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Hey everybody. Welcome to the podcast. Thanks for hanging out with Jude and I as we talk investing. Talk investing, finance and retirement. He is the Roth guy, and Jude basic questions that people get stumped on all the time. So why not just continue to have this conversation? Since you’re the Roth guy, how do we know, how much should we be putting, you know, like in our company sponsored plans, right? Whether you’ve got the traditional 401 k, that you know, you get at most places, or the now Roth 401 k, which more and more people have access to, they wonder, like, which one is, like, the best one to go with, or do we do a split? Or what’s the breakdown, right? So that’s what we’re going to get into this week. How you doing? I’m doing excellent. I’m so excited to talk about this, this particular topic, because this is probably the number one question I get from pre retirees, people who are still working and have access to a employer based plan. And as you said, more and more companies are offering the Roth 401, K, but there’s so much confusion out there about this. And, you know, we talk about this stuff all the time, so we kind of think, oh yeah, everybody knows, but that’s not the case. People really don’t understand the differences and where they should be focusing their money. Yeah. Well, where do you want to start? I mean, if we could rehash, you know, a traditional Roth, or traditional IRA, or Roth IRA, but I think we should probably just focus on the 401, k in the raw 401, k, because there are some similarities, and then there are some differences, right? So you start with however you want to go, just kind of breaking down those two differences. Maybe I love it. I think that’s exactly where we should build. This, this. Build a foundation, and on top of that foundation, then we’ll get really granular and understand what you and your particular situation should be considering. So, as you know, and most people because the 401 K has been around now since the mid 70s, most people who work for employer probably have access to a 401 k or a four or 3b which acts very similar. Can you put you put money in from your salary, your income, that money is tax sheltered. You’re not getting you’re not getting taxed on those dollars. So typically people say, consider it a tax deduction. So if you make right lowering your taxable income, right lowering your taxable income, absolutely and the the concept is that the 401, K is replacing that old pension plan that our parents and grandparents had. You’re responsible for saving money for your retirement. The trade off is you’re going to get a tax deduction now, lowering your tax taxable income, you’re going to put all this money away in this tax sheltered vehicle, meaning you’re not going to get a 1099, and then down the road, in the future, you’re going to pull money out to replace the income. That’s the whole benefit of the four. And it’s just the code. It’s just the tax code, 401, K, it’s it’s a quote, a Will Smith or Will Ferrell movie. It’s not how much you have in the account. And it’s not a race, exactly 5k or 401 k. And so since 2006 Jude is when the Roth 401 K, has been around 100%

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and that’s been a really slow adoption for some, for some companies to offer that. But now I’m seeing widespread acceptance of that Roth 401 k. And the Roth 401, K was named after a senator that introduced the bill. His last name was Roth, right? The Roth IRA came from from that, and it’s exactly morphed, yeah, exactly, exactly. My apologies, you’re right. So the Roth IRA was introduced by Senator, and that’s where we get the name Roth from, yeah, I think that was, I think the Roth IRAs are the late 90s, I think. And then now the Roth 401, K is that adoption in 2006 and really the secure act one Mo and two, oh, Jude is when, I think the government started telling companies, hey, let’s start utilizing this more for people. Yeah, because the one of the purposes of the Roth guy is that we strongly believe taxes are going to go up in the future, and we rather you be proactive. Because in your IRA, in your 401 K, you have a hidden partner. You know, if your statement in that 401 K says a million dollars, well, you don’t actually have a million dollars, because remember, Uncle Sam is going to take a chunk of that when you start pulling money out. So the solution to that is having that Roth 401 k or IRA, and we’re going to get we’re going to talk about the differences a little bit later, because they’re not.

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Exactly the same things. They’re they’re like kissing cousins. They’re very similar, but not exactly the same thing, right, right? And so when you look at the the Roth, 401, K, the biggest benefit is that you can put income in from from your salary. It’s going to be tax sheltered. You’re not going to get a tax deduction. It’s not going to reduce your taxable income, but all of that money is going to come out tax free when you retire. Yeah. And so people who believe, like we believe that taxes are going to go up, they’re thinking, Okay, I need to put some money in my in my raw for 1k

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in addition to my traditional, but should I put all of my Sal, all of my contributions, in the Roth and zero in the traditional? Or should I put part in the traditional and part in the Roth? And the most common thing I see you ask you, what do you think most people do when they have to make that decision? You know, since it’s so recent, I feel like my wife did the same thing. She’s like, Well, I’m just going to go 5050 because I’m not exactly sure what to do. Yeah, exactly, yeah. That’s the most common answer I get, yeah. So let me kind of, let me kind of give you a couple of setups here. We’ll kind of break this down just a little bit. So, you know, one of the problems with a Roth IRA is contribution limit. You make too much money. You couldn’t put a lot in. So part of this fix is people would say, Well, I make a lot of money, so therefore I’ve got to put my money in my regular company, sponsored 401, k, because the income limits are higher, right? Well, that’s kind of the match with the Roth 401, K, you can, you know, you can make more and put it in there. So that’s a benefit. Companies are now able to start making that the matching deposit used to be where they just had to put it into one now the company has the option. A lot of companies do anyway, check with your HR person, right? But a lot of companies can now do the matching into the into the Roth 401, K. So there’s a lot of similarities where they made this Roth 401, K, almost like, it’s almost like the superhero versus the traditional, you know, normal company sponsored 401, is that fair? Yeah, that’s, that’s a great analogy. The, you know, just like the diagram of the Roth guy, it has its cape, it’s ready to be the superhero of your story, right? Because of all of those benefits that you mentioned, you know now you can have matching contributions. The money is going to come out tax free. And when we’re doing planning for a client, we’re also looking at the possibility of their their children or other beneficiaries inheriting these dollars. And we don’t have time to go into it today, but those dollars are going to be inherited tax free. But the thing that I want to really discuss today is, how much should you be putting in each correct the most common thing is what you said in what your wife did is say, Well, I don’t know. I’ll default to 5050, okay. Now that’s just the default that there’s no math or science or strategy behind that. And there really is a strategy for how much you should be contributing at the firm, we have something that we call the tax efficient funnels to try to make sure people understand the difference on how your dollars get taxed. So the first funnel is pre tax dollars, as we’ve talked about before, you’re not paying federal taxes on that. It stays in the funnel tax shelter, and it comes out completely tax. It completely taxable when you take $1 out. Now, if you listen to the gurus, they’re gonna tell you you should Max fund your traditional 401, k, because you’re gonna get the greatest tax deduction. But let me ask you a question, if you believe, like we believe, that taxes are going to go up in the future, and we’re at a at a low tax environment now, that means you’re going to pay more taxes on this money. You’re basically creating your own tax time bomb. And that’s been that way for years. And I know there was a lot of There was joy and sadness, depending on your viewpoint about the passing of the one big, beautiful bill. But one of the pieces about this was keeping the current tax rates they are for a few more years, right? So therefore, you know, people say, well, taxes aren’t going up. Well, we still owe $37 trillion so you know, so the odds are that and rising. So four years, six years, eight years from now, they’re probably going up. And so if you’re just going to be entering retirement at that window now, you got that big tax time bomb. Now that’s why some people get so scared, because they believe in the tax time bomb, but their solution is to go to the other extreme. And if you’re looking at our tax efficient funnel to the far right, you have the tax advantage funnel. These are instruments where you’re putting money in, mostly that you’ve already paid federal income tax. It sits in the funnel, tax free, tax sheltered, and comes out tax free. And the one thing we’ve been talking about today.

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Is the Roth. So we’re going to focus on that. But these people go to the other extreme and say, I’m going to put 100% of my contributions into the Roth. Well, you’re missing a big benefit. You’re not getting a tax deduction for that money that you’re putting in a Roth today. Okay, so here’s the thing, there is a sweet spot. There’s a sweet spot between how much money you can put in and get a tax deduction today to your traditional and how much money you should be putting in into your Roth 401, K to protect yourself from future tax higher future tax rates. That makes sense. I mean, and being in Florida, or, you know, you guys golf all the time. You want that sweet spot when you’re hitting that gun, when you’re hitting that driver, right? So, yeah, my feeling was terrible there, so I’m not helped out of golf, yeah. But so, so break the sweet spot down for us. So the sweet spot is going to be a little different for everyone. Okay, what? But the basis of creating the sweet spot is understanding, how do you actually pay income taxes. And for that, we show we’re very visual here at the firm, we show our clients what we call the tax cut. The tax cut basically shows your tax rates on income that you make, and it shows the standard deductions for either single or married, filing jointly. And so I want you to kind of understand this concept.

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If you’re filing the standard deduction, you’re going to get a deduction that goes against your income, if we’re talking today for at least $31,500

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so what if you’re retiring today and you’re pulling money out of your traditional 401, K, actually, it’s got to roll over to an IRA, but work with me here. If you’re pulling money out of your traditional 401, K, you literally could pull $31,000

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out, 31,500

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and pay zero income taxes. Does that make sense? Correct standard deduction if you’re standard deduction under, if you’re under the the thresholds, the new thresholds from the one big, beautiful bill, which we have that on the screen there for the updates. But yep, exactly. So if all of your money is in the Roth, 401, k, that means this standard deduction goes to waste. Yeah. And so what we try to

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help our clients with is coming up with a number that will allow them to fund their 401, K, get a current tax deduction today, and get to the point where, when you pull money out, you’re using the standard deduction to pay current taxes on that income, yeah, because you’re, you’re still going to have an income, right? Because it’s, it ties back to the question of, well, how do I take this money I’ve saved and get an income check when I no longer get a work check, right? And that’s what you’re talking about. So you’re talking about like you converted it from the 401, maybe to a traditional IRA or whatever, and you still have to pull that. You still have to have income. So it makes sense that you are still utilizing and I think when you add all the updates in Jude, and don’t quote me on the exact number, but for seniors over 65 with the new bill passing, it’s like almost 40 grand. Absolutely, absolutely. So if we don’t use the 401, K, we’re actually giving money away to the federal government if we don’t use 401 k. And that’s what I try to help clients come up with and customize how much money should they be putting away? Not to go to the extreme of putting everything in the Roth or the other extreme, putting everything on the traditional side, but coming up with something that’s customized. Here’s an example to keep things really simple.

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Let’s say you were contributing to the traditional 401 k and the Roth 401, K, and by the time of retirement, you had a million dollars in your traditional side. Okay. Well, if you take 4% of that, that’s $40,000.40 grand, yep, and that $40,000

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could be applied toward your standard deduction. So now here’s what you did over all these years. You got a deduction for making contributions to the traditional side, and when you retired, most of that money that you’re pulling out of the traditional side, yeah, is not being taxed fully because of the standard deduction. Yeah, you’re only paying what 85 on $8,500 worth of income, and that’s going to be in the lower pace of the of the tax bracket. Because people often do forget that even if you’re in the 22% tax bracket, all of it’s not charged taxed at 22% it works its way incrementally up, so you could be a fairly low tax position there exactly, exactly. And all this takes is a little bit of pre planning. I’m not saying don’t put money into Roth because in that same example, let’s say you have a million dollars in the traditional side, but all along, you’ve been putting money also in the Roth side.

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Five, you might have half a million dollars on the raw side. Yeah, we already know is not going to pay any any income tax, right? So that there’s a sweet combination here where you can really get very strategic and and practically pay no income taxes in retirement. So that’s the that’s the key, right? Because we always see things like the power of zero and how to retire with no income tax and all that stuff. It’s, you know, I think I’ve made this joke on here before. It’s not like the gold watch parting gift of retirement. You don’t get to 65 and they say, Here’s Medicaid, or, excuse me, Medicare, and also zero tax, you know, on your income. Unfortunately, we would love it, but that’s not but if you plan strategically to your point, Jude, you could lower your taxes. It’s not automatic, and for years there’s been that, well, you’re automatically in a lower tax bracket when you retire, not necessarily because of where, which accounts you have and how you’re pulling the money out. But if you get strategic about it, you could at least maintain or be in a lower one. Is that fair? That’s 100% on point. And I don’t say this to alarm people or to be an alarmist, but at if you look at the history of our tax brackets, and I talk about this in my seminar, taxes in retirement, at one point, our highest marginal tax bracket was 92%

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right now, to be fair, there was a lot more deductions and different things that you could do wartime after wartime, Reagan. Reagan famously said, I won’t do but so many movies a year, the whole thing goes to taxes Right exactly. Now, I’m not saying we’ll get to 92% but our highest marginal tax bracket now is 37% taxes are on sale, so if we don’t use this time to do strategic planning, then we really have nobody else to blame but ourselves. If when we retire, the tax rates are much higher than they are now, and the net that you’re actually putting in your pocket is much less than what you expected. Yeah. And so it really is a, it is a math equation, right? So, and is, you know, a lot of times you’ll hear advisors say, well, we don’t help our clients necessarily, with when they’re still working with picking their, you know, their 401, K allocations. But it is worthwhile, I think, if you’re still working with a financial professional, and you’re still in your working years, to just talk with them about, Hey, what is that sweet spot for me? Right? So to ask that question, yeah, 100% fully. And so I hope in this episode, what we were able to accomplish is to show people, one, that there should be contributing to both their traditional and their Roth in their employee sponsored plan. And two, it takes a little bit of pre planning, but we can find the sweet spot specifically for you. You know, it’s funny, somebody’s probably saying, so I’ll just do the 5050 because it makes life easy. I know there’s going to be a certain amount of people like, I’m not into this. Just give me the default. Well, look, you can find out how you could convert tax efficiently. You can take a look at some of the things by using the Roth conversion estimator. There’s different things, you know, there’s lots of stuff you could do. So go to the tax bomb.com

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get yourself some time onto the calendar, you know, check out the calculator First, check out some of the stuff there. But certainly reach back over to Jude and and the team there at centrust and just find out. Like, go through and have a chat about what you need to do. And we’ll have links in the show descriptions below for all that good stuff. But again, it’s the tax bomb.com

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the tax bomb.com and again, if you want to just go straight to the to the resource there, go ahead and click on the links in the show notes to go right to Jude’s main company homepage. And just get some time on the calendar. You can always do that as well. All right, Jude, I think we got it. We got it. We got some graphics up for folks. We hopefully explain it a little bit at the end of the day, like everything in retirement. I think it was, was it? David Walker, I think that said, Yeah, math is a or no, so I just screwed it up. But he said, retirements a four letter word, and it’s math, it’s math, and we’re here to help clients with the math. There you go. All right, my friend, thanks for breaking it down, and don’t forget to subscribe to us, folks, Apple Spotify. And of course, here on YouTube, hit the subscribe button. Thumbs up, notification bell, so you catch new episodes when they come out, and we will see you next time here on the Roth guide,

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financial planning and advisory services are offered through prosperity Capital Advisors, PCA and sec, registered investment advisor with its principal place of business in the state of Ohio, centrist financial strategies and PCA are separate, non affiliated entities. PCA does not provide tax or legal advice. Insurance and tax services offered through centrist financial strategies are not affiliated with PCA. Information received from this podcast should not be viewed as individual investment advice. Product discussions and illustrations are hypothetical in nature and will vary based on many factors, including, but not limited to age, health product insurance carrier and product design you should consult the insurance carrier website and policy for.

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