Are You Doomed Because You Don't Have a Roth Account?

 

In my last post I lamented the confusing and often contradictory personal financial advice being handed out over the media and online.  But one piece of advice seems to be consistent across all sources: It is better to have a Roth account than a non-Roth retirement account.  In fact, if you don't have one, you are advised to start moving your money into one right away.

But is it REALLY better?

There’s no doubt a Roth account has some advantages.  In these retirement accounts one deposits money that has already been taxed and which—upon withdrawal—will not be taxed again, nor will the interest/investment gains that have accumulated in it.  In a non-Roth account the deposits are not taxed upfront, but both the deposits and the accumulated growth in the account are taxed upon withdrawal. The difference between a Roth and a non-Roth account has been likened to paying tax on a bag of seeds as opposed to paying tax on the entire harvest. 

If you start socking money away in a Roth account early in life, then you would have decades of accumulated wealth by the time retirement rolls around that you could withdraw without paying tax on it.  The rationale for opening a non-Roth account has been that it is better to have the upfront tax deduction when you are more likely to be in a higher tax bracket than you will be in retirement.  But in recent years, given the growing national deficit, the lower-tax-rates-in-retirement assumption has fallen out of favor and experts have leaned into Roth accounts as the best alternative for retirement saving.

Now comes a study from three finance professors at Providence College, published in the Journal of Wealth Management and reported by Marketwatch that claims to show most taxpayers would be better off with a traditional (non-Roth) account.  In fact, over a 45-year lifetime of saving the typical retiree will end up saving nearly 25% in tax liability by using a non-Roth account.  They even concluded “[t]hose who expect to have $1 million or less saved in retirement are not expected to pay taxes on their distributions.”

I tend to believe them (well, as much as I believe any “expert”, and only to an extent), especially given the current income tax structure in the United States and the prospect that it will continue as is for another four years. The bulk of my retirement money is in non-Roth accounts.  I’ve already withdrawn tens of thousands of dollars (hey, retirement bucket list travel, grandkids…..don’t judge me!) and have not paid any income tax on it.  And I’m not using any special tax breaks or elaborate strategies. It's the tax brackets and the historically high standard deduction.

We simply cannot know future tax rates or predict what legislation will be passed years in the future and plan our finances with any certainty about those factors.  We just do the best we can.

So once again, do not automatically accept the conventional wisdom.  Carefully consider your own situation.  And by all means do not feel you have made a mistake by stashing your retirement savings in a non-Roth account.  At least you saved for retirement, and that’s more than a lot of people can say.

Until next time,

Roger

“How do you know what will happen tomorrow?....As it is, you take a certain pride in planning with such confidence.  That sort of pride is all wrong.” James 4:14, 16 Phillips

Confused or Depressed? The State of Financial Advising

 Would you be completely baffled if you encountered this road sign while you were driving?  Would you know what to do, which way to go?

I can guess your answer, and that is why I chose this picture as a graphic illustration of today’s financial advice.  Listen to too many “experts,” read too many financial advice columns, and you will soon discover how confusing and even contradictory they can be.  Why is that so?  Why, for example, does one expert say you are financially secure in retirement if you start out with $500,000 while another says, oh no, you need $2 million?  Why does one source say you can safely withdraw/spend 8% of your retirement savings each year and still not outlive your savings, while another says 4% is the safest route, and yet another says 2.7% is the max you should be taking out annually if you want to be certain not to run out of money by the time you are age 95?

Part of the disparity is the assumptions from which each advisor works.  In the examples above, one advisor might assume that the retiree is invested more heavily in stocks than in bonds.  Another might project that the stock market will perform better than his peers would predict.  But I believe there’s more than just differing working assumptions causing the confusion.  I’m afraid that not everyone touting his financial credentials online, in print, on radio, or on television necessarily wants to give solid financial advice but is more interested in making money for himself.  And if he makes a bold prediction or goes against the flow of what most others say or foresee, he garners more attention, more television interviews, more clicks to his website because he stands out—even if what he says is absurd.  As long as he can throw some numbers around, cite some statistics, he can sound authoritative. 

This is more common that we might believe.  I read a lot of articles about personal finance, in print and online, but there are some sources I’ve simply stopped reading.  One preaches nonsense, another is transparently throwing out click-bait to make money.  What is the ordinary investor to do?

My suggestion: find a couple of reliable sources for your financial advice.  Don’t live in fear over your future financial situation.   It probably is not as dire as you are being told.  Take a moment, whatever advice you are listening to or reading, to evaluate what the source has to gain by directing you to take specific actions.  Sometimes, they just need an audience or an increase in the number of people going to their website.  But some advisors might stand to make big commissions if you do as they tell you to.  Not everyone is looking out purely for your interests.  Remembering that, having a spending plan (budget), saving regularly, and living within (preferably below) your means will be key to a secure future financially.

Until next time,

Roger

“To show partiality is not good—yet a person will do wrong for a piece of bread.” Proverbs 28:21 NIV®*

 

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™

 

[By the way, I took that picture on a rut-filled, unpaved mountain road to a lodge in Alaska.  It was a joke.  There was also a sign at the top of the hill that read, “Freeway Ends in 500 Feet.”]