“Taxes are the single biggest factor that separates people from their retirement dreams.”
That’s a quote from today’s guest, Ed Slott, a nationally recognized IRA distribution expert, CPA, and bestselling author.
If you’re like most members of the Financial Independence Retire Early (FIRE) community, you understand the massive tax challenges inherent in retirement planning. Strategies such as the mega-backdoor Roth are popular because the FIRE community loves to optimize for taxes.
Ed does, too.
His book, The New Retirement Savings Time Bomb, is about how we can diversify and manage our tax risk so that we can achieve our financial independence and early retirement dreams.
So … what should we do?
Ed is a big proponent of Roth accounts because they’re an easy, widely-available solution. His Traditional IRA has a balance of $0.
He advises that younger listeners, regardless of salary, focus exclusively on funding Roth accounts the moment they start earning.
He says that while your focus may shift with age, it’s a good idea to have some funds in tax-free vehicles to hedge against potential tax increases.
Curious as to why? Ed provides his thoughts and expertise as a CPA in this interview.
As a bonus, Ed finishes the interview by answering three questions submitted by a listener named Pepp.
Pepp asks:
“My questions are centered around retirement planning. My job offers a 401k and a Roth 401k. What are your thoughts around percentages between those two types of accounts, especially when your retirement is a big question mark? I’m in my mid-40s and I don’t anticipate retiring for another 15 years (if ever). I don’t know if my tax bracket will be higher or lower. How can I strategize my split between a Roth in a regular IRA inside of my 401k?
“I’m also concerned with the new SECURE Act that went into effect December 2019. I have a beneficiary IRA that I inherited from my father, and I want to leave a legacy to my son. However, the SECURE Act states that you need to drain the IRA within 10 years. If I want to send a gift to my son later in life, does this mean it’s smarter to put more funds into a Roth?
“Lastly, I’m digging into the pro rata rule, and I’m confused about how it works. Does having a beneficiary IRA matter if you want to do in-plan 401k conversions? I also have an individual IRA that I rolled over from a previous 401k into a regular IRA. Should I contribute more to my 401k and then do conversions to Roth within the plan? What should I consider here?”
Ed answers Pepp’s three questions at the end of today’s episode.
You’ll enjoy this episode if…
- You’re torn between how to fund your different retirement accounts
- You have no idea how to plan for retirement and need a simple explanation
- You’re already a huge Roth IRA/Roth 401k fan and want to know whether you’re putting your money in the best place
- You love nerding out about retirement planning and want to get into the weeds on tax code
Resources Mentioned:
- The New Retirement Savings Time Bomb, by Ed Slott
- Think and Grow Rich, by Napoleon Hill
- SECURE Act | Congress article
- SECURE Act | Investopedia
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Chris
Love the podcast, but I hate this episode. The advantages of Roths are well known, but this guy’s bluster, bombast, and fear-mongering are more about selling books and his barely masked political ideology than real threats to 99% of people. The only realistic threat of any significant tax increases is to people in the $207k+ tax brackets (for a single person). Keep in mind this is adjusted for inflation every year. For people retiring today they’d need somewhere around $5M in their traditional retirement accounts to need to worry about this, far less than 1% of the population. Far more people will be in a lower tax bracket after they retire. If getting a tax break now encourages short-term thinkers to save more for retirement now, great. If tax breaks in the future get long-term thinkers to save more for retirement, that’s also great. Most people are fine with some sort of blend.
Fear based decision-making is rarely good for finances.
And one more thing, IRAs and 401ks ARE for retirement, not generational wealth transfers. Allowing inheritors to stretch withdrawals over 10 years seems reasonable and generous to me. Allowing people to basically delay taxation forever does not.
Thanks for what you do. Please pushback a little harder next time. I feel like you wanted to.
Jacob
Yes! This comment summarizes my thoughts exactly.
Dan Torbiak
Thanks for the Ed Roth interview, I enjoyed it. I am a CPA (Canadian), of similar age to Mr. Roth. Like Mr. Roth, I can get excited about saving taxes. But I hope I do not arouse as much emotion as he tries to do. Most people make better financial decisions when they are not in an emotional frame of mind. This is as true for tax planning as for investing and car-buying. Keep up the great work!
Brian
Hi Paula, I just discovered your podcast recently and have been loving it so far!
This was an entertaining interview with Ed, but ultimately it seems like the entire interview can be summed up as him screaming “Roth is better! Roth is better!” without actually engaging in an analytical defense of his thesis.
For instance, I appreciate that you tried to put real numbers to it in your example case of someone who is at the 30% marginal tax rate, deciding between putting $1000 into a traditional account vs the corresponding $700 into a Roth account. However, Ed completely skirted the question and did not address the analysis. I am therefore left completely unconvinced that Roth is better if your anticipated retirement marginal tax rate is less than 30% (in his particular example).
He says that the worst case scenario of contributing to Roth is “locking in a 0% tax rate.” This is a cute, but ultimately inaccurate statement. The more accurate statement is that you are “locking in a 30% tax rate” (again, assuming a current day 30% marginal rate). This would be suboptimal if your future marginal rate in retirement is less than 30%.
Personally, I am in the 37% marginal tax bracket, and anticipate my marginal tax rate in retirement to be 24% (assuming today’s brackets/rates). Ed has not convinced me at all that I should contribute to Roth accounts in lieu of traditional accounts. (Yes I backdoor Roth IRA after maxing out all of my traditional deferred accounts). Do you agree with my thoughts?
Thanks!
Georgia
Agree with the comments below. I love your podcast, but hated this episode. The guest had a singular point he kept repeating over and over again, without engaging in any meaningful analysis. I appreciate that you tried to push back a little, but he completely ignored your attempt at being analytical. This interview was no more informative than Suze Orman’s.
retirement planning
I’m here to hop on the bandwagon. Love the podcast, but this episode was tiring to say the least. I actually thought that some of what he was saying may have been inaccurate, at least in my experience with retirement planning.