounts and found this video to be very well done and very informative. Thank you for explaining the topic from different angles rather than trying to frighten people into a specific course of action.
So glad it was helpful and thank you for spending time with us!
Mixing deductible and non-deductible contributions is an accounting nightmare. Thanks for confirming this to everyone!
Thank you for watching!
why is it a nightmare?
Why mix deductible and non-deductible contributions? Just put the non-deductible in a taxable brokerage? The it is crystal clear it is non-deductible.
Holy cow! Thank you so much for this segment. The concept of Roth IRA versus traditional IRA has always confused me. I have always been taught that one should always get a Roth IRA, now I get the concept that there are times when a Roth IRA is more beneficial than a traditional and vice versa. Thank you thank you thank you. This has been so helpful..
So glad it was helpful! Thank you for watching!
If you have access to 401(k), good default option is to place your traditional money in 401(k) and keep your IRA as Roth.
Thank you! My largest investment is my Roth IRA, which I now trade options with. I converted my first 401K in 1998 and two more over my career. I did this because wanted to be able to withdraw my money earlier than with a traditional IRA. Also, when I was young and making money, I spent money carelessly. I could buy a new expensive toy or pay conversion taxes. Now that I’m retired, I’m much more careful about my spending. Tax brackets had little to do with my decision, because how could I predict that? No regrets for me going with the Roth IRA.
when I was 30 I had 10K doing nothing, so I put it in a 500 index. 30 years later it's around 90k with zero input or thought from me. I plowed through the 2008 crisis and every other hiccup in the market. That 10k came from me driving a used car vs a new car at the time
Thank you for sharing!
Keep these coming! One of the best break downs for investment accounts/retirement accounts I have seen. Helped me understand a lot.
We plan on it 🙂 thank you so much for spending time with us!
Another dimension to explore is how a person intends to drawdown these options during retirement. The common assumption is that people will use it as a continuation of monthly or annual income, a steady stream that hopefully lasts a lifetime: Trad works well, with Roth serving a subordinate role to manage tax brackets. One alternative is to use the funds for irregular or even one time very large withdrawals for a retirement dream: Roth works well for this. Another approach is the intention to leave the funds to pass to beneficiaries or charities. Not everyone with these retirement accounts will use them entirely or even partially for income continuation purposes.
All excellent points. Thank you!
Yes, retirement is time to buy a mansion in cash, move states, join a country club. You have worked hard to save and it is time to use the money. Frankly medical costs balloon after 60 so better to have nest egg ready for that.
Shouldn’t retired people enjoy the wealth accumulated through their hard work and realize their personal retirement dreams and charitable acts?
@@SulemaTrollope nope - it's all hookers and blow at that point!
Related to that is the subject of (Traditional to) Roth conversions, and Required Minimum Distributions.
If your retirement game plan has conservatively underestimated returns on investments, your portfolio has likely grown significantly more than what you need to support your desired spending. When it comes time to take RMDs from your Traditional account, it may be more taxable income than you want (more "heavy liquid" in the bucket model). That makes me think that if your investments (in a Traditional account) have grown faster than planned, it might be prudent to do some Roth conversions in years when your effective tax rate is lower, to blunt a future spike in tax rate due to RMDs.
@23:24 Kudos for mentioning the “Ultra Max” option - for someone who wants to stuff their retirement savings to the max, Roth really outshines by letting you put in ~33% more spendable money.
This can be really useful if you’re on a short timeline to turbo-charge your tax-advantaged retirement account with only a few income years left.
Exactly ..in 2009 as after losing big time in a fund I bought into individual stock portfolio .. in transition of jobs and lost incoming I shifted a lot of Ira money to Roth - now the majority of my money is not tax able until this crooked govt changes that
100% I max out all tax advantaged accounts so Roth makes way more sense.
Did I interpret this right, if you max out your 401k, you should choose 100% Roth side of the 401k?
@@JimNadeo Generally, yes. Max roth represents the absolute most you can save for retirement. In some cases where you’re closer to retirement and in a very high tax bracket traditional may make more sense. That said, if you’re maxing out year after year in Roth you’re doing great. Having a little traditional helps as RMDs will be low and typically low tax. As of now, corporate match is traditional which checks that box.
My 2 cents.
@@JimNadeoIf your goal is to put the most into your 401k and you are hitting the maximums, Roth gets you a lot more "spendable" money because the contribution limit is the same but taxes are paid before you contribute it. i.e., if your effective tax rate is 25%, putting $10k into traditional 401k gets you $7500 spendable money (because taxes are deducted when you withdraw), while putting $10k into Roth gets you $10k spendable money. This is relevant if you are hitting the contribution limits, because you can't just contribute extra to the traditional 401k to make up the difference.
A niche use for Roth IRAs my friends and I found in high school and college (yeah, we're nerds) is if your upper middle class parents are paying for school and room and board while you're at college, and you're working part-time but have zero expenses, you'll have several grand to save and no income taxes to pay because you're below the standard deduction. You throw that money into a Roth untaxed at both the beginning and end of its life. But you have to be a disciplined college student (rare) and be filing independent of your parents. I'm ignorant of the math if you're a dependant of your parents but saving for retirement.
My man! Thank you for properly representing financial planning professionals like myself and drawing the distinction between investment management and financial planning...
Excellent content. Keep it up.
Appreciate you tuning in!
This was very helpful. Thanks. I can't believe how complex this subject is.
So glad I was helpful! Thank you for watching!
Good explanations but you did not talk about the 2 gotchas: RMD & IRMMA which can really hurt you in retirement. Those are the main reasons for me doing conversions.
Yeah I think you would need quite a bit in traditional before RMDs force you into higher tax brackets, it's like 190k or something in income for IRMMA to kick in. if you're projected to have 3-5 million plus in traditional then yeah conversions are a good idea, or if late in the game you don't have very much in roth as long as you're not currently in a very high bracket.
Those 2 gotchas are less than 10% of population
yeah if you're worried about overly taxed RMDs and IRMMA then you don't have to worry about running out of money in retirement, there are some things you can do on the margins but sometimes you simply have to pay taxes on your mountain of wealth.
You probably won’t have the same deductions in retirement. You’ll get HAMMERED in taxes.
Another thing about converting to Roth in pre- and early retirement years is using the lower brackets while you can still file jointly. RMD's don't go down when a spouse passes (assuming the spouse is the beneficiary of all accounts), but rates effectively double when you're suddenly single.
"This is not the man I grew up with." That's pretty funny actually. I remember how my dad would treat my kids (good) and I was thinking the exact same thing, haha.
🎯 Key Takeaways for quick navigation:
00:15 🧮 Debunks the misconception that paying taxes on a lower initial investment (like $5) will always yield better financial outcomes.
01:00 🎙 Introduces Zach, a certified financial planner, as the expert guest to discuss Roth and traditional IRAs.
01:43 🚫 Addresses the fear-based marketing in the financial industry and advises to be aware but not afraid.
02:51 💰 Explains that most retirees fall into a lower tax bracket and so the tax situation often improves after retirement.
03:32 🏆 Claims that understanding the information in the video will put viewers ahead of 90-95% of the population in terms of financial literacy.
05:25 🛠 Highlights the importance of optimizing tax benefits for retirement using IRAs.
06:23 🍴 Uses the utensil analogy to explain why having a mix of Roth and traditional IRAs is beneficial for flexibility.
07:20 🛡 Stresses the importance of having multiple financial tools to adapt to uncertain future scenarios.
08:30 📝 Begins to explain the tax statuses of different retirement accounts, emphasizing the difference between pre-tax and post-tax contributions.
08:59 📑 The logistics of handling taxes in a 401k and an IRA are different. In a 401k, the amount is deducted before you get your paycheck, while in an IRA, you pay taxes first and then get a deduction.
10:07 💰 For Traditional accounts, taxes are deferred, meaning you don't pay taxes when you put money in. For Roth accounts, you pay income tax upfront but withdrawals are tax-free in retirement.
11:15 🛑 A key concept to grasp is "where the tax event happens" in both Traditional and Roth accounts. For Roth, taxes are paid before the money enters the account; for Traditional, taxes are paid when you withdraw.
14:33 📊 When it comes to the spendable amount in retirement, both Traditional and Roth paths can result in the same amount if tax rates, growth rates, and time invested are the same.
16:34 🔄 People often misunderstand that putting the same nominal amount in both Traditional and Roth accounts doesn't lead to an equal comparison due to the tax treatment.
17:15 🔄 Various scenarios with different tax rates and growth rates result in the same spendable amount, as long as the variables (tax rate, growth rate, and time invested) are consistent.
17:44 📊 Tax rates fluctuate over time, affecting your Roth vs. Traditional decision.
18:12 🎯 Your current and future tax rate heavily influence which type of account to go for.
18:39 💡 For a dropping tax rate, traditional accounts are better; for an increasing rate, Roth is preferable.
19:35 ⏳ Tax rates are expected to rise post-2025, which could affect your decision.
20:17 🔄 If you expect a significant tax rate drop in retirement, traditional is the way to go.
20:45 📈 Tax brackets are scheduled to go up by 2-3% after 2025.
21:53 🚀 If you're in a low tax bracket, lean towards Roth; high tax bracket, go for traditional.
22:48 🔮 Your decision should consider not only your current state but also future possibilities.
23:43 💰 Max-funding your retirement is more effective in Roth, as there is no partnership with the IRS.
25:18 🎯 Roth accounts allow you to contribute a greater effective amount due to after-tax contributions.
25:48 🛣️ "Degrees of Freedom" mean having more choices in the future; both types of accounts offer different freedoms.
26:30 🚨 Fear-mongering around high taxes on retirement accounts is exaggerated; difficult to pay 70% in taxes unless in an extreme financial situation.
27:35 🛠️ Importance of planning for 'multiple paths of control' in retirement, particularly in managing tax brackets.
28:19 💡 An ideal retiree could have about $80,000 to $100,000 of income in 10-12% tax brackets.
28:46 📊 Being exclusively "Roth or Die" misses opportunities to take income out at lower tax brackets in retirement.
29:39 🎯 An ideal retiree can have $150,000 to $250,000 of annual income with an average tax rate of around 10-11%.
30:49 🤔 Four reasons to choose between Roth and Traditional accounts: future tax rate, maximizing contributions, tax bracket management, and degrees of freedom.
32:25 💵 You can fund both Roth and Traditional accounts at the same time, but there are max contribution limits.
33:33 📝 Most employer plans currently match with Traditional accounts, not Roth.
34:43 👨👩👧 Both spouses can have individual IRAs, increasing the family's overall contribution limit.
35:23 📝 Discusses complexity around various types of retirement accounts like 401K and pension. If you're an active participant, income limits change for IRA contributions.
36:20 💰 Explains income limitations for tax deductibility in traditional IRAs. Must make under $116,000 a year for full tax deduction if an active participant.
37:27 👩💼 For self-employed people without any retirement plan, there are no income limits for IRA contributions.
38:51 👨👩👦 Outlines three scenarios: Both spouses are active participants, one is and one isn't, and neither are. Different income limits apply in each case.
39:48 👪 Discusses spousal IRA contributions and requirements for kids to have IRAs.
41:11 🚫 Roth IRAs have income limits where contributions stop entirely, unlike traditional IRAs where you lose tax benefits.
42:21 📊 Mentions Zach's spreadsheet on how various income streams are taxed, from traditional IRAs to capital gains.
43:03 🗂️ Addresses how income sources are tracked for tax purposes, stating that tax forms do most of the heavy lifting.
44:20 📊 Different income types are taxed differently, much like oil and water separate based on weight.
45:16 🤑 Roth accounts are the lightest in tax burden, as they are taxed at zero upon withdrawal.
45:57 🚗 Withdrawals from traditional 401k or IRA accounts can push you into a higher tax bracket.
47:35 🤝 Financial advisors offer more than just investment guidance; they help in tax planning, retirement, etc.
48:15 📈 Index funds are just one part of investment management, and they can't replace the full scope of what a financial advisor offers.
51:15 💰 Investment management is only 20% of wealth management; other aspects include estate planning, insurance, and more.
52:22 ⚠️ Be cautious of fear tactics from financial advisors, especially around retirement and investment risk.
53:29 😨 Financial markets are always evolving, making decisions out of fear common but often unwise.
54:22 📈 March of 2009 presented the best investment opportunity of a lifetime, underlining that fear can cause missed opportunities.
55:33 ⚠️ Being overly conservative in investments can ruin retirement plans.
56:44 📊 Long-term earnings growth is almost all that matters for long-term investors, not short-term market fluctuations.
57:27 🧩 Having a financial adviser can help validate or negate feelings about market conditions, providing a bigger picture.
59:17 🤔 Even experts often make only slight adjustments in their portfolios despite painting a grim picture of the market.
01:00:14 📺 Media can exaggerate risks; professionals see even an 8% deviation in stock allocation as significant.
This is impressive!
Thanks for the summary. Saved me an hour, since this is stuff I already knew.
I beg to differ. His rationale is at 13:40 and it is a wrong assumption he makes. When people choose an amount to contribute to their retirement account, they choose a dollar amount (i.e.: $10K). For the Roth scenario, they do not choose a dollar amount and then calculate out the taxes they paid. In other words, in both the Traditional IRA scenario and the Roth IRA scenario the contribution amount should be $10k in his example, not $10k for Traditional and $7500 for Roth. When calculating the taxes paid by the investor with this factor corrected, the Roth will be the advantageous scenario, especially with higher percentage gains. Do not fall for his false assumptions. He tries to dismiss this correction at 16:35, but with false logic. Let's calculate the amounts the way people actually make these contribution amount decisions in real life.
The Roth when permitted is almost always superior to the tax bomb. Conversions and "backdoor" maybe a bit more complex to figure out whether advantageous or not. @@ltronics62
How can the couple earning $500,000 a year two years from retirement contribute to a Roth? Isn’t there an income limitation for Roth contributions?
Thank you! This presentation helped me so much. I am retiring in a few years and have been freaking out about having all my retirement funds in a 403B. I'm only going to need about 85K a year in retirement, so my taxes will be relatively low. I should be fine.
Thank you for spending time with us!
Wow! Super informative! I’ve been studying for about 5 years and this is one of the most educational I’ve seen.
Taxes are impossible to understand but you made is simple. If you can call anything taxes simple 😊
Thank you so much!! Means a lot!
Wow. Good addition to your channel. So many people I know need this. I was fortunate enough to have a financial passion even before college.
Thank you so much! We are excited to dive deeper into financial conversations for retirees. So smart to have that passion early like you did!
Very good at explaining the details. Good job. If someone is planning on retiring at full retirement age it might not make much of a difference. You you are planning on retiring early and you need health insurance you can use the Roth to help keep your income looking low so you can get qualify for Acá subsidies.
Thank you for watching! Great insights!
And it doesnt increase the amount of Social Securty being taxable.
Damn straight! 0% tax for retirement 🏁
Exactly right. Supplement with ROTH or use available cash. In addition, ladder your cash in Treasuries to avoid state taxes.
Wow. I have a much clearer understanding of retirement planning. Thank you both!
So glad it was helpful!
The delivery of the content is superb. Calm, genuine, and well-paced. So refreshing to see.
So glad you enjoyed it! Thank you for sharing this comment, it made our day!
Great content. This was a great overview on retirement planning. Thanks Erik & Zach.
Thank you so much Anita!
Great explanations! The “tax on seed or harvest” argument always gets under my skin!
Thank you so much for watching!
Its amazing to me that theres an entire industry built around making sure the robbers steal as little as possible. Imagine the overall oppprtunity cost for the nation because taxes are so complicated that it takes thousands of people doing full time jobs to minimize how much the robbers steal. Elimination of all taxes other than a retail sales tax would really simplify things
no one told me we were supposed to invest ,our Roth's Ira. So for the last 15 years they have been just sitting in the bank! WHAT???????????????????
Oh no!
Things to consider. IRMAA’s, single vs married tax rate when a spouse passes away, future tax increases (“Trump tax rate expiration”), maximizing lower tax brackets in retirement (you don’t want zero taxes in retirement ie 100% Roth, each tax year you will pay a portion of your taxes in the lower brackets), no RMDs for Roth, Roth passes tax free to heirs. Nothing is certain in the future, but balancing can actually reduce total tax percentage over a lifetime.
Generally, Roth when not making much money and pre tax when you get up to the 28+% tax brackets.
Let me add this, for most people, RMDs will not be a problem because the data shows most Americans have not saved nearly enough money for retirement anyway. This will only affect those who have done well setting aside and investing for retirement.
Also pushing more of the SS into taxability.
If you invest for a long time, SS isn’t that much.
Also take into account qualifying for ACA subsidies if you use that pre-Medicare. These can be $1000s/ month in those early post retirement years.
Great video. A few points
1) As you said most employers are matching 401k with pretax. So, that can fill the opportunity to pay lower taxes on the first $100k at retirement.
2) Backdoor methods essentially eliminate the Roth IRA income contribution limit. You did say it correctly as what is deductible, but that is not the full story.
3) for employer 401k plans that support it, mega backdoor Roth raises the contribution limit, based on their anti-discrimination tests and IRS limits. This plays into having both pre-tax and Roth for higher income tax bracket income earners since the after-tax contributions would be converted to Roth.
Can you expand on the last point? I max my 401k plus catch up and then fund and IRA to max and back door that to Roth. I do have option for Roth 401k new last year but am not doing. If I do Roth 401k instead of plain 401k, it would not be deducted pretax would it?
@@firefeethok_tui2355 a megabackdoor Roth is when you fund an After Tax 401(k) which is not subject to the same $23k annual limit as Traditional 401(k) or Roth 401(k) but instead goes against your remaining total contribution limit ($69k) which includes your employer match. You then do an in plan conversion to Roth 401(k) (or rollout to Roth IRA). Your employer’s plan has to support it.
I love this! So much more in depth than the typical discussion!
I think that the reason why a Roth is important is because of the difference in time horizon, and the limits for the account. I need to save more than $10k/yr to retire, and the $6500 limit on a Roth Ira is only a bit more than half of what is needed.
But the time horizon on the traditional 401k is ar retirement. Whether I need it or not, I have to take out an RMD from the 401k or pay the concequences. But my Roth Ira has no such limits. So I may put the same base amount in both my 401k and Roth Ira, but my Ira could have an additional 10-15 years to compound and grow in the background, while the 401k will likely be drained or mostly gone before the Roth is touched. That extra time in my projections pretty much always wins out over the tax loss on the front end.
But like you say, you need both. It is important to have multiple account types to have options depending on the year and how things are going. Those degrees of freedom are important!
My retirement planning is
1) get the full employer match on the 401k. That isn't free money left on the table, that is part of my compensation package that I worked hard for, so I'm not about to let my employer keep it.
2) max the Roth ira. It isn't all that much, so absolutely fill it up.
3) max out an HSA, and spend as little as possible. This is an amazing asset with near term and retirement benefits over time, so not doing this would be rough.
4) figure out your time horizons, and add more to the 401k as needed.
5) add to non-retirement accounts, without severely over-shooting overall retirement goals. You never know what the future brings, but I'm young and my wife and I have had issues where we could not work for periods of time. Having a non-employment income stream (such as dividends) can help a lot with making savings last a lot longer. This can also buffer to prevent the need to take out loans from your retirement accounts if/when things hit the fan. This isn't so much for retirement, but as a buffer to protect retirement.
Of course, overall income and things matter a lot, so ymmv. But at least for our situation, this is the plan, and so far so good.
Love the ideas! Thank you so much for watching and adding your insights here!
IAM loving every minute of this! It’s the FIRST time I’ve ever heard the options on IRA’s!!!
So glad it's useful 🙂 thank you for spending some time with us!
Excellent, Excellent video, Erik. Thanks!
Thank you so much!
not the same spendable amount but I like what you are pointing out! the traditional is going to have standard or itemized deductions, then 10%, then 12%, so in reality, the traditional is lower taxed than Roth being taxed at your top marginal rate.
Shocked that this was left out of the math in such a long discussion. It makes such a difference, yet so many CPAs don't even mention it.
Interesting comment. I'm Interesting in running numbers on difference in maxing either Roth or Trad, then factoring this in. Thanks!
Fantastic content! Love the idea of having multiple “utensils” great analogy - easy to understand. Thanks for your commitment in helping others. ❤
Thank you so much for spending time with us!
Wow - Really liked listening to this. Great topics and touched on so many nuggets that I never thought of. Going to have to watch this a couple times to figure out what changes I should make.
Thank you for spending time with us!
We have this one as a follow up as well:
th-cam.com/video/-U_su7Ak7QE/w-d-xo.htmlsi=DJ78hjgrAwvDuOXs
Mind blown on the 'Max Fund' concept, I never thought about it that way.
Thank you so much for watching!
I worry about our tax rates skyrocketing as our government spends out of control.
I have a pre-tax employer 401A. The match makes it instantly worth it no matter what. Though the investment options are highly restricted and not great.
I also have access to a Roth 457b. I'm investing to get the match on the 401A, max out the 457b, and I'd like to start investing another 30% outside retirement to fund an early retirement. If I do retire early I can start doing rollovers from the 401A if needed.
I haven't even finished watching this video (half way now), but I felt compelled to add this comment. Your guest is a genius! The 500K earner's example and $5, $10, $20 example were such an eye opener for me. I am going traditional all the way. Thank you!!!
Thank you so much for spending time with us! Zacc is amazing!
Super kind!!! Funny how the best thing I got from that insurance sales pitch was the most clear example of how not to think! 😂
The point about taking advantage of the 0, 10, and 12% tax brackets in retirement is an incredibly valuable one.
Agreed! :)
It is under valued, misunderstood, and under applied by both retirees and financial advisors.
17:23 The issue is different when you’re up against contribution limits. Then it’s not “earnings available to save” that matters so much as contribution limits. And in that case Roth gives you more spending money in the end. You put the same contribution (say, $6,500 in 2023) in either account, but Roth is not taxed on the way out. EDIT: Sorry, you did make exactly this point at 24:30 !
There is a difference though in the tax rate incurred at contribution (marginal rate) vs withdrawal (average rate).
Your numbers are skewed, because once you turn 72-73 you have take that money at the wrong time and at rate that puts you in the 39% or higher tax bracket, which is AWFUL!!!!!
Congratulations, Zacc is the first "professional" I've ever heard point out that maxing a Roth will give you significantly more money in retirement than maxing a traditional IRA or 401k. Yes, it requires more money up front, since you're contributing post-tax dollars -- but that also means you're involving more of your money in a tax-advantaged vehicle.
Thank you for making it that far! 🙂
A lot of the comments haven't made it to that point.
Great video up to the point where he mentioned diversity particularly involving international markets. The top American companies are in fact international companies.
really helpful wide-ranging discussion thank you
Thank you for watching!
I’ve noticed a trend in my 35 years of living. Tax rates have a tendency of increasing over time. I’d prefer to pay the taxes on the rate I can see here and now
Here is a really cool site that has historical tax rates:
taxfoundation.org/data/all/federal/historical-income-tax-rates-brackets/
The trend has been decreasing rates for a long time. That will change after the Trump era tax cuts. Rates will go up a bit.
The bigger factor to consider is the tax BRACKET you will be in during retirement. Most people (not all, but most) end up in a lower tax bracket during retirement than they are during their working years.
So remember to look not just at marginal tax rates across the board, but look at the tax bracket you may fall in during retirement.
Thank you for watching!
Fed income tax has been decreasing for decades, at the cost of our huge national deficit. Though state and sales tax is another story.
@@jimbochoo3316 it's actually the outsized government spending that's the problem. They are extremely inefficient with their spending.
There is no way that taxes will get cheaper in the future, I'm paying now while it's (relatively) cheap.
Tax rates do tend to increase, but the biggest tax increase would be if they add taxes to a Roth, which would not shock me. Adding a capital gains tax on withdrawal of non principal funds would not shock me as the government gets desperate for funds.
Have 457 traditional, whole life index,roth IRA,Defined benefit plan,individual accounts mostly keep MLPS in there.Also stack physical gold,silver,and platnium.No debt including home.I think I got almost everything you mentioned.lol
This is so fantastic. Great info, appropriate pace/scope, really well presented. Kudos
Thank you so much!
nice interview and explanation. a Roth IRA account after retirement also gives the flexibility to 'spend' without having to worry about raising your taxable income - which may or may not be important to everyone. in my case, i just don't want to contribute to ca waste while i reside here so i take full advantage of pretax income and will search for a state that has lower taxes (insert sarcasm emoji here).
Another benefit of a Roth…number 5….is you do not have to account for any withdrawal amount tax consequences ever. So if you need X amount pronto, you can do it whenever. This may be easier to manage for family members that don’t do math or taxes and you are somewhere between able to manage your money and being dead.
This is assuming the tax rate will be the same now as when they retire...Look at the direction this country is heading. By the time some of us retire there could be free college and healthcare and the tax rate coudl be MUCH higher in the future. Taking advantage of Roth now could shield you from some of that.
I think the key details I would note is to look at what tax bracket you are in. If you are in a low tax bracket, then do a roth. If it's a higher tax bracket, or you think you are in peak earnings periods of your life then use traditional. And now I see about 18:50 you discuss this.
Thank you for the information, fancial call
Maybe it will discussed later in the video, but tax brackets will be higher for those who have additional income streams. Employer or government pensions, rental properties, etc. The benefit of an IRA is the tax break at a high earnings level, and a lower tax rate upon withdrawal. If someone doesn't move down in tax brackets due to other income sources, roth would make more sense wouldn't it?
This is very helpful - thank you so much for the discussion and education.
Thank you for spending some time with us :)
The heavy vs light liquid argument is very clever and unique, good job!
Thank you for watching David!
The Traditional and Roth may come out the same, but only under one very enormous assumption...
That the government is going to maintain the exact same tax rate for a decade. There's one thing history makes clear: Taxes will rise. The government will always demand more.
So paying 25% taxes now means 15k untaxed later while no taxes now may mean 32% tax rate on the traditional later.
IT IS A NEAR GUARANTEE THAT A FUTURE CONGRESS WILL FIND A WAY TO TAX, DIRECTLY OR INDIRECTLY, ROTH MONEY. “Your Social Security will never be taxed.” -FDR
I doubt they would exempt current holders. The accounting on that would be a nightmare. They will just tax it at capital gains rates (or unearned income god forbid) on all non principal amounts. You can still dodge with the 0% rate but you can bet that 0% rate won’t last.
Riots in the streets. So if that were to happen, we would pay the initial income tax rate on the Roth money, then they would renege on their promise and tax Roth withdrawals anyway a second time. Then you'd be taxed yet again (sales tax, etc) when you finally got the pittance left over. No way.
The math explained helped a lot. Thanks.
Thank you for watching!
Loved the details and info provided in this episode!
Thank you so much for watching. And adding your comment!
The real problem with the roth for people in their 30s or 40s is, how can you realistically trust Uncle Sam to not change the rules and make it taxable 30 or 40 years from now.
What you forget about is SSA Income would be taxed much more if you are contributing to Traditional 401k with RMDs Required Minimum Distributions Income at age 73-76? and not ROTH which doesn't contribute to Taxable Income. As a result, Income Tax in Retirement would most likely be in a higher and not the same Tax Brackets, plus SSA Income is taxed differently than earned income. Plus if your RMDs Required Minimum Distributions Income from you contributing to Traditional 401k would push you into Medicare IRMAA Extra surcharge for your expensive enough already Healthcare when on mandatory Medicare Plan, then you would definitely regret doing primitive Math and not according for all Costs of Retirement and not just Taxes. Lastly, ROTH allows your Heirs to get it Tax Free, and not be charged 50% in some places for just inheriting hard saved and invested for the family money....
One consideration is if you live in a state with income taxes during your working years, then move to a state without income tax after retiring. You're better off in a traditional 401k in this scenario.
great and obvious BUT NOT so obvious point made towards the end - wealth management, taxes, and retirement planning/prep are 3 different things with a great deal of overlap - BUT not the same...
A quick comparison - your car needs fixing. Body work is different from Engine Service work, is different from electrical diagnostic work...
Wow, Zacc is awesome! Excellent show, thanks guys. Glad I found this channel (even though I’m nowhere near retirement ;) My awareness level just went way up 🌟
So glad it was helpful! And yes, Zacc is awesome 🙂 thank you for watching!
NEVER pay an advisor an AUM fee! ONLY pay an advisor by the hour!
Sounds great to say, but I can’t find one to pay by the hour. Got a recommendation? I pay .48% AUM for my current team.
@@swright5690 How much do you have invested with them? Ask them how many hours of work the actually perform on your account each year.
Half of me wonders if this is why there’s a push to use traditional IRAs and 401ks instead of roths. Higher assets equals more AUM to charge a fee on. Just some food for thought.
Agreed. I do it myself and pay a CPA annual fixed fee for taxes. The money saved by doing it myself I use to subscribe to professional trading websites who show how to trade and do much better than an index fund.
@@swright5690 Ask your current "team" to list the precise hours they are spending on managing your account..... then divide that into the amount you are paying them.
Great financial education is essential for everyone, and it's best when presented in a simplified manner. Understanding key financial concepts can help individuals make informed decisions about their money and plan for the future effectively. By breaking down complex ideas into easy-to-understand discussions, people can grasp important principles like budgeting, saving, investing, and managing debt.
Thank you for valuing the importance of financial education! Absolutely amazing interview. 👏🏼👏🏼👏🏼
Thank you for spending time with us!
Nice talk. When people ask me about gold, I say I prefer stocks. People are working 24/7 to make business survive & thrive, nobody does that for gold's value.
Thabk you for watching!
This guy is good... Great video
Zacc is excellent. Be sure to check out his site: www.thefinancialcall.com/
Very good stuff there.
very comprehensive and easy to follow
Thank you for watching!
So many people don't get this. But his analogy & graphic is a bit off. People don't think about investing in constant dollar terms. If they have $100 to invest, they'll invest $100 regardless of the tax status. Then the Roth looks good. So you have to front load the tax. Show them that they aren't investing $100, they are investing $125 to get to the same backend number.
I loved the illustration, great podcast
Thank you so much Tina!
47:21 *I'm a convert to the DIY index fund approach to saving/investing.* Most financial advisors I've done business with over the last 25 years weren't worth what they cost me, and some I considered working with were borderline predatory, actively tried to push terrible advice and products on me. If I could go back in time, I'd do my own investing with index funds through Schwab or Vanguard from the start.
To be fair, there are a few things I use a financial advisor for, generally when I want to do something complicated (like make a backdoor Roth contribution) or bounce some of my long-term planning ideas off someone familiar with my situation. However, there are plenty of other places to look for sound financial advice (accountants and tax attorneys, for instance). There is exactly one financial advisor I trust, and when he retires, I don't plan on getting another.
I'm an advisor. I agree with you but a backdoor Roth almost never makes sense. So how did yours recommend it? on what math?
@@DeathByOstrich I've long had a Roth IRA, and I was above the threshold to contribute to it. I'm expect to be in the same or similar income bracket when I retire as I am right now due to pension plans and other income streams I'm building, I want to max out my retirement savings, and I didn't want to start another retirement account.
So, as I understand it, I wouldn't qualify for the standard IRA tax deduction, and I couldn't contribute directly to my Roth, but I could put the money in a standard IRA and backdoor it into a Roth. Seemed like a good call to me.
@@DeathByOstrich I hope you're one of the good ones. Those are hard to find. It always seemed messed up to be getting advice from a financial advisor who's trying to sell me stuff.
You need all 3 buckets:
1) tax free which is Roth 401k, Roth 403b and similar
2) tax deferred which is traditional 401k, 403b, IRA and similar accounts,
3) taxable but liquid accounts (meaning can be quickly accessed and used) like brokerage accounts, etc
All of these accounts have different tax events and good uses. For example, if I need money fast for something in retirement I can draw on my normal short term brokerage investments or perhaps my Roth. I will be forced to take RMD from my deferred accounts some day but not the others. I’d I need to make a significant purchase I can use my Roth so I don’t have to pay taxes on the others. Do some research on the 3 bucket retirement for taxable, tax free and tax deferred accounts and how to use them
Seems like Roth is best early career(first 15 or 20 yrs), traditional for late.
I would max an HSA before an individual account but overall yes. Multiple forms to play the game!
@@WLyons9856 I agree.
@@kkcombs622Your logic makes a lot of sense from a tax standpoint. To some degree it depends on which accounts are available from your employer, if your employer has no Roth than still investing in the other types of accounts up to the full match probably makes sense before finding a Roth on your own.
The Roth also makes a lot of sense if you believe tax rates are going to increase in the future.
At roughly 44 minutes in, you discuss the issues of filling out the tax forms. Indeed, it is very complicated, and the reason that my wife and I have used a CPA to prepare our taxes for more than two decades. She has done a wonderful job for a reasonable fee each year. Background, I'm retired, my wife continues to work, and so far that only thing I have withdrawn from my IRAs (I have both kinds, traditional and ROTH) has been to invest in real estate. But your discussion of managing taxes is spot on. You can adjust your bracket by the accounts you withdraw from.
Thank you so much for watching and adding your thoughts here. Appreciate you!
Great! I'm glad I started young!I'll stick to my Roth IRA, Self-directed Roth IRA, and TSP Roth with high growth investments. I can't predict future tax implications. I don't want to deal with RMDs either.
Once should also use the effective tax rate on withdrawal (i.e. across multiple tax brackets) as a comparison, rather than the marginal. Also, regarding maxing out a Roth, one should consider the option of maxing the traditional and then putting into the traditional and putting the tax savings into a brokerage account and pay preferred tax rate which is, at the higher tax brackets, is still better than a Roth. You can then roll the traditional into a Roth when you have a bunch of "room" in lower tax bracket during retirement, you don't need to spend it if you don't want to have $200,000 in spendable income.
The main reason I do Roth is because, when I retire in 30 years I’m sure the tax rates will be much higher. If I was 2 years from retirement, I would have a better idea. But 30 years out I’d rather pay the tax rate I know about than the one I can’t predict
I think you'd enjoy this one where we revisit the topic and tax rates:
th-cam.com/video/-U_su7Ak7QE/w-d-xo.html
Great point made if the spendable would be the same regardless if Roth or Traditional one should 100% lean towards Roth since you know what you are paying in taxes now but you definitely don’t know what the taxes will be in 20 years. Why go into a blind relationship with the IRS? Wouldn’t it be better to just get them out of the way now? Specially with taxes being the lowest they’ve ever been. Ultimately diversifying is key and I think having on both is key but if I had to pick I would hands down pick Roth.
Wow, thank you so much for this very informative video about the truth of Roth and traditional account. Well explained and I learned more knowledge about it.
So glad it was helpful! Thank you for tuning in!
The bad math illustration can also be applied to roth conversions
Example
you convert 100k -25%tax =75k and then the market crashes by 50% leaving you with $37500 of spendable dollars.
vs
100k and then market crashes by the same 50% leaving you with 50k that you then convert at 25% leaving you with the same $37500 of spendable dollars .
Great video this is something that not many on talk about.
Thank you so much! Great points!
Zacc here, you are so right. Same math for conversions or contributions. Works the same. Fascinating to throw in the market drop illustration. You proved it further that same tax & same market performance always = same spendable.
@@zacccall9897 Just think of all of those that recharacterized(when it was allowed) a Roth conversion after a crash only to end up with the same spendable money even after paying the tax on the lower post drop amount .
I did just that in 22 crash for my mother...took out some stocks at very low price from traditional IRA. I wish I converted my IRA to roth. I see that for a single person if wanting 80k income in retirement, you can easily get into situation where social get taxed a bit if most of money come from traditional 401k RMD.
@@apip6387Its not as bad as you think.
A single filer can have 80k of income from which 30k is social security and 50k is from a pre tax and pay an 11% effective tax rate .
My argument is pay tax now because you're going to pay more down the road. Taxes have only gone up over time. 😅
Went down during orange man.
Fork Spoon or knife was the best example I’ve ever heard.
We're pretty fond of it, too 🙂
Thank you for watching!
The real danger of RMDs is the requirement to pull a set amount out in a down market when you can least afford it. With Roth accounts now exempt from RMDs, in combination with the tax free growth, it is a no brainer to put money in (for me - your financial calculus may be different)