Roth for Retirement: You Might Be Missing Out!

Updated : Oct 22, 2019 in Articles

Roth for Retirement: You Might Be Missing Out!


(energetic rock music) – Hey, everybody,
Craig Stanley here with Summit Group of Virginia and Summit Group
401k Consulting. This is actually our first video of hopefully many more to come. We’re going to try
to break down some of the financial
complexities of our world and really just try to help
you make better decisions, whether it’s within
your retirement plan
or outside of it. So, I hope you enjoy it. We’re going to kick it off today with one of my favorite
topics, and that is Roth. Now, Roth, which is
really just named after the late
Senator William Roth, who came up with the idea, is all about saving for
retirement in a different way for tax purposes. And when we’re
talking about Roth, especially for this video, we’re
referring to both Roth IRAs or Roth 401ks or Roth 403bs. Now, all of those are
treated primarily the same for tax purposes. They really just have some
different rules around them. For example, a Roth IRA, after
you make a certain amount of money, you’re no longer
eligible to contribute to a Roth IRA, but those
income limits don’t exist with Roth 401ks or 403bs. The other main difference
is just how much money you could put into either
of those in any given year. But certainly, if you
have interest in Roth after this video, then you
should check with your employer to see if they offer Roth
within their 401k or 403b. Now, with that said, most of
us know the traditional way of saving for retirement,
and that’s pre-tax. Now, pre-tax is, I’m
going to put the money in, and then I’m going to take a
tax deduction or write it off of my taxable
income for the year. I’m going to then
invest it and grow it, and as I start taking that
money out and drawing it out of the account in retirement,
both that principal and the earnings are
taxable to me as I use it. Now, Roth’s the flip of that. Roth is I’m going
to put the money in, and I’m going to
pay the tax today. I’m then going to
invest it and grow it, and as I start taking that
money out in retirement, both that principal
and the earnings get to come out tax-free. Now, there are a couple
rules around that. One is you have to be at
least 59 1/2 years of age before you start
taking that money out, and number two is that Roth
has to have been in place for at least five years.
But assuming both of those are the case, then again,
principal and earnings get to come out tax-free. So, let me give you an example. If we have a 40 year old,
and that 40 year old is going to put in $100 into
their retirement account, and they’re going to invest
it for the next 27 years, to age 67, their
normal retirement age, and let’s also assume that
over that period of time, they’re going to earn an average annual rate of return of 8%. Well, if you do
the math on that, that $100 at age 40 becomes $800 at age 67. So then, the question becomes
if that 40 year old were you, would you have rather
have paid tax on the $100 when you put it in at
age 40, which is Roth, or would you have rather
have paid tax on the $800 when you took it out at
age 67, which is pre-tax? And let’s also ask would
your answer be different if we threw different
tax rates in? There’s a lot of
people that think that if they’re at a
higher tax rate today than what they might
be in retirement, then Roth isn’t a
good idea for them. Well, let’s do the math on that. Let’s assume that 40 year old is at a higher tax
bracket today at 35% and that they’re going to be
at a lower tax bracket at, let’s say, 24% in retirement
at age 67. And of course, these are just assumptions. We don’t even really know
what tax rates will be then, but let’s go with it. Well, that 40 year old,
if they’ve paid 35% in tax on that $100 when they put
it in, $100 times 35% is $35. Or at age 67, if they had
waited and took $800 out at age 67 and paid
it at a 24% tax rate, well $800 times 24% is $192. So, going back to the
question, would you have rather have paid $35 in tax at age 40, which is Roth, or would you have rather have
paid $192 in tax at age 67, which would’ve been pre-tax? So, my point is is that
I think a lot of people underestimate the long term
tax-free growth opportunity that Roth can provide
and focus too much on what their tax rate is today versus what it might
be in retirement. So, if you haven’t given
Roth consideration, or if you have but you
really just focused on those tax rates now and
what it might be in the future, I would highly encourage
you to give it another look, and get nerdy like me. Look at the numbers. I’ve put a link to a calculator in the comment section below. You can plug in
your information, and you can really try to
help quantify what it might be for you, whether you made
pre-tax or Roth contributions over the long term. So, that covers it today. I hope you enjoyed it. If you haven’t looked at
Roth, or if it’s been a while, please take a look at it again. I think you might find
it to your advantage. More videos to come. Take care, everybody. We’ll talk to you soon. (energetic rock music)

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