Have you been worried by some of
the financial gurus who are out there telling you that all that money you saved
for retirement is not really yours? That
Uncle Sam is ready to take his share in taxes, so you are not going to be as
well off as you think in your golden years?
I understand what they are
saying; I just don’t buy into it—not for everybody’s situation, at least. Let’s review the facts.
Most people save for retirement
via a workplace plan like a 401(k) or through a personal account, like an
Individual Retirement Account (IRA).
Most of those accounts are regular, or non-Roth accounts, meaning that money
that is deposited is not taxed before it goes into the account. This is a nice upfront tax savings. But the money IS taxed—along with the years’
worth of growth in value—when it is withdrawn in retirement. The usual pitch for these plans is that in
retirement you are likely to be in a lower tax bracket, so it’s better to have
it taxed then rather than in your peak earning, high-tax-rate years.
A Roth account (either a 401[k]
or IRA), on the other hand, does not give a tax break at deposit. The money going into the account has already
been taxed, but when it is withdrawn in retirement both the initial deposits
and the years’ of growth in value are NOT taxed. The recent selling point for these accounts
is that taxes now are at historic lows after the Trump tax cuts of 2017, and they
have nowhere to go but up, especially in a Democrat-controlled government
intent on rolling back Trump policies.
So you should—the logic goes—deposit money now into a Roth account or
even switch money from a non-Roth account to a Roth account and pay the resulting
tax bill while the rates are low.
Again, I understand the
rationale, but two factors give me pause.
First, I don’t like the implicit message that people have been saving
unwisely by investing in non-Roth accounts.
I salute anyone who has the foresight to save for retirement in any type
of retirement account. For some of us,
when we first started saving there was no such thing as a Roth account. And even now, not all employers offer Roth
401(k) accounts. So should I direct my
nest egg into a Roth IRA and give up the employer match I get when I deposit
money into their sponsored 401(k)? Give
up an immediate 50% to 100% return on my
investment? I don’t think so. Besides, there are strategies for minimizing
the tax burden in retirement. All is not
lost if you don’t have a Roth account.
But the second reason I don’t buy
into the Roth hype is that I think part of the argument in ts favor is
flawed. Suppose, for example, I use some
of those tax avoidance strategies I referred to and paid little or no taxes on
the withdrawals from my non-Roth account?
Then I not only avoided taxes upfront but dramatically reduced my
rate—maybe even to 0%--upon withdrawal and maybe end up not paying any taxes on
the deposits. (Of course, if I had a
Roth account I wouldn’t have to jump through hoops to avoid taxes, so there IS
that.) And who is guaranteeing that tax
rates are only going to go up? The
headlines yesterday quoted President Biden saying that under his tax plan,
Americans earning less than $400,000 “wouldn’t pay a penny in taxes”. I think that was a verbal slip-up on his
part; he meant to say “a penny more in taxes”. (What a difference a word makes!) True or not, it shines a bright light on the
uncertainty of the future. Can you (or
the talking heads on TV) guarantee that YOUR tax rate will go up in retirement? Truth is, we don’t know the future, and each
change in administration in Washington will push its own agenda and inject new
elements of change.
Financial professionals rightly
urge you to plan ahead. Save for
retirement in whatever account you have at your disposal, given all the
factors. And if the rules of the game
change, then adapt to those. No one
should ask more of you than that.
Until next time,
Roger
“Now listen, you who say, ‘Today or tomorrow we will go to
this or that city, spend a year there, carry on business and make money.’ Why, you do not even know what will happen
tomorrow….Instead, you ought to say, ‘If it is the Lord’s will, we will live
and do this or that.’” James 4:13-15
NIV*
*Scripture quotations
taken from the Holy Bible, New International Version® NIV®
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Used by permission.
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