Apr 23, 2019
This week, we’re going back through the archives of the One Minute Retirement Tip to cover my hand picked favorites. I’m covering a wide range of retirement topics that you might have missed along the way. These are the episodes that I think give you the most useful information to help you on your path to retirement, all in about 1-3 minutes per day.
Roth 401ks and Roth IRAs are one of the most googled topics on retirement. And the advice out there is always this wishy-washy garbage that always hinges on whether or not taxes will be higher or lower in the future.
Excuse me, but how many of you out there know if taxes will be higher or lower in retirement? It’s absolutely ridiculous. Most people can’t even tell you what their tax situation will look like this year because of all the recent tax changes, courtesy of President Trump.
Go ask your CPA what they think taxes will be in 5 years...good luck getting them not to laugh.
Here’s how Roth contributions to your 401k work: Every dollar that goes in to the plan goes in after you’ve paid taxes on it, so you miss out on that tax deduction in the current year. But guess what? Every dollar in the Roth is never taxed again, so you could let that grow tax free for the rest of your life or take the money out as income, but whatever you do, the government never gets their hands on it after you retire.
There was actually a study done a few years ago that looked at Roth 401k vs. Traditional 401k contributions. They ran thousands of different scenarios and the conclusion that they came to is that most people would be better off contributing to BOTH a traditional 401k and a Roth 401k.
But guess what, every single dollar that your employer puts in to your plan through matching and profit sharing contributions is pre-tax dollars. So the only way you can get money into your Roth bucket is by contributing to the Roth from your own paycheck.
And my take on this is that it applies for people in higher tax brackets too. The conventional garbage advice is that if you’re in a higher tax bracket, you should maximize your Traditional 401k and not contribute to your Roth because when you contribute to a Roth, you don’t get a tax deduction.
So why would you want to contribute to a Roth?
Because, you are...never...taxed...on...that...money...again.
So let me send you off into your day with this: Take a look at your current 401k contributions. If you’re not making Roth contributions, consider making Roth contributions for at least a portion of what you’re putting in to your 401k.
And if your plan doesn’t offer a Roth option, ask the powers that be to add it to your plan. It’s quick, cheap, and easy for them to do, and it can make a world of difference in the long-run.
That’s it for today! Thanks for listening.
My name is Ashley Micciche and this is the “One Minute Retirement Tip”.
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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance, wealth management, Roth 401k, Roth, Roth IRA