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Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have. Whether you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics into practical, actionable steps. Our mission is to guide motivated people to become financially successful. Welcome to The Financial Call. This episode is a little bit different. I was a guest on the YouTube channel 90 Days From Retirement. 

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This YouTube channel specializes in Medicare planning. Specifically, they spend a lot of time on Medicare decisions. And the 90 days from retirement is about the timeframe that you should start thinking about your Medicare decisions before you transition into retirement. A lot of retirees have questions about Roth and traditional accounts. Specifically, they wanna know about converting to Roths or contributing to Roths 

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deciding between the two different options. And I did an hour long conversation with Eric Soderbergh on his channel, 90 Days From Retirement. And it has over 23,000 views in the last couple of weeks. So it's gone really well. And I feel like we should get it here for you guys as well. So we've taken the audio from that video and that will be the rest of this podcast episode so that you have access to the audio. There aren't too many visuals. It won't be a problem. 

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if you just listen to the audio. However, if you would like to, you can go straight to YouTube as well to see the visuals and the video of us talking on the channel, 90 days from retirement. And I opened it up by explaining that I was in this presentation and this insurance salesperson was teaching other insurance agents and advisors how to help sell a particular product. And he said, if you put a $20 bill on the table, a $10 bill on the table, 

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and a $5 bill on the table and ask your prospective client which of the three they want to pay taxes on, they will pick the $5 every time. Which logically that makes sense to our minds, but it's bad math. And if you want to understand how that is not right and how that doesn't work and how there's more to understand and there's so much more strategy available to you, but the bottom line is that's bad math and you need to understand the math to be able to really do. 

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any type of Roth versus traditional strategy, whether it's contributions or conversions. So the rest of this episode, it'll jump right in with Eric explaining it and then you can listen to what we talk about and how we break down the math and then give you four reasons why you could pick Roth or traditional in each of the scenarios based on that math. Thanks for listening. So his pitch was you put a $5 bill, a $10 bill and a $20 bill on the table. 

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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 pick the $5 bill, pay taxes on the five and then let it grow to 20 and then spend that later. And this is one of those moments when my OCD just kicks in 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. 

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That's bad math. And here's the bad math, 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. For our first video of this kind, I can't think of a better person to have on than Zach Call. Zach is the president of Capita Financial Network, and we will be 

discussing the important differences between a Roth IRA. 

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and a traditional IRA. I think you'll 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, they are encountering marketing like crazy. We're in the Medicare space. 

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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 base a lot of our decisions on emotions, and that's just normal. We're built that way. The problem with that is that it's very easy for marketing folks to hit those emotions hard and. 

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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 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, which usually ends with a, let's call it a product pitch of some type. So it's very common in our industry. 

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for investors, for just retirees, anybody who's trying to improve 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 taxes 

because the Roth and traditional decision is primarily a tax decision.

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And I'll explain that in a second. 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 think if people can understand what we talk about today, I don't know how long this is gonna go, but I know what we're gonna 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 they're gonna be in the top. 

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understanding of the people who have money. If they have money at all, it's saved. They're in the top something. I mean, the reality is most people don't have more than a few thousand dollars for an emergency. And most retirees have less than a hundred thousand dollars 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 

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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. 

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Why an IRA versus a Roth? Or are you throwing traditional IRA and Roth IRA together when you say IRA? Throwing those together. So why either of those options versus some other investment vehicle? 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. It's not an either or, but the benefit or the reason for doing traditional or Roth IRAs 

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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 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're able to leverage your dollar further than you would through say just a regular brokerage account on your own. Right. And there are some serious benefits to investing in real estate, investing in brokerage accounts, 

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small businesses, I mean other things that have nothing to do with IRAs, 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. You want to have 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 real estate or those other things? Yeah. I actually think everyone should. 

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everyone should have some IRA or of some type, traditional or Roth. And the reality is everyone should have a little bit of both. So I'll cover that and explain why today. But the easiest way to understand this would be 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. 

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And I think you would pick a fork. It's probably the most versatile of the three. But a week later, when you guys decide to have soup, that's going to get really complicated. So you have to really think about this in terms of it's 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 week. It's even more difficult to predict what kind of retirement picture you might be in. 

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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. It's such a complicated, because you just talked about all these variables that 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 mentioned both, but that's the question is just tell me what should I do? 

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The reality is you need a basic understanding of how these accounts work. So what I'm going to do, if you're OK, Eric, is I'll dive in to let's get people the basic understanding of the two major account types for retirement or two. Let's say it differently. The two major tax statuses, 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. 

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And then after that, I think it'll actually be pretty simple. OK, 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-taxed. 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 it feels real good right now.

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because you get this tax benefit. And- Real quick, when you say it's not taxed, does that just mean that it's not going towards your reportable income at the end of the year when you're filing taxes? You got it. 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. If it's an IRA, you didn't pull that from your paycheck before it got taxed. 

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It feels like it got taxed because it came through your payroll and taxes were 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. 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. And you ask that question. It's true. 

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But depending on the account type for traditional tax status, it may be subtracted before you see it, or it may be subtracted after you see it. Anyway, that's the way those two different counts work. 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 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. 

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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 when 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. That's the core basics of the tax. So if you can imagine, and I have some... 

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images if you want, you can change them to whatever you want and make them look however you want. But the idea, if you can imagine, put like a little red stop sign wherever you have to pay taxes or a red something on 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. The first step is just understanding the tax event happens in that order. 

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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 out. Okay. So keep going. Use it. 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. This is the point. If you can understand this, you're better off than just about everybody out there in this concept. But 

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A quick story, so I'm sitting in a conference and this room is full of 100 financial advisors, insurance salespeople, 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 a strategy that is meant to be tax-free growth for retirement through life insurance, which it has its place. And there's an opportunity there. 

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But this guy basically was saying everybody should have it and it should be the sole tool for everybody, right? You know the presentation I'm talking about. 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 wanna 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. 

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and then spend that later. And this is one of those moments when my OCD just kicks in 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 that's bad math. And here's the bad math. So we're gonna pretend you have $10,000 to save for retirement. And let's take you through the traditional tax status. And I'm waving my hand in the air. I forget we're on video. I'm not used to this, Eric. 

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but I'm waving my hand in the air in front of the camera because I've got this drawing that shows we're gonna take you through the traditional tax status path, $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 gonna say that you invested at about an 8% growth rate over about nine years. That would double the money. 

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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 $5,000 

of the 20 went to Uncle Sam, and then you get 15,000 spendable. I've never heard anybody call the spendable account balance, but 

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That's important because that's all people care about is how much money do I have to spend in retirement? OK, so we get to the spendable account balance of $15,000. 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 percent out at that time. Now we have to pay $2,500. Now, remember, we had to pay $5,000 in taxes on the traditional side. 

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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 less in tax. I beat Uncle Sam. They're pumped about this, and that's the strategy of this presenter that I'm talking about. He paid on the $5 bill, basically. OK, so they paid $2,500 in taxes. Then that means that they only have 7500 left over to invest. So they invest at the same growth rate. 

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same number of years, what'd I say, like 8% growth rate for nine years, and they double the money. So 7,500 times two, double the money, 15,000, no taxes on the way out, $15,000 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, this will always work out to the same spendable amount every time. So that's the hard part for people is 

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They think paying taxes on the smaller amounts better, which is why I think Roth has gotten so much fanfare as of late. At the same time, I wanna be careful. I'm not against Roth's. I'm just against blindly misunderstanding the math. 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. Oh, absolutely. Not the prior stuff. It's how much do you have spendable once you need it? And a lot of people will argue, well, wait a second. 

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If I put $10,000 into my 401k, I'm going to put $10,000 into 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, $2,000 to $3,000 from your regular paycheck to make that money after tax. So if you're willing to put $10,000 into the Roth, what you're really saying is you're willing to dedicate 

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$13,000 to retirement. So put 13 in the traditional and we're back to the same equal math of the same spendable amount in the end. That's the odd thing. 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 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. 

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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. Their tax rate changes. Specifically, their tax rate changes. You won't be able to know exactly, oh, in my early years, I'm gonna get a certain rate of return and then later, you won't be able to predict that exactly. And frankly, it doesn't matter what order you get the returns in too much. 

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but the tax rate matters. Okay, so, and if you're okay, I'm basically gonna 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, 

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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 rough. Save the 30% tax on the contribution, pay the 12% tax on the withdrawal. So that's important. So to illustrate this, I had a client who was on the doors of retirement. He was about two years away and they are still to this day, super frugal. 

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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 really tough tax bracket. 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 rates 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... 

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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 two 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 they were going to retire and spend 80. Now, if they're going to spend 80, we can control their tax brackets so well. 

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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 8 later? That's the idea. OK, so if your tax rate will drop at that moment, your contribution 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. So if you're at a low tax bracket today and your tax rate is going to go up,

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Make Roth contributions, take advantage of the low tax bracket, and then withdraw later tax free when your tax rate is higher. Also, I talked about this just a second ago, 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... 

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We obsess over small differences. If they can pay 22 today, and meaning throw it into a Roth at 22% tax, and then in retirement, if they're gonna be at 25, we didn't save them a ton of money, but we saved them real dollars. So if your tax rate will rise, then you should be doing Roth. Okay, the last two, I mentioned there are four different, maybe I didn't, 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. 

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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 traditional. And when I say low and high, the tax brackets go 10 and 12% and 22%, 24. 

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Anything above 24, you should probably be doing traditional. 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 to 24. If they're in their final earnings years and they're going to retire and spend 80 to 150 thousand dollars a year. 

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They should probably actually do traditional in the 22 and 24 because in retirement they'll only pay 10 and 12. So it's less about 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 blabbering, like babbling on here. Like, are you okay if I keep going? Dude, I am loving every minute of this. Cause you talk, and I want to get to this in a minute cause you talked about it's probably a good idea have both and me working with you guys, I have both. 

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And so keep going. But there are reasons why to have both. And that's going to be reason four. So I'll explain reason four here in a second. The reason to have all three utensils at the dinner table. And by the way, I don't ever talk about it that way, but 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 say

10,000 either way, traditional or Roth. Now, number three is you want to ultra max fund your retirement contribution limits. 

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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 long. It's 2023 right now. 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. If you are the type where you're like, I'm gonna max fund my retirement contributions every year. If you put 22,500. 

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into a traditional 401k, you're in a partnership with the IRS. Some of that money is not yours. Some of it's theirs. 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 Roth, there's no partnership. You own 100% of it. Let's pretend you're 51 years old just to make life easy. And you can put in $30,000. 

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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 

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The third reason you would pick one or the other is even if you know your tax rates 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. 

Reason four. 

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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 directions that you can go in your future state. I thought that was fascinating that engineers use that to like set themselves up for future problem solving. 

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So the idea here is 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 it really is. But future marginal tax bracket management is the ability to say, we talked about those rates, 10, 12, 22, 24, and by the way, those are as of 2013 too, and the lines for those changed every year as well.

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If we have the ideal retiree set up, so this is also something I'll give you an image for this, but you decide. This is where the fear comes in. So 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. 

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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 assets die, have it go through estate taxes and your kids would have to be making like $800,000 in income and be in the highest tax brackets. That's how hard it is to pay. So if that's you. You do have a problem. Now let's talk to the other 99.99% of America here for a minute. 

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where that's not your problem. So if you prepare in a way to set yourself up for multiple paths of control in retirement, meaning degrees of freedom or marginal tax bracket management, whatever you wanna 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 you have a couple. They take social security. 

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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, $80,000 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... 

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taxable income in retirement, taxed at zero, 10, or 12%. So we wanna maximize that space. In other words, what I'm saying is if someone is exclusively hardcore, wroth or die, they missed an opportunity. Because in retirement, there's an opportunity to take income out at zero, 10, and 12% brackets that they missed, and they probably paid a much higher tax bracket during their earning years. Okay. 

30:23 

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, 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 to 15% capital gain rates on average. And then... 

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you could take from the Roth and HSAs at no tax costs. 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 let's bring this back full circle to the first thing you brought up today. Be tax aware, not tax afraid. 10 to 11% doesn't sound bad to me at all. In fact, I would love to, you would love, everybody would love to pay 10 to 11% tax rates, but hope 

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doesn't necessarily make selling people very easy. I think that's commendable with what you do with 90 days from retirement is that you don't do the fierce side, you just say, we're just gonna educate you like crazy and hopefully you can see the value in that. But that's it. So I'm gonna do a quick recap. I'm gonna be quiet. I've talked for a long time. I do have a couple. And then you're going to ask questions. I'm sorry to do that a little bit, but questions we can finally answer them because now they have the background. Recap is there are four different reasons to do one or the other. 

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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. That's it. No, I think that's beautiful. 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. 

32:16 

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. 

32:40 

So having both, we talk about the life cycle and 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 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 Roth, you start making sense there contributing to that? 

33:10 

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. OK, so let's first talk about the rules. You can fund both at the same time. You just have a max contribution limit that needs to be shared. If that contribution

limit is what is it now? For the 401K. And then we talked a lot about 401Ks, different limits for 401Ks and IRAs, different restrictions around the two, to around who can contribute. 

33:39 

So you might not even have the option of an IRA, but 401k, you're over 50, 30000. If you're under 50, 22,500 IRAs, much lower limits and higher restrictions. So funny. I love concepts. Don't keep track of all the numbers and rules exactly. So it's 6500. I think it is plus 1000 for catch up on an IRA. Got you. We'll verify that real quick, but. 

34:03 

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 the traditional. 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 to realize is that your employer is most likely going to match traditional. There's a recent law that came out again, all this relative to 2023. 

34:31 

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 an accounting 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 law's out, do it. And the employer's like, whoa, whoa, whoa, hold on, this is gonna be hard. I've seen very little employer adoption of that capability just yet. But... 

35:00 

I think it's coming. So, but just for now, most of you, as you put money in Roth, you are automatically getting into diversification of tax status, that marginal tax bracket management degrees of freedom. You're getting that naturally because you're putting Roth money in and they're putting traditional money in. So you're getting a little bit of both. 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. 

35:28 

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 IRAs within the same family? Oh, for sure, for sure. And by the way, I just pulled it up. It is sixty five hundred dollars for the IRA plus a thousand dollar catch up 

for fifty five plus people over 50. Fifty. Yeah, 50 is the contribution. Catch up age for IRAs. This is where it gets a little bit tricky. 

35:55 

on IRA eligibility. There's something called active participants. So if you have a pension plan, 401k plan, all of those are governed by a body called ERISA, E-R-I-S-A. If you have one of these types of plans and there's more than just 401k in pension, but I'm trying not to over complicate today. You can see I have a hard time with that. But here we go. So you try not to over complicate it. Those two account types, if you are an active participant in a plan.

36:25 

then your income limits drop to lower levels for eligibility for IRA contributions. And sorry, let me say this differently, for IRA deductibility eligibility. So let me say that differently. Because 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. It hits you, kind of feels after tax. 

36:54 

because it comes through your payroll. 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. 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. 

37:24 

That's like perfect. That's a deduction. So reversing the income back out of your paycheck, you can only do that if you make under certain limits. This is where it gets complicated because if you are an active participant, and let's do again, filing jointly, you have to make under $116,000 a year to get the full reversal back out, to get the full deduction back out. If you're not an active participant, 

37:52 

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. So that's the nice thing. 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. But once you become an active participant in a retirement plan, the government's basically saying like, 

38:20 

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 $22,500, which I kind of agree, it's way easier. So there are no income limits on the 401k. You could be making a half a million dollars a year, and if you really want to do a Roth contribution over there, you're not gonna run into any problems. Let's see if I can summarize this. If you are an active participant, 

38:48 

you have a really low income. I say low being like relative, but as a couple, it's 116,000. That's pretty common for a lot of dual income households to go over that. 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. And then,

39:18 

If you don't have an active participant, you're good. If nobody is. 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 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 a situation where one is and one is not, the one who is not is the one who isn't sub their. 

39:46 

bumped up. The limit is higher, 218,000. Yeah. Instead of what did I say? 116. Gotcha. So then the couple that neither of them, they have no limit on income. You got it. Really, the reason we brought this up because you asked, can I do one for my spouse as well? And you absolutely can. It's called a 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 by the way, we talked about. 

40:14 

The contribution limit being $6,500. If you only earned $2,000 for the year, like a kid or somebody else, that's the max contribution limit. 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. But they need earned income. They need to start. Yeah. See, that's the point. That's what squeezes their contribution limit down to zero is if they have no earned income. So oftentimes you'll see. 

40:42 

parents will say like, okay, go get a job. And if you save $100 towards your Roth IRA, I'll match it for you. You become the employer with a match. I'll give you another hundred bucks to throw in there. But the kid needs at least $200 of earned income to be able to do that. 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. In other words, the ability to reduce your income. 

41:12 

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 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. And my personal opinion is that gets a little bit messy because now you've got money mixed in the same account. 

41:42 

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. 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. Okay. What was

your longer term? I call it marginal tax bracket management. Marginal tax bracket management. So you talked about how your first, 

42:12 

potentially like $100,000 once things get deducted, but say it's $80,000 is gonna be coming from pensions or not pensions. It was the traditional IRA. Traditional IRA, social security. Social security. And 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 really open up and flesh out. Well, you already did. There's a great video on 90 days. You already did, yes. Nevermind. Just listen to Eric's, he's way more succinct. 

42:39 

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. So the point being is that there are those limits of $80,000. And 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 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? 

43:08 

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? Oh my gosh, that is a good question. It seems complicated in my mind. Yeah, you have to track this and report this. You don't. Okay, so there's very little work you have to do. And the reason is because the tax forms are so complicated. And then this is the reason they are complicated is because all the little questions and the little like now times line 16 by 

43:35 

50% and subtract from lesser of line two and one. And that is what goes on. It's like a choose your own adventure almost feeling within the tax forms. And only a few of us are nerdy enough to spend that much time on them. But all that math is calculated for you. Basically, if you have income show up, it's going to show up to in the form of a 1099 as income to you somewhere, a W2 from earned income at work, 1099 for brokerage accounts. 

44:03 

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. Those entities send one to the government as well. So the government knows how much income you had. 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. 

44:32

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. So the heavier liquid drops to the bottom and that's gonna be your higher tax rate items. Let's say that you have capital gains, which is, I'm gonna say long-term capital gains at a lower tax rate on average, oftentimes it's about 10% less in taxes, depending on where you're at on the scale. That's a lighter liquid. It's gonna float to the top. 

45:01 

And then the heavier liquid is going to hit the bottom and that's going to hit you at 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. So let's say that 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 $20,000 of Roth and traditional. 

45:31 

Let's just talk about that for a second. That person pays zero. I'm talking a couple. 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. Now, let's say you're sitting there with that scenario and you wanna buy a car, and your next resource is really just a withdrawal from your traditional 401k or IRA. When you take that money out, that's heavy liquid. 

46:00 

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. They were at zero before, but that heavy liquid went to the bottom and it lifted up the long-term capital gains income. 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%. 

46:29 

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'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 

46:58 

guess what it's gonna be like when they file their taxes in March. And that gets tricky. 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, specifically like meeting with you and all of you at Capita. And he was like, well, why would I need an advisor? I can just throw it in and then index fund and that's fine for me. So I hope that this conversation illustrates some of the value of an advisor as you're going through all of these complex thoughts.

47:28 

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 figuring it out? And let's just take like a moment and sympathize or empathize with your friend because a lot of people who call themselves financial advisors are truly 

47:58 

and only investment managers. So if your friend is thinking about the question of, why should I hire an investment manager or buy an index when I could buy an index fund? He's got an incredibly strong argument. 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, 

48:26 

there are investment managers that use index funds. So it's not like they're against each other here. In fact, if an index fund for a specific category 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 stock within a sector. Like in the best way to get healthcare stocks on a diversified basis might be to own a diversified index healthcare fund. That might be the best way to do it. 

48:55 

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 advisor, I'm a wealth manager, I can't ever use an index fund because my customer will question that. If I was the customer, I'd be really mad at my investment manager for not using the index fund. Okay, so let's take a step back. There are multiple reasons. Even if we isolate, what I'm going to call is about 

49:24 

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? 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. 

49:52 

The majority of the price fluctuation of the S&P 500 is because of Apple, Google, Facebook, Microsoft, and a few others. 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 3,000 to 5,000 stocks in there. And then you're missing international. It's like, oh, okay, I'm going to do international too. I'll buy the IFA index, which is Europe, Asia and Far East and gives me a little...

50:21 

But what about South America, Candid? You can see how like, you can start to wonder, okay, but what are my allocations across the index funds? That's 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 raw. 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, 

50:50 

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. But an index fund can be an incredible tool to help facilitate growth, keeping up with inflation and empowering a wonderful life. 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. 

51:19 

That's estate planning. Insurance, that's a lot of what you do. That's part of the wealth management conversation. Investments, taxes, college savings, you get the idea. There's so many different categories 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 hurt as you go into individual securities if you don't know what you're doing. 

51:49 

One thing that 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? That's a great question. And we talked specifically about some tax fear mongering that happens. I do want to just mention one other a little bit outside of just the tax concept. It's more around investment decision making. 

52:18 

Oftentimes, as an individual gets closer to retirement or they transition into retirement, their risk tolerance will decline. That happened with my dad. 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? This is not the man I grew up with. He got really risk intolerant as he got older. And a lot of financial advisors feed on that, unfortunately. 

52:48

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. 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, 

53:18 

And I would go to the break room every day and it was Bear Stearns one day, AIG another day, Lehman 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. It was probably the best investment opportunity of most of our lifetimes would have been to buy. 

53:48 

in March of 2009. That was the bottom. 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 in 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 changes. You as a retiree, as you become more conservative. 

54:16 

that risk becomes more potent to you. 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 buying too much of conservative assets. Now, I'm not trying to tell people they should be aggressive, but what I'm saying is the people I've seen ruin their retirement plan the most are the ones that went overly conservative. 

54:46 

and got completely out or put everything into something that locked them in forever. Or they put it all on black and spun the table. Does that make sense? Yeah. So as long as you are diversified and one CEO out there turning their company upside down has negligible impact on your retirement plan, if you can maintain that status that you don't really care what any CEO does because you'll barely notice because you're that diversified. 

55:15 

You're fine on that side. And then make sure you don't bail. Make sure you don't get subject to fear-based rhetoric or fear-based conversations 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. 

55:43

as these businesses grow their earnings, earnings growth is 96% correlated with stock prices over time. So our companies growing their earnings is almost all that matters if you're a long-term investor. So don't let the fear-based conversation derail your retirement plan. That's probably the other fear, concern, and things to watch out for that's a little bit outside of the tax side. 

56:12 

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's so many videos out there that are just trying to scare people into a decision. And I think that if we can separate ourselves, and that's why I like personally having an advisor of, okay, 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? 

56:43 

It's OK to your point. That's one small piece of your big puzzle here that we've got and it's negligible. Everything will be OK. 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 Greece going under at the time and a bunch of other things. 

57:12 

And this portfolio manager that I was listening to, and it was a bunch of financial advisors all listening to this guy talk. And I really respect this guy. I still follow him on Twitter. It's been a long time. 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 guardrails 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 so he would buy assets of all asset types. 

57:41 

stocks and bonds, international developed countries and US or larger 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 opened it up to Q&A, a couple questions come through, and then another advisor, thankfully, asked the question that I was hoping he would ask. 

58:11 

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 represent that feeling? And he said, I'm all the way down to 52% stocks. The rest of us are just like, whoa,

hold on. You should have told us that at the very beginning of the call, because he had only changed 8% of the stock to bond ratio. 

58:38 

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 painted a picture that the world was falling apart. 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 

59:08 

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. So his whole world is decided in inches where for us, that's really not that big of a deal. So deciphering the difference between the news and action sometimes can be really difficult for people who aren't in the industry. 

59:37 

That's great. Huge props to everything that you brought to this conversation. And 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 you have built out. And I said this in the, 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? Yeah. It's unbelievable. So if anybody watching or listening, you want more information on not just the conversation that we're having. 

01:00:06 

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 so people can get there quickly. The guided path I think is brilliant. And so a lot of the social security content here on 90 days from retirement, we leverage you guys a lot. So we appreciate your help in all of that. You are the financial experts and you're fantastic. Thank you. This is super fun. I'm glad that we had to do this. Well, I think that's probably a good place to stop. Yeah, thanks Eric. You're awesome man. 

01:00:34 

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01:01:02 

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01:01:32 

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