so his pitch was you put a $5 bill a $10 bill and a $20 bill on the table and you asked the client which one of these numbers do you want to pay taxes on and he said inevitably the client will always pick the $5 bill and he said clearly you would pick the $5 bill pay taxes on the five and then let it grow to 20 and then spend that later and and this is one of those moments when my OCD just kicks in right and I'm like shaking in my seat but it's not my presentation so I have just barely enough tact not to say anything right and I just sit there quietly but the that's bad math and here's the bad math [Music] okay this video is the first of many to come where I will sit down with financial professionals to discuss how you can plan and structure finances in a way to prepare for your retirement and for our first video of this kind I can't think of a better person to have on than Zach call Zach is the the president of capita Financial Network and we will be discussing the important differences between a Roth IRA and a traditional IRA I think you will find his insights to be remarkably helpful Zach is a certified financial planner and the host of both the podcast and the educational website called the financial call he has been a contributor to the Social Security resources and videos on both our 90 days from retirement website and this YouTube channel so I hope you enjoy all right Zach so often on our Channel and with the clients that we interact with with they are encountering marketing like crazy we're in the Medicare space and so much of that marketing is fear-based you're going to get penalized by this you're going to lose out on that and so as we start having a financial conversation one thing that I've heard you say a lot is be aware Not Afraid so dive into that a little bit when it comes to finances and what you interact with as people are coming on those decisions well we all ba base a lot of our decisions on emotions and that's just normal we're built that way um the problem with that is that it's very easy for marketing folks to to hit those emotions hard and it really makes us act so it's the same in the finance space as what you experience obviously you guys do it with education and relationships in our world the the fear-based marketing tells people that they will pay 70% of their Ira away in taxes if they don't do exactly what those people say right so which usually ends to ends with a let's call it a product pitch of some type right so it's very common in our industry for investors for just retirees anybody who's trying to improve their their overall wealth to be afraid or have been told they should feel afraid so my thought is you shouldn't be afraid of it in fact most retirees have a lower tax bracket than they had while they were working so the reality is things are going to get better from a tax standpoint and I know we're talking a lot about about taxes because the wroth and traditional decision is primarily a tax decision and I'll explain that in a second yeah but if you are aware of how it works you don't have to be afraid of how it might work and we can figure that out here today I'll I think if people can understand what we talk about today I don't know how long this is going to go yeah but I know what we're going to cover if they can just conceptualize what we'll cover today they will be better off than somewhere in the 90 to 95% of the population of the people who have money so like they're going to be in the top understanding of the people who have money and they're and they're in if they have money at all and saved they're in the top something I mean the reality is most people don't have more than a few thousand for an emergency and most retirees have less than $100,000 for retirement so they're in the top well and that's a good point because as we were talking and thinking through this conversation there are two personas that I kind of have in my mind that would benefit from this and so the first is that there's somebody who has funds that are available to put into some sort of a retirement vehicle or an investment vehicle and the second Persona is somebody who has been doing that over time they've been putting funds away inside of some sort of an investment vehicle in this case we're talking Roth and traditional IRAs and then they want to make sure that they've made the right decision as they're approaching retirement so with those two personas in mind why an IRA what is an IRA and why is an IRA an investment vehicle that they should use on as opposed to a different investment vehicle okay so let me ask you to clarify are you talking about why an IRA versus a Roth or or are you throwing traditional IRA and Roth IRA together when you say Ira throwing those together so why both of those either of those options versus some other investment vehicle oh okay perfect um the reality is that those both have limitations so most people if they're saving enough for retirement they should be doing some sort of Ira traditional or Roth and other things so it's it's not an either or but the benefit or the reason for doing traditional or Roth IRA is there is a tax break there's tax control and tax flexibility if you use them right and so that's the idea is if if you're preparing for retirement there's going to be an opportunity to enhance your retirement savings by optimizing the tax benefits the government's willing to give you got it so they they're able to you leverage your dollar further than you would through say just a regular brokerage account on your own right right and there are some serious benefits to investing in real estate investing in brokerage accounts investing in small businesses I mean other other things that have nothing to do with Ira there are serious benefits to those but there are also serious benefits to using an IRA so we want to be careful not to make it a competition too much just you want to have different type different players on the field at the same time so who is that person that would be looking at an IRA again whether a Roth or a traditional what does that person look like that should be looking at an IRA or Roth IRA versus retire real estate or those other things yeah I I actually think everyone should so everyone should have some Ira or you know of some type traditional or Roth and the reality is everyone should have a little bit of both so I'll cover that and and explain why today um but the the easiest way to understand this would be like if I was asking you to pick between the three major utensils for the rest of your life and you have to use just one do you know what I mean like I'm saying hey do you want to use a spoon a fork or a knife for the rest of your life the other two are not available to you for the rest of your life and I think you would pick a fork it's probably the most versatile of the three right but you know a week later when you guys decide to have soup that's going to get really complicated so you have to you have to really think about this in terms of it's not not about one being better than the other it's about having the tools available for the situation you might find yourself in the future and the most difficult aspect is just like it's hard to predict what you're going to have for dinner in a in a week right it's even more difficult to predict what kind of retirement picture you might be in 20 years from now or 10 years from now and so the reality is you want those different tools available to you and there's a reason at each moment in your life based on your tax situation to take advantage of each of those tools and set yourself up to have that flexibility in the future and it's so it's such a complicated because you just talked about all these variables that be could be coming into this decision but so often people say just tell me should I have a Roth or should I have a traditional and you mention both but that's that's the question is just tell me what what should I do yeah and that's and I so let's dive into are you okay if I I want to tell people but the reality is you need a basic understanding of how these accounts work so what I'm going to do if you're okay is I'll dive into let's give people the basic understanding of the two major account types for retirement or two let's say it differently the two major tax statuses yeah because there are 401ks 403bs 457s IRAs simple and seps these are all different types of retirement accounts they all have one of two tax statuses traditional or Roth so we're going to talk about the tax status let's do it and then um after that I think it'll actually be pretty simple perfect okay so to understand the tax status you first need to understand when things are taxed so money going into a Roth account has already been taxed money going into a traditional account is pre-tax and then on the back end it's reversed so if you put money into a traditional account whether that's your 401k Ira whatever it may be you do not have to pay taxes on that and that feels real good right now because you get this tax benefit right and real quick when you say it's not tax is that just meaning that it's not going towards your reportable income at the end of the year when fing taxes you got it um and this is kind of unique because whether it's a 401k or an IRA the logistics of that are slightly different so if it's a 401k it disappears from your paycheck and you never report it on your tax return you never have to show it right yeah if it's an IRA you didn't you didn't pull that from your paycheck before it got taxed it actually got it feels like it got taxed right because it came through your payroll and taxes withheld and all of that then you take it from your bank account you drop it into a traditional IRA there are eligibility limits based on income but let's say that you qualify and you get to deduct so you get that to be pre-tax money is the idea yeah so you put it into a traditional IRA and instead of it never showing in the first place it shows and then you get to subtract it back out so that's so so when you you ask that question it's true but depending on the account type for a traditional tax status it may be subtracted before you see it or it may be subtracted after you see it got it anyway that's the way those two different counts work okay so either way the end result is you don't pay taxes on it if you put it into a traditional account of some type if you want it to go to a Roth account let's let's do it with the 401K again you put it into your 401k and your employer allows you to do a Roth election to your 401k that money will hit your 401k and it will still be showing up on your tax return and you'll still have to pay income tax on it so you don't get as much of a tax break well in fact you get zero tax break for putting it into a 401K Roth and then it will grow in that account in the future and then when you withdraw in retirement no taxes come out of that Roth 401k or Roth IRA so that's that's the core basics of the tax so if you can imagine um and I have some images if you want you can change them to whatever you want make them look however you want but the idea if you can imagine like put like a little red stop sign wherever you have to pay taxes or a red something um it's an a Roth that's right before it hits the account and a traditional it's where it comes out and that's super important to understand the tax event around the account cash flow if you know where the tax event happens then we can start to strategize okay so the first step is just understanding the tax event happens in that order now I'm going to explain why the math messes everyone up but I want to tell you a quick story so I love this I love the illustration that's here that you pulled up so but but keep going use it I I have found that this concept is kind of an aha moment for a lot of people and it almost is frustrating for people when they finally get it so I'm just going to throw that out there don't be frustrated folks but you'll be this is the point if you can understand this you're better off than just about everybody out there in this concept but a quick story so I'm sitting in a conference and this room is full of hundred um financial advisers Insurance salese like people in the finance industry of some type and the presenter was a wholesaler of an insurance company trying to teach the audience how to sell um a strategy that is meant to be tax-free growth for retirement through life insurance mhm which it has a place and there's an opportunity there um but this guy basically was saying everybody should have it and it should be the sole tool for everybody right you know you know the presentation I'm talking about yes um okay so his pitch was you put a $5 bill a $10 bill and a $20 bill on the table and you ask the client which one of these numbers do you want to pay taxes on and he said inevitably the client will always pick the $5 bill and he said clearly you would would pick the $5 bill pay taxes on the five and then let it grow to 20 and then spend that later and and this is one of those moments when my OCD just kicks in right and I'm like shaking in my seat but it's not my presentation so I I have just barely enough tacted not to say anything right and I just sit there quietly but the that's bad math and here's the bad math okay so we're going to pretend you have $10,000 to save for retirement and let's take you through the Trad additional tax status and I'm waving my hand in the air I forget we're on video I'm not used to this Eric but I'm I'm waving my hand in the air in front of the camera because I've got this drawing that shows we're going to take you through the traditional tax status path okay $10,000 you don't have to pay any taxes when it goes into the traditional account so you have $10,000 to invest we're going to make life easy for math especially for people just listening here and we're going to say that you invested at about an 8% growth rate over over about 9 years that would double the money and so the 10,000 would turn into $20,000 now you have to pay taxes on it in retirement to get it out and we're also going to use Easy Math even though there is no such thing as a 25% tax bracket right now there has been in the past we pay 25% taxes to get it out meaning $55,000 of the 20 went to Uncle Sam and then you get 15,000 spendable I've I've never heard anybody call like the spendable account balance but but that's important because that's all people care about is how much money do I have to spend in retirement right okay so we get to the spendable account balance of $115,000 well let's now take the Roth path and let's tax it at the very beginning and see what happens so we go the Roth path we have $10,000 and then we take 25% out at that time now we have to pay 2,500 now remember we had to pay $5,000 into taxes on the traditional side and now we're only paying $2,500 in taxes on the Roth side so the typical person would say fantastic I won I did it I did it I paid less in taxes I beat Uncle Sam you know so they're they're pumped about this right and that's the strategy of this this presenter that I'm talking about he paid on the $5 bill basically okay so they paid $2500 in taxes then that means that they only have 7,500 left over to invest so they invest at the same growth rate same number of years what would I say like eight yeah 8% growth rate for 9 years and they double the money so 7,500 time 2 you know double the money 15,000 no taxes on the way out $115,000 spendable again so that's the crazy thing as long as your tax rate and your growth rate and the time investing is the same these this will always work out out to the same spendable amount every time so that's the hard part for people is they think paying taxes on the smaller amounts better which is why I think Roth has gotten so much fanfare as of late yeah um at the same time I want to be careful I'm not against roths I just am I'm just against blindly misunderstanding the math do you know what I mean well it seems to your point they're saying like oh that $2,500 is less than $5,000 so it must be better but I think what you're saying here is that that spendable amount is what people should focus on absolutely not the prior stuff it's how much do you have spendable once you need it yeah and and a lot of people will argue well wait a second if I put $10,000 into my 401k I'm going to put 10,000 into to the traditional or I'm going to put 10,000 into the Roth I'm not going to put 7,500 into the Roth to which I would respond great okay if you put 10,000 into the Roth that means you had to pay probably another $2,000 from your regular paycheck yeah $2 to $3,000 for from your regular regular paycheck to make that money after tax so if you're willing to put 10 into the Roth what you're really saying is you're willing to dedicate $113,000 to retirement so put 13 in the traditional and we're back to the same equal math of the same spendable amount in the in the end so that's that's the odd thing and and I don't know if you want to share this but basically I've run four different scenarios to help people understand a low tax rate a high growth rate a low growth rate like the math we just showed it it doesn't matter as long as the growth rate stays the same the tax rate stays the same and the time invested stays the same then they will get to the same spendable amount now I'm not making the argument that it doesn't matter what I'm saying is if all the variables stay the same it doesn't matter but the variables don't stay the same for people's life right their tax rate changes specifically their tax rate changes you won't be able to know exactly oh in my early years I'm going to get a certain rate rate of return and then later you know you won't you won't be able to predict that exactly and frankly it doesn't matter what order you get the returns in too much um but the tax rate matters okay so if and if you're okay I'm basically going to get to the answer that you wanted earlier of what should I do okay we're there now if you can understand that the same spendable amount occurs when you have the same tax rate then a different tax rate will create different levels of tax savings over time meaning let's say that you have a high tax rate and it's going to drop well if you have a high tax rate today and you have to pay 30% tax on any earned income but you're going to retire and it's going to drop to 12 there's an 18% tax difference between those two you should be doing traditional you should not be doing WTH save the 30% tax on the contribution pay the 12% tax on the withdrawal yeah so that's important so I had to illustrate this I had a client who was was on the doors of retirement he was about two years away and they were they are still to this day super Frugal and they're the sweetest couple ever love them to death but he was making about $500,000 a year so he was in a re really tough tax bracket yeah he was making all of his contributions to a Roth 401k so that means he was paying taxes on the contributions and I think they like a lot of conservative folks feel that tax will go up over time and the reality is I believe as well that tax rates will go up in the same tax bracket meaning if you make the same amount of money I think the government will raise tax rates after 2025 they're scheduled to go up in 2026 each tax bracket will go up by about 2 or 3% so that's something we should all factor in this decision but their financial situation was not the same their financial situation was a half a million dollars in working years and then and they were going to retire and spend 80 yeah now if they're going to spend 80 we can control their tax bracket so well so their tax bracket was going to go for somewhere in the 30% with federal and state down to around an average of 8 to 12% taxes so why pay 30 when you could pay eight later that's the idea okay so if your tax rate will drop at that moment your contributions should probably be traditional other side of that if your tax rate will go up we're all hoping that we're going to make more money in the future right so if you're at a low tax bracket today and your tax rate is going to go up make Roth contributions take advantage of the low tax bracket and then with and then withdraw later taxfree when your tax rate is higher also I talked about this just a second ago um the Trump era tax cuts they expire after 2025 so every tax bracket will go up by a couple percent so we see a lot of retirees today or near retirees today in a 22% tax bracket that will be in a 25% tax bracket this is a very small difference but we obsess over small differences right so if if they can pay 22 today and and meaning throw it into a WTH at 22% tax and then in retirement if they're going to be at 25 we didn't save them a ton of money but we saved them real dollars so that so if your tax rate will rise then you should be doing Roth okay the last two so there I I mentioned there are four different maybe I did but there are four different reasons that even though you get to the same spendable amount you should be aware of it and maybe go one way or the other so we've covered two tax rate is going to drop you should do traditional tax rate is going to rise you should do Roth and when I say you should do I'm talking to all the demographics you mentioned earlier the person who is just starting out and doesn't know how to save or where to save if you are in a low tax bracket do Roth if you're in a high do tradition um and when I say low and high the tax brackets go 10 and 12% and 22% 24 anything above 24 you should probably be doing traditional MH anything below 22 meaning the 10 and 12 you should do Roth and then at 22 and 24 we see people go either way kind of depends on what they think their financial future will be and if they have a lot of money they're probably going to be in a higher tax bracket they should do Roth at 20 24 if they're in their final earnings years and they're going to retire and spend 80 to $150,000 a year they should probably actually do traditional in the 22 and 24 because in retirement they'll only pay 10 and 12 yeah so it's less about like where you're at today and more about trying to predict today versus the future and then going one way or the other but those are two of the reasons there are two more and Eric I'm just like babbling like babbling on here like are you okay if I I am loving every minute this so cuz you and I want to get to this in in a minute because you talked about it's probably a good idea to have both and me working with you guys I have both and and so keep going but there are reasons why to have both and that's going to be reason for so I'll explain reason four here in a second um the reason to have all three utensils you know at the dinner table um and by the way no one ever talk about it that way but I'm I'm kind of liking how that visually helps but number three let's cover that really quick it goes back to that well I would save 10,000 either way traditional or Roth Now number three is you want to ultra Max Fund your retirement contribution limits let me see if I can explain that if you are under 50 and you can contribute to a 401k through work you can put in and these numbers will change so I don't know how how long 2023 it's 2023 22,500 if you're under 50 $30,000 total if you're over 50 that's where we're at today and every year this goes up a little bit um if you are the type where you're like I'm going to Max Fund my retirement contributions every year if you put 22,500 into a traditional 401K you're in a partnership with the IRS some of that money is not yours and some of it's theirs right and it depends on it when you take it out and what your tax rate is so it's not a set percentage partnership but you're in a partnership with the government on that money if you put it into a WTH there's no partnership you own 100% of it so let's pretend you're 51 years old just to make life easy and you can put in $330,000 $30,000 to a traditional 401K is less than $30,000 to a Roth 401k because the reality is you putting 30,000 to a Roth 401k gosh if you can put that much money towards retirement you actually probably make a decent amount of money and your tax rate is probably in the 20s or more so you also paid somewhere around $6,000 of taxes on your tax return so it's like you saving $36,000 not 30 so the third reason you would pick one or the other is even if you know your tax rate's going to go one way or the other you can choose to ignore that if you want and say I get it I get it maybe traditional is better for me today but I want to Max Fund my retirement contribution eligibility up to the 30,000 and 30,000 of Roth is more than 30,000 of traditional so that's reason three yeah reason four has to do with something an engineer taught me a term for I explained the concept but I didn't know the term and he said oh it's degrees of freedom and I said I have no idea what you're talking about teach me what degrees of freedom is and degrees of freedom is the ability to set yourself up so that at a point in the future you have multiple paths you can choose from or multiple um directions that you can go in your future State yeah I thought that was fascinating that Engineers used that to like set themselves up for for future problem solving so the idea here is if you want and what we called it sorry he called it degrees of freedom what we call it is setting yourself up for good marginal tax bracket management degrees of freedom is a whole lot better sounding but a little bit less descriptive than what what it really is right but future marginal tax bracket management is is the ability to say we talked about those rates right 10 12 22 24 and by the way those are as of 2013 too and the lines for those change in 20 every year as well but if we have the ideal retiree set up so this is also something I'll give you an image for this but you decide but this is where the fear comes in so that my dad is in this demographic too and he gets the mailers just like your parents do for Medicare and he gets the mailers that say Hey if you have over $500,000 of investable assets you're going to pay 70% of it away in taxes if you don't do just this thing now the reality is I I tried to figure out a way someone could pay 70% of their Ira away in taxes it's incredibly difficult like you would have to purposefully love the government to figure out how to make that happen and you'd have to have 20 to $30 million of of assets die have it go through estate taxes and your kids would have to be making like $800,000 an income and be in the highest tax brackets so that's that's how hard it is to pay that's if that's you you do have a problem now let's talk to the other 99.99% of America here for a minute um where that's not your problem okay so if you prepare in a way to set yourself up for multiple Paths of control and retirement meaning degrees of freedom or marginal tax bracket management whatever you want to call it if you set yourself up for that here's what we call the ideal prepared retiree they take Social Security let's talk about a couple make life easy say have you have a couple they take Social Security pensions and withdrawals from their traditional tax status while they're in the 10 and 12% tax brackets so that's up to about I'm going to round here because these numbers are going to change anyway but about $80,000 $80 to $90,000 of income and everybody gets to deduct a certain amount of income from their tax return too which we won't go far into that so the reality is you can have about $100,000 of income over that even of traditional taxable income in retirement taxed at 0 10 or 12% so we want to maximize that space in other words what I'm saying is if someone is like exclusively hardcore Roth or die yeah right yeah they missed an opportunity because in retirement There's an opportunity to take income out at 0 10 and 12% brackets that they missed and they probably paid a much higher tax bracket during their earning years yeah your employment so going back to the concept of setting this up if for the ideal retiree they spend $100,000 of taxable income and then if they have like we talked about real estate or regular brokerage accounts which we haven't that's not the point of today but we could get a lot of money out of those types of assets at a very minimal tax cost maybe 10 15% capital gain rates and on average and then you could take from the Roth and hsas at no tax cost so the bottom line an ideal retiree could have $ 150 to $250,000 of annual income and have an average tax rate of somewhere around 10 or 11% and this is goes back let's bring this back full circle to the first thing you brought up today be tax aware not tax afraid right 10 to 10 to 11% doesn't sound bad to me at all right fact I would love you would love everybody would love to pay 10 to 11% tax rates it's um it's but but hope doesn't necessarily Mak selling people very you know very easy you know what I mean but I think that's I mean that's I think that's commendable with what you do with 90 days from retirement is that that you don't do the fierce side you just say we're just going to educate you like crazy and hopefully you can see the value in that but that's it so I'm going to do a quick recap I'm going to be quiet I've talked for a long time and then you're going to ask questions but but your questions I'm sorry to do that a little bit but questions we can finally answer them because now they have the background right for sure um recap is there are four different reasons to do one or the other will your tax rate rise will it drop are you trying to Max Fund your contribution limits or do you want to have marginal tax bracket Management in the future or degrees of freedom and that's it and then the main thing to understand about the Roth and traditional tax status is that if the variables are the same meaning the tax rate and the growth rates same spendable yeah no I think that's beautiful like I think you just took a really complicated process and I think especially with the help of the graphics that we'll put up here I think that'll make it so much more understandable for everybody and to your point of what we try to do here on 90 days from retirement is we're not trying to persuade or push anybody into either decision it's all going to be based on them they make the decision we're going to help you understand how it all works and now you're armed to make a decision based off of your specific situation so I think that's beautiful I do have a few questions yeah I'm so sorry I feel terrible but I don't know go ahead so so having both we talk about the life cycle again the vast majority of our viewers here are going to be approaching retirement but for if we do get the a handful or two that are coming in at say 18 to 65 years old that range there when we talk about changing tax brackets as you're going through your life and and you're starting off we have somebody say our videographer who isn't in the higher tax brackets right now but in the future he will be is that something where at the beginning get a wroth you start making sense they're contributing to that and then as you start to grow to your point of hitting those specific margins you can have both can you fund both at the same time yeah is it only funding one or the other take me through that concept great question okay so let's first talk about the rules you can fund both at the same time mhm you just have a max contribution limit that needs to be shared gotcha so total so like if that contribution limit is what is it now in for the 401K and and we've talked a lot about 401ks different limits for 401ks and IAS different restrictions around the two too around who can contribute so you might not even have the option of an IRA but 401k if you're over 50 30,000 if you're under 50 22,500 IAS much lower limits and higher restrictions um so funny I'm I love Concepts don't keep track of all the numbers and rules exactly so it's 6,500 I think it is plus a th000 for catchup on an IRA gotcha um we'll verify that real quick but anyway so that's the so that total number I could do half of that into a Roth half into a traditional but I can't do the full number into both a Roth and a traditional that's right that's right so you couldn't do 30,000 into each you'd have to do if you're over 52 401K you'd have to pick or split the difference the other thing realize is that your employer is most likely going to match traditional the there's a there's a recent law that came out again all this relative to 2023 recently came out and just barely made it eligible for your employer to match with Roth contributions but most employer plans are not equipped for that kind of a of um an accounting like nightmare that they'll have to keep track of and so I think a lot of employees are a little bit like well hey the laws out do it and the employers like whoa whoa whoa hold on this is going to be hard and so they're I've seen very little employer adoption of that capability just yet but I think it's coming so but just for now most of you as you put money in Roth you are automatically getting into um diversification of tax status that that marginal tax bracket management degrees of freedom you're getting that naturally because you're putting money in and they're putting traditional money in so you're getting a little bit of both I have I have a related question but different questions to both of that so when we talk about let's talk about the rules around a Roth let's say it's not through an employer it's not a 401k it's just an individual account there is there a way for both me and my wife to have one now so rather than that limit being on me contributing can we get multiple IA within the same family oh for sure for sure and by the way I just pulled it up it is $6,500 for the IRA Plus ,000 catchup for is it 55 plus people over 50 50 50 plus yeah 50 is the I is the contribution catchup um amount for or age sorry for IRAs gotcha um okay this is where it gets a little bit tricky on Ira eligibility there's something called active participants so if you have a pension plan 401k plan um all of those are governed by a body called irisa e r i s a if you have one of these types of plans and there's more than just 401K in pension um but I'm trying not to over complicate today you can see I have a hard time with that but here here we go so you you try not to over complicate it those two account types if you're if you are an active participant in a plan then your income limits drop to lower levels for eligibility for Ira contributions and sorry let me say this differently for Ira deductibility l eligibility okay so me say that differently yeah cuz those were words that like a lot of people are like listen man I know those words individually but when you put them together like that I don't know what's happening okay so we talked earlier about putting money into a traditional IRA yeah it hits you kind of feels after tax right because it comes through your payroll yeah and then you have to then send it to an IRA and you then get to subtract it from your income that's how it reverses the tax and it becomes pre-tax money M but some people make too much money to be eligible for that reversal of income the reversal of income is what a deduction is like if you could take income subtract it out from your paycheck and make it not show up on your tax return that's like perfect that that's a deduction yeah um anyway so reversing the income back out of your paycheck you can only do that if you make under certain limits and it gets this is where it gets complicated because if you are an active participant and um let's do again filing jointly if you make you have to make under $116,000 a year to get the full reversal back out to get the full deduction back out yeah if you're not an active participant and your spouse is not an active participant they actually include the spouse in this too so if neither of you are an active participant there's no income limit okay so that's the thing so like let's say you're self-employed and you don't have a plan a retirement plan you've set up for yourself of any type through your work you can make an IRA contribution and deduct it no questions asked you're fine because you're not an active participant yeah but once you become an active participant in a retirement plan government's basically saying like you have these massive contribution limits over here why are you fighting us over this $6,500 contribution to your IRA just put it over there where you can do 22,5 00 um which I kind of agree like it's way easier so there are no income limits on the 401K like you could be making a half a million dollars a year and if you really want to do do a Roth contribution over there you're not you're not going to run into any problems yeah um anyway so the the let's see if I can summarize this if you are an active participant you have a really low income I say low being like relative but you know as a couple it's 16,000 that's pretty common for a lot of dual income households to to to go over that right um if your spouse is an active participant but you are not the government's trying to help you out a little bit here they're like okay we get it you don't have a plan so your income limit now as a couple is 218,000 so they bump it up yeah and then and but anyway if you don't have an active participant you're good if nobody is so that so there's it sounds like three scenarios here one you're both active participants in a plan so both husband and wife in this case just as an example are both active par participants in some sort of a 401k or pension there's a situation where one of the spouses is an active participant and the other is not and then a situation where neither are active participants you got it and so in the situation where one is and one is not the one who is not is the one who isn't sub they're they're bumped up their limit is higher 218,000 instead of what did I say one 16 gotcha and then the couple that neither of them they have no limit on income you got it and then you really the reason we brought this up is because you asked like can I do my do one for my spouse as well and you absolutely can it's called the spousal IRA contribution you set up an IRA in your spouse's name my wife and I do this every year she doesn't have a lot of earned income and and by the way we talked about the income sorry the contribution limit being 6,5 500 if you only earned $2,000 for the year like a kid or somebody else that's the max contribution limit it's it's it's the lesser of your total earned income or 6,500 that brings up another question then so can I set these up for my children oh yeah uhhuh but they need earned income they need to start see that's the point like that's that that's what squeezes their contribution limit down to zero is if they have no earned income so often times you'll see parents will say like okay go get a job and if you save you know $100 towards your Roth IRA I'll match it for you you become the employer with the match and like I'll give you another hundred bucks to throw in there but the the kid needs at least $200 of earned income to be able to do that yeah perfect yeah okay so so going back those are the contribution limits I keep saying that but I need to clarify and you can decide if you edit but it's the deductibility eligibility they're in other words the ability ility to reduce your income is contingent or dependent upon your income level for a traditional contribution a Roth is different a Roth they've got different rules they actually will stop your contribution entirely at certain levels and into an IRA okay so a traditional you can make a contribution even if you make a million dollars a year you just don't get it as a tax deduction yeah and my personal opinion is that gets a little bit messy because now you've got money mixed in the same account of traditional meaning pre-tax and after tax in the same account and you have to track that it's called basis you have to track the money that's already been taxed in there and it it gets a little bit it it's mostly annoying it's not the end of the world you can do it it's just people don't like to have to deal with that interesting okay let's go back to the degrees of freedom real quick or the what what was your longer term I call it marginal tax bracket management marginal tax bracket management so you talked about how your first it can be potentially like $100,000 once things get deducted but say it's $80,000 is going to be coming from um pensions or not pensions it was traditional traditional IRA Social Security Social Security and like just to maybe throw a quick thing in there not all of your Social Security will be taxed that's a whole ball of wax someday I hope you and I get to like to really open up and flush out already did a great video yes never mind just listen to Eric he's way more succinct anybody who has seen that video though Zach is the one who put that spreadsheet together So for anybody who was like man that spreadsheet we want it Zach is the one who put it together um so so the point being is that there are those limits of $80,000 then you talked about the next step would be things like real estate Investments or capital gains is now going to be around that 15% and then finally the Roth um withdrawals is that something where you're actively tracking that is that something where you have to report those phases or you're just taking it out from all of these accounts and at the end of the year are you designating okay my first amount came from this account my second amount came from this account or is it just kind of all okay this is oh my gosh that is a good question it seems complicated in my mind okay I have to track this and report this you don't so there's very little work you have to do and the reason is because the tax forms are so complicated and and this is the reason they are complicated is because all the little questions and the little like now Times line 16 by 50% and subtract from lesser of line two and one and like that is what goes on it's like a Choose Your Own Adventure almost feeling within the tax forms right and only a few of us are nerdy enough to spend that much time on them but all that math is calculated for you okay basically if you have income show up it's going to show up to in the form of like a$ 1099 as income to you somewhere a w to from earned income at work um $199 is for brokerage accounts um if you have Partnerships and other business income k1s are going to hit you all these are just different reports that the entities send to you and that you gather in the beginning of the year and you're waiting until you get them all right to then do your taxes right um those those entities send one to the government as well so the government knows how much income you had M and then it's it's your job to then get it right on the tax return by plugging it into the right spots and the tax return will figure all of this out so maybe an easier way of understanding this it's kind of like oil and water when you pour it into a cup one of them's heavier than the other they stay separated mhm so the heavier liquid drops to the bottom and that's going to be your higher tax rate items so let's say that you have capital gains which is I'm going to say long-term capital gains at a lower tax rate on average you know often times it's about 10% less in taxes depending on where you're at on the scale that's lighter liquid it's going to float to the top and then the heavier liquid is going to hit the bottom and that's going to hit you at the income rates ordinary income rates are higher than long-term capital gain rates and then Roth is always the lightest liquid it goes all the way to the top it's zero on the way out okay so let's say that you you had $50,000 of regular income the heavy stuff hits the bottom and then you had $20,000 of capital gains and then you had $220,000 of Roth and traditional which by the way that person like let's just talk about that for a second that person pays zero I'm talking a couple yeah that couple pays zero on their long-term capital gains because at the bottom of the long-term capital gain bracket there's actually a 0% long-term capital gain bracket people don't know about that but there is so but now let's say you're sitting there with that scenario and you want to buy a car and your next resource is really just uh a withdrawal from your traditional 401k or IRA when you take that money out that's heavy liquid yeah you pour it into the bucket and it hits the bottom right away and it pushes everything up so as it pushes things up it may actually change the tax bracket on your long-term capital gains right yeah they were at zero before but that heavy liquid went to the bottom and it lifted up the long-term capital gains income and now you're you might be taking on a 12% income bracket and you might have thought oh it's only 12% like that's no big deal I can take that IRA withdrawal that's no big deal it's 12% but what you don't realize is it pushed all your $20,000 of capital gains into the 15% so that $20,000 withdrawal may have actually cost you closer to 27% tax rate because it affected because it's heavy liquid hit the bottom pushed everything else up but the tax form figures all of that out it's on us and this is part of the reason that we do annual tax planning with our clients an annual tax strategy as to how they take money out of their accounts because it's on us to guess what it's going to be like when they file their taxes in March yeah and that gets tricky yeah well this is a perfect segue to a question that I had and I've got a very close friend who I've talked to about this uh specifically like meeting with you and all of you at capita and he was like well why would I need an adviser I can just throw it in an index fund and that's fine for me so I hope that this conversation illustrates some of the value of an adviser as you're going through all of these complex thoughts but especially when you start talking about okay how much money can I take out during retirement how much money should I take out to maximize what you're talking about with these tax brackets so maybe you can answer that even better as people ask you well why should I use an advisor versus just throwing stuff in an index fund and yeah figuring it out can and let's just take like a moment and sympathize or empathize with your friend okay because a lot of people who call themselves financial advisers are truly and only investment managers so if you if your friend is thinking about the question of why should I why should I hire an investment manager or buy an index when I could buy an index fund he got an incredibly strong argument right there are investment managers that do a really good job with investment management and produce something different than what a pure Index Fund can do and let's just take a step back and say there are investment managers that use index funds so it's not like they're not like they're against each other here in fact if an index fund for a specific category investment of investment let's say that you're looking for a particular style of investment maybe it's a certain type of dividend paying stock or a certain type of or a certain stock within a sector like in the best way to get health care stocks on a diversified basis might be to own a diversified index Healthcare um fund that might be the best way to do it for that for that investor if I was working with an investment manager and there was a really good way to get something done but we had this fake comparison that we had to compare against and say well I'm an adviser I'm a wealth manager I can't ever use an index fund because my my customer will question that like I would hate for my if I was the customer I'd be really mad at my investment manager for not using the index fund do you know what I mean like so okay so let's take a step back there are multiple reasons even if we isolate what I'm going to call is about 20% of the wealth management conversations and work which is Investment Management even if we pretend that that's the entire world of wealth management there's still an argument to be made for am I too busy yeah do I need help because yeah you could buy an index fund but which one like you buy the S&P 500 you have just us large cap stocks which by the way is driven by about the top 10 out of all 500 the the majority of the price fluctuation of the S&P 500 is because of Apple Google Facebook Microsoft and a few others right it's it's the top 10 that drive that so then you might say well I don't really want that maybe I want to diversify out let's buy the total market index and get 3 to 5,000 stocks in there and then you're missing International it's like well okay I'm going to do International too I'll buy the the EA index which is Europe Asia and Far East and gives me a but what about South America Canada you can see how like you can start to to to wonder okay but what are my allocation allocations across the index funds that's where where an investment manager comes into play but I don't even think that's the real argument here we haven't even talked about Investments today and I don't know what are we up almost like an hour and we're doing just taxes and we're doing just traditional and Roth do you know what I mean so so I guess what I'm saying is investment management is 20% of the conversation that needs to be had around wealth management the real question is is your money empowering your life and if it's not there's a problem and an index fund doesn't teach you how to do that yeah but an index fund can be an incredible tool to help facilitate growth keeping up with inflation and empowering a wonderful life so that's that's an important distinction to be thinking about so the other categories would be estate planning is your money matching your values and going to the right people at the right time are the people having control over it that should have control over it the people know about it that should know about it that's estate planning Insurance that's a lot of what you do right that's part of the wealth management conversation Investments taxes you know college savings you get the idea there's so many different categories that that that investment decisions is really about 20% of it and so yeah if you're comfortable with all of those conversations you enjoy it and you really like it for a lot of people who are do-it-yourselfers I suggest they use index funds because you can really get you can really get hurt as you go into individual Securities if you don't know what you're doing um one thing that I we talked about at the beginning was making decisions based off of fear so rather than being fearful be aware so what are some of the fear tactics that you see in your world around financial planning Financial advising financial decisions that people should watch out for okay that's a yeah that's a great question and we've talked specifically about some tax fear mongering that happens um I do want to just mention one other a little bit outside of just the tax concept it's more around investment decisionmaking often times as as an individual gets closer to retirement or they transition into retirement their risk tolerance will decline that happened with my dad he he was super risk tolerant and as I helped him through his retirement transition I was actually shocked to see how conservative he became it's like who is this man who is this man that I this is not the man I grew up with um but anyway he got really risk tolerant or really risk intolerant as he got older and a lot of financial advisers feed on that unfortunately and it's it's easy for us to make decisions out of fear and what's really difficult about financial markets is that they are always evolving and always new in other words the statement of we've never seen markets like this will always be true yeah and I get that comment a lot in our calls with clients and say we've never seen anything like this before and it's you're absolutely right when in 2008 during the Great Recession and I would go to the breakroom every day and it was be Sterns one day AIG another day Leman Brothers another day these are companies that had been around for decades to over a hundred years and all of a sudden and they were collapsing by the day and that was a market we had never seen before we haven't seen that since but we had never seen anything like that before was probably the best investment opportunity of most of our lifetimes would have been to buy in March of 2009 that was the bottom and I I I don't know I'm not trying to call any particular market movement but that was by far the best Market investment opportunity that I would have ever had and so far so what I'm saying is that fear is strong and we will always see new variables to the marketplace as businesses evolve and Technology change so you as a retiree as you become more conservative that risk becomes more potent to youh and you become more at risk for making a poor decision whether that be going way too conservative bailing on your Investments when they drop or um buying too much of of conservative Assets Now I'm not trying to tell people they should be aggressive but what I'm saying is the the people I've seen ruin their retirement plan the most are the ones that went overly conservative and got completely out or put everything into um something that locked them in Forever um or they put it all on black and and spun the table does that make sense so as long as you are Diversified and one CEO out there you know turning their company upside down has negligible negligible impact on your retirement plan if you can maintain that status that you don't really care what any CEO does cuz you'll barely notice because you're that Diversified you're fine on that side and then make sure you don't bail make sure you don't get subject to fear-based um rhetoric or fear-based conversations that that make you so scared and so paralyzed to move the reality is businesses make more money and as long as businesses make more money in the future their stock prices will eventually follow but kind of like the tail to a kite they're going to whip back and forth in the meantime so as these businesses grow their earnings earnings growth is like 96% correlated with stock prices over time so our companies growing their earnings is almost all that matters yeah if you're a long-term investor so don't let the fear-based conversation derail your retirement plan that's probably the the other fear um concern and things to watch out for that's a little bit outside of the tax side but that's the other one that we see well and it's so applicable not just to that but our world too right I mean there just so many videos out there that are just trying to scare people into a decision and and I think that if we can separate ourselves and that's why I like personally having an adviser of okay I'm I'm feeling this help me understand the bigger picture here is this feeling warranted or is it not and to have that person that is an expert in that space help say yes this is something that we need to start moving on and taking action on or you know what it's okay to your point that's one small piece of your big puzzle here that we've got and it's negligible everything will be okay yeah and let me tell you a quick story to maybe wrap up on this the way people talk and the way people act that are professionals within the industry like on the news would shock the public to understand how much of a divide there is let me explain what I mean I was on a conference call back in I think it was 2010 and we were really worried about gree going under at the time and and a bunch of other things right and this portfolio manager that I was listening to and it was a bunch of financial advisers all listening to this guy talk and I really respect this guy still follow him on Twitter U it's been a long time I I think he's a really really smart individual his fund was a go anywhere fund what that means is he gets to choose whatever he wants to buy that's not normal most funds have a mandate they put guard rails around the manager and say buy just this type of thing stay in your lane this manager they basically said do whatever you want and and so he would buy assets of all asset types stocks and bonds International and developed uh sorry International developed countries and us or you know large or small companies you get the idea like anything he wants to buy he had a benchmark of 60% stocks and 40% bonds just index funds that his goal was to beat that Blended Benchmark so we spent an hour with him telling us how awful everything was and so then at the very end they open it up to Q&A a couple questions come through and then another adviser thankfully asked the question that I was hoping he would ask right and he's like okay you've just told us how terrible everything is how much we should be concerned what are you changing within the allocation of your portfolio in order to to represent that feeling and he said I'm all the way down to 52% stocks the rest of us are just like whoa whoa whoaa hold on let's you should have told us that at the very beginning of the call yeah because he had only changed 8% of the stock to bond ratio if for those listening bonds are typically more conservative than stocks stocks typically fluctuate more so a way to get more conservative within your portfolio would be to adjust the ratios between stocks and bonds and he had only done 8% and he had basically just just painted a picture that the world was falling apart right so what I'm telling you here is as you listen to the news and you hear people talk about how awful everything is you should know that a lot of the professionals to them it is a big deal to deviate 8% off their target that's a big deal to them so to them they're saying can you believe the risk I'm taking here of underperforming by going 8% under on my stock allocation this is scary well to him it is he could get fired if the market goes up and he doesn't keep up with it right so his whole world is is decided in inches you know where where for us that's really not that big of a deal yeah so deciphering the difference between the news and action sometimes can be really difficult for people who aren't in the industry yeah that's great um I huge props to everything that you brought to this conversation and we're we're going to have more of these because we talked about this is just the Roth versus traditional IRA conversation there are so many more um you have built out and I said this in in the introduction an entire educational website called the financial call where you take I think it's eight is it eight seasons that you'll have y um that are it's unbelievable so if if anybody watching or listening you want more information on not just the conversation that we're having but a range of different topics the financial call is a great place to go and we'll put that in the description of this video people can get there quickly the guided path I think is brilliant um and and so a lot of the Social Security content here on 90 days from retirement we we leverage you guys a lot so we appreciate your help in all of that you are the financial experts uh and and you're you're fantastic thank you yeah yeah this is super fun I'm glad that we to do this well I think that's probably a good place to stop yeah thanks Eric you're awesome [Music] man
