This Faith in Finance podcast is underwritten in part by Sound Mind Investing. For more than 30 years, do-it-yourself investors have relied on SMI for proven strategies and trustworthy guidance. SMI helps people build wealth so they can provide for their families, prepare for the future, and give generously. Learn more at soundmindinvesting.org. Retirement isn't just about how much you save, it's about how wisely you plan.
Hi, I'm Rob West. When it comes to IRAs, the choices you make today can shape your tax bill and your income for decades to come. Traditional or Roth? Contribute or convert. Mark Biller joins us to break down how to make sense of your IRA options so you can move forward with clarity and confidence.
And then we'll take your phone calls at 800-525-7000. That's 800-525-7000. This is Faith in Finance, biblical wisdom for your financial decisions. While Mark Biller serves as executive editor and senior portfolio manager at Sound Mind Investing, a longtime and faithful underwriter of this program, Mark, we are genuinely grateful for your partnership, and it's always a pleasure to have you here. Welcome back.
Well, thanks, Rob. I appreciate you having me back. Mark, you've written a helpful piece in the SMI newsletter on making sense of your IRA options. And before we get into the specifics, I want to zoom out a bit. When we think about retirement income here in America, what's the big picture framework people should have in mind?
Yeah, well, Rob, historically, Americans have relied on a three-legged stool for their retirement income.
Social Security is the most familiar leg, and that's historically provided somewhere in the 35 to 45% range of retirees' monthly income. The second leg of that stool used to be company pension plans, but those are increasingly rare now. These days, employer-sponsored retirement plans like 401ks, 403B plans, that's really filling the second leg now. And those plans For today's retirees make up about 15 to 20% of their monthly income on average. That's a segment that's probably going to grow as more retirees have these plans.
And then the last leg, the third leg of the retirement income stool, has always been personal savings. And a key vehicle for building that personal retirement savings is the individual retirement account, or IRA. And that's doubly true if a person doesn't have a good company retirement plan, like a 401. Because in that case, their personal savings has to pick up that extra slack. Yeah, that's really helpful.
I often describe retirement income as coming from different buckets, and I know that's a framework you agree with as well, right? Oh, absolutely, yeah. And, you know, it's good also here right up front, Rob, to point out that an IRA itself isn't an investment. It's just a tax-sheltered account that holds your investments and provides better tax treatment of your earnings.
So within an IRA, you can own most of the same investments that any other account can hold.
So you can have stocks, bonds, mutual funds, CDs, even gold, although that can get a little more complicated. And the key here is that you can likely invest your IRA money using the same investments as the rest of your long-term investment plan. Mm. Yeah, that's very helpful. Uh let's unpack the two primary types, especially for those who may be new to this.
When someone hears traditional versus Roth, what's the fundamental difference they need to understand? Yeah, that's a big one. Traditional IRAs, they came first. They've been around since 1974. And the biggest point to understand with traditional IRAs is you normally get to take an immediate tax deduction for the amount of your contributions right now.
In other words, you're saving on your taxes today. Then your traditional IRA investments will grow tax-deferred until you start withdrawing from it during retirement. At that point, when the money is withdrawn down the road, that's when you'll pay your income tax on both the original contributions and the gains that you earned all along the way.
So, traditional saves you taxes now and you pay your taxes later. Roth IRAs flip that. They're the opposite. They're newer. They've only been around since 1997.
With a Roth IRA, your contributions aren't deductible today, so there's no upfront tax benefit.
However, with a Roth, all of your future withdrawals, including your investment gains, are going to be tax-free as long as you wait until your retirement age.
So with a Roth, there's no tax break now, but no taxes to pay later. Yeah, that's really helpful. So the key question is, do I take the tax benefit now or defer it and take it later? We'll continue to unpack this, plus contribution limits, income eligibility and phase outs, plus when to convert from traditional to Roth. All of that and more with Mark Biller today.
By the way, to read this article, head to soundmindinvesting.org. Don't go anywhere. We're just getting started. What we do is very special and it's very unique. This is Bethany.
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SMI provides step-by-step guidance for do-it-yourself investors, from those just getting started to those getting ready for retirement. More information, including a short video webinar on profit and peace of mind no matter what's happening in the market, is available at soundmindinvesting.org. We're talking IRAs today here on Faith and Finance. With me today, my friend Mark Biller. He's executive editor and senior portfolio manager at Sound Mind Investing, a longtime underwriter of this program.
And he's written a really helpful article. This is a topic that comes up so frequently on the program, specifically making sense of your IRA options. If you want to read this really helpful article, just head over to soundmindinvesting.org. While you're there, you can check out the private client group and get more information about the Soundmind Investing newsletter, which so many of our listeners take advantage of. Mark, before the break, you were talking about the difference between the traditional IRA and the Roth, which was a helpful primer for many folks today.
And at the end of the day, the real question that drives the difference between the two is: do I take the tax benefit today or defer it and take it later? Right. Yeah, that's the biggest distinction, Rob. And because of that, the question of which type to choose largely boils down to whether you expect to be in a higher tax bracket when you retire than the tax bracket you're in now. And because most young people have relatively low incomes as they start their careers, it's usually been a pretty easy choice for young people to choose Roth accounts.
So they're foregoing a tax benefit today when they're not paying much tax anyway, and then they get tax-free withdrawals in retirement when presumably their wealth and incomes will be a lot higher. That's why you and I are always banging the drum for Roths with young people.
Now this gets a little more complicated for people who get within maybe 10 to 15 years of retirement because those people tend to be in their peak earning years at that point.
So I'd encourage those folks to read the article we have available this month. because there's actually a pretty good case for traditional IRAs for higher earners who are getting close to retirement. But tax rates aren't the only factor in the traditional versus Roth decision either. Yeah, that's helpful.
Now, contribution limits matter as well, and they change year to year.
So, what should listeners be aware of when it comes to how much they can put in? Yeah, well for 2026, total IRA contributions are capped at $7,500 per person.
Now, if you're 50 years old or over, you're allowed to contribute more. Those folks can contribute $8,600 each.
Now, I say each because if a husband and wife are filing a joint tax return, they can make IRA contributions for each spouse even if one of those spouses doesn't work, as long as their combined earned income is at least as large as the amount of their IRA contribution.
Now, those contributions do have to be made to separate IRA accounts because there's no such thing as a joint IRA.
Now, how does that compare to employer-sponsored plans like 401ks and 403Bs? Yeah, contribution limits are a lot higher for 401ks, and that's frankly one of their main benefits.
So for example, an employee can contribute $24,500 per year into a 401k, and that actually goes to $32,500 if they're at least age 50. There are some other specific rules if you're 60 to 63. You can find those in the article. Importantly, Rob, when people are wondering, well, then should I go with my 401k or should I do an IRA? The general rule of thumb is if you have a workplace plan where your contributions are matched by your employer, You really shouldn't even consider an IRA until you've contributed enough To get the full match of your 401.
That's free guaranteed money, and you really should think of that as part of your compensation package.
Now, once you get above that matching level, you can either keep contributing to your 401k, which is fine as long as you like the investment choices available to you there. But if your investment options are limited within your company plan, your 401k, That's when it makes sense for a lot of people to pivot and start contributing to an IRA instead because you normally have a greater variety of investment choices available within an IRA. Very good.
Now before we shift gears, Mark, let's touch on eligibility. Share how income limits and whether someone has access to a workplace plan shape what options are actually available to them. Yeah, unfortunately, this is the most complicated piece of the puzzle, Rob. And so again, I would point people to the article. We're going to rip through it real quickly here, but it's laid out in detail in this article.
So Big picture for traditional IRAs, whether you qualify to make deductible contributions depends on whether you're covered by a workplace retirement plan, and then secondly, how much modified adjusted gross income you earn. If you're covered by a plan at work and your income is low enough, you'll get a full deduction. And then as you move into a phase-out range, which for married couples is in the $129,000 to $149,000, your deductibility gets phased out.
Now, above a certain level, you can't make a deductible contribution at all. For Roth IRAs, it doesn't matter if you're covered by a workplace retirement plan. But you still have these income limits. And for a Roth IRA, a married couple typically loses the eligibility to contribute to a Roth if their income is over $252,000. Yeah, that's helpful.
Then there's the question mark many people wrestle with. It's those old 401ks from a previous employer they've separated from service. Does it generally make sense to roll that money into an IRA? Yeah, well like we just discussed, one of the big issues is what are the investment choices within the plant. There's a second issue though, and that is having a whole bunch of these separate little retirement accounts scattered around if you've changed jobs several times.
So, if you don't mind having multiple accounts and you like the investment options in your old 401k, there's really no big rush to roll it to an IRA. But again, IRAs typically give you a broader range of investment choices. And if you've changed jobs a few times, it's typically a lot easier to manage one IRA than deal with several scattered 401ks. There is one little hitch, and that is if you've left a company at or after age 55, You have a four-year window where you can actually withdraw from a 401k penalty free.
So in that little age window, 55 to 59 and a half, That's the one time that you maybe want to stay with the 401k because it offers some more flexibility. Mark, just about 45 seconds left, and folks obviously can get a lot more detail in the article, but the question comes up so often, and I know you won't be able to do it justice, but get us started in thinking about when it makes sense to convert from traditional to Roth. Yeah, so the main appeal of converting is tax planning.
So you can proactively control how much of your income hits your tax return each year, and that means lower mandatory withdrawals in retirement later on.
So the sweet spot is usually from retirement age, like 60-ish, until age 73, when you have to start those mandatory distributions. And that's when you can really tax plan exactly how much makes sense to convert each year, do a little bit at a time each year. And that can be a huge tax benefit as you're heading into retirement. Mark, this has been so helpful. Thanks for your time today.
We appreciate it. Always my pleasure, Rob. That's Mark Biller, Executive Editor and Senior Portfolio Manager at Soundmind Investing, a longtime underwriter of this program. Check out this article and more about SMI at soundmindinvesting.org. We'll be right back.
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So glad to have you with us today on Faith and Finance. I'm Rob West. Time for your calls and questions. We're ready for you. The lines are open.
We just need you, 800-525-7,000. With any financial question today, whether it's your lifestyle, maybe it's your spending plan, how to stay on budget in light of these sky-high expenses. Perhaps you're struggling with how to navigate this market or paying down debt. Maybe it's giving wisely. Whatever you're thinking about today, we'd love to hear from you.
The number is 800-525-7,000. That's 800-525-7,000. You can call right now. Raphael is a business owner in Florida. Raphael, go ahead.
Thank you so much for taking my call. All right, so I got uh I got two questions. Um I am Small business owner, I own a business where I clean pools, and I'm finally getting the resources now where I can start getting more and more business in my city. Yeah. And so I just have a question where I'm really wanting to start moving forward.
taking all the accounts of the profits the right way. And I just wanted to ask for some advice on some practical ways to start doing that. Maybe you start using Excel or spreadsheets, but I don't have no experience with that. And I just wanted to know kind of like the next step forward into taking all the accounts of the finances, the flow of the business itself. Like I've never own the business yet?
And yeah. I love this question because getting this set up now, Raphael, the right way is critical. Because if the Lord continues to bless this and you stick with it and you grow the business, you really want to have your book set up the right way. You want to have your accounting procedures. You want to have clear separation between your business and your personal finances.
And this is going to help you make sure that you can document truly all of the business expenses before the IRS and not ever be challenged on that.
So I think part one, in terms of the best way to approach the accounting, is really to, first of all, separate everything immediately. That's non-negotiable.
So I'd have a separate business checking account and a separate business savings account for taxes and then a business credit or debit card and don't mix personal and business whatsoever. Second, you want to choose a simple accounting system early.
So even a small business needs structure. I think QuickBooks is just as good. As any other, but you're going to want to track your income, your expenses, every dollar spent, your owner contributions, your owner draws. You know, this is going to be really important because you want to get this in place now before the volume increases. And then I think third is really to treat taxes as a bill that you don't get to skip.
So, you want to set aside money as you earn it, not later. I mean, maybe 20 to 30 percent of net income goes into a tax savings account. You want to pay those estimated quarterly taxes and you don't spend the money that belongs to the IRS because that's going to get you into trouble. And then you want to pay yourself intentionally, you don't want to just grab money when needed.
So, you know, depending on the structure, you know, if you're an S-Corp, a lot of times, what you'll do is you'll, especially when you get to this place where you can do this consistently, set yourself up on a reasonable salary and then take distributions along the way as you're able. And you'll save some taxes on that because you won't have to pay both sides of the FICA tax, you know, on the distribution portion. I think it's also important that you get with a CPA or accountant who specializes in working with small businesses because they can help you set up all of the processes and the structure that I just described, even help you. Set up, you know, just some of your routines and QuickBooks and help you know what it is you need to watch in terms of monthly reports and just all the things that you need to be doing to, again, make sure there's clear separation personally and professionally, but also that you've got a good set of books so you know genuinely how the business is doing. And you can evaluate that over time.
And paying somebody to help you get all that set up and then walk with you in that process, I think, is really critical. And even though it's an extra expense, I think it's one that's well worth it. Does that all make sense, though? Yes. Absolutely.
Thank you so much. That was really sound advice. I have one more small question. And so this is one thing that was explained by a spiritual mentor of mine a while ago, but it didn't click for me in that time. But in this moment, I felt like I.
It did click for me just personally, and it's the fact that God owns all of my money and all of my property and my business. And so once I really understood that in my heart, I kind of shook a little bit, and I know that his word says. All of what I need to know about that and how I need to address that and flow with that. But I just wanted to ask, and And how can I honor God with all of my profits and and all of my money? And how can I continue to walk with Him in the terms of because sometimes I spend my personal money and I feel like I don't n necessarily know with God is approving of, you know, just these small spends and whatnot too.
I mean I know it's good to just have financial wisdom regardless, but um But I don't want it in terms of I know. Yeah. I think you're, I mean, it's a great question. I love the heart behind this, Raphael, and God will honor this. You know, the posture matters as much as the process.
So, since all the provision and your business belong to God and not you, and that's true of all of us, everything we have, including the breath in our lungs, is a gift from the Lord entrusted to us for our care, and that includes your business. That means we view ourselves as a steward, not an owner. And so, when you walk into that business every day, you're saying, not what should I do with my business, but Lord, what would you have me to do with your business? And then at that point, it's about faithfulness. And we operate the business with honesty and we pay people fairly and on time and we avoid debt or risk that compromises our integrity.
And we make decisions that reflect love of neighbor, not just bottom line growth. And I think one other thing you can do is build generosity into the structure of your business from the beginning, whether it's through giving or serving clients with excellence or creating value that genuinely helps others. I would say invite God prayerfully into those financial decisions. Trust Him as your provider while you manage His resources. Make prayer a key part of this entire process.
But I think it's also important to understand that when you do and operate this business, understanding your role as steward and you do it as unto the Lord, playing to an audience of one. It brings him incredible glory. And this is a part of the way he's created us. He created us to be workers. We're to take, you know, the latent potential of his creation and to turn it into something that's productive for the, uh, you know, for human flourishing and to bless mankind.
You're providing products and services that bring beauty and order to people's homes. And you can do that in a way that honors the Lord. And you're living into God's purpose and unique design and thumbprint on your life every day when you go to work. And I think when you bring that posture and that mentality to it, it's a game changer because it really changes the why of everything that you do.
So I hope that's an encouragement to you today, Raphael. I'm confident the Lord's going to honor your desire to honor him with everything in your life, including your business. Hey, call anytime if I can help you further. Lord bless you, my friend. That's going to do it for us today, folks.
Hey, check out our website. Support our work there when you click give. at faithby.com and we'll see you tomorrow. Faith in Finance is provided by FaithFi and listeners like you. Yeah.
