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Learn the Power of Roth in Your 401k Thumbnail

Learn the Power of Roth in Your 401k

Investing Retirement Funding

I recently met with a client that asked me if it would be appropriate for her to be contributing to her Roth 401k, and it prompted a discussion about taxes retirement. And I thought it'd be a good topic for a video to talk about really the power of the Roth in your retirement account. But first I wanna introduce myself. My name is Warren Berger. I'm the owner of Luminary Financial Advisors. We're located in Cocoa Beach, Florida, but we serve people all over the country and basically we try to help people achieve their life goals through financial planning. Now, let's talk a little bit about Roth. I think most people are familiar with the traditional 401k where you're putting in pre-tax money so you don't pay taxes on that money now but it'll be fully taxable when you take it out later.
And the expectation is that when you arrive at retirement you'll no longer be receiving a salary and you're you would be in a lower tax bracket to start taking those funds out. But here's the thing, it's not that simple. And I think when these retirement plans were first designed, that was a pretty cut and dry scenario. But if we look around now, we see that our tax rates now at about approximately 40 year lows we have the Tax Cut and Jobs Act that was enacted in 2017, that sunsets in 2025, which means as of 2026, all of our tax rates are going higher unless Congress steps in to mitigate that. And with the the scale of the national debt that we see right now and some of the fiscal priorities that are out there, I think it's pretty unlikely that we're gonna see any kind of hold on taxes or even tax cuts in, in the near future.
Frankly, I think we're gonna be seeing higher taxes for years to come. So in looking in that context, the Roth becomes a much more important part of your portfolio. So let's talk about that a little bit with the Roth. You're contributing money and paying the taxes on that now, but then you never pay taxes on that in the future. And here's where this gets really important that traditional 401k that you may have been contributing to. It's not just say necessarily the $10,000 you contribute to now. Ultimately that money is going to be, you know, if you contribute 10,000 now and it's $60,000 later, that 60,000 will be fully taxable when you take it out, as opposed to the Roth where you do pay that those taxes now. But that growth, that compounding over time is actually a compounding of tax savings because you're never gonna pay taxes when you take that out. And ultimately, I'm a fan of tax diversification, which means you don't have to go all in on one or the other. Having some traditional 401k holdings that pre-tax along with some Roth, along with even an individual account where you're taxed to capital gains, but you're not penalized for taking it out before retirement. That diversification gives you optionality when you're trying to make decisions, both now and then in the future. If your company offers a match, that match is automatically put into your traditional
401K. So you're still gonna have funds going towards that traditional route. And you don't necessarily wanna just jump headfirst into doing all Roth because you may be sitting pretty close to the next tax bracket in your income. And so diving head firstt into the Roth may have you jumping into another tax bracket. So there's a little bit of of due diligence that needs to be done in order to make sure the, that you're contributing the appropriate amount to your Roth. But you know, you could start out maybe 10% of your savings is going to Roth while the rest is still going to traditional. And over time you can adjust that so you have more and more going to this tax-free option. Ultimately I think it's the most powerful retirement vehicle that we have for mitigating taxes right now. And so, you know, you definitely wanna give some really thoughtful consideration towards your Roth options. And if you have questions, feel free to reach out. I'm always happy to help. Thanks for watching the video and I hope to see you again.