Roth Over a Traditional IRA? With Mark Biller

This faith and finance podcast is underwritten in part by Soundmind 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. The average person makes 35,000 decisions a day, and one of them just might be traditional IRA or Roth. Hi, I'm Rob West.

We get that question a lot as folks try to decide which type of retirement account will put them money ahead in the long run. Mark Biller joins us today to take a fresh look at the problem. Then it's on to your calls at 800-525-7000.

That's 800-525-7000. This is faith and finance, biblical wisdom for your financial decisions. Well, if anyone can shed new light on the traditional versus Roth IRA decision making process, it's of course Mark Biller and his team at Soundmind Investing where he serves as executive editor. Mark, great to have you back with us. Thanks, Rob. Good to be back. Mark, in this month's SMI newsletter, you've got a great article to help folks make this decision titled, should you use a Roth account, even if you prefer traditional?

Why is this a good time to ask that question? Yeah, Rob. Well, Roth IRAs were introduced almost 30 years ago, way back in 1996. And since then, there have always been rules about who's allowed to contribute to a Roth account, but no one's ever been required to choose one versus the other. However, that's about to change because there's a new law that's going to force some older, mostly higher income 401k plan investors to direct at least some of their contributions into Roth accounts. And I should add, all of this also applies to those using 403b plans 457b plans, or the thrift savings plan. And while the start of this new law has just been put on hold for a couple years, it does raise a question that's worth considering really for all investors who are eligible for a Roth account. And that question is simply this, regardless of your age or your income, if you've been favoring a traditional account, would it be smart to direct at least some of your retirement contributions into a Roth account? Yeah, now we want to help our listeners answer that question. But first, Mark, give us a little background in case some folks might not understand the difference between these two types of accounts.

Yeah, absolutely. So first of all, whenever we're talking about Roth versus traditional, these are specific types of accounts that provide specific tax benefits for savers. And that's true whether we're talking Roth versus traditional in a 401k plan, or Roth versus traditional IRAs. A lot of times people get confused thinking that Roths are a particular type of investment. And they're not you can own most of the same things, stocks, bonds, mutual funds, cash, and so on, either inside or outside of a Roth or traditional account. It's just that in a Roth or traditional account type, you get some specific tax benefits.

Let's just rip through those real quickly. Sure, with traditional IRAs and workplace retirement accounts, the money that you contribute lowers your taxable income right now. So if you put in $5,000 this year, you'll pay 2023 tax on $5,000 less income than if you hadn't made that contribution.

Now down the road that catches up to you when you make withdrawals from a traditional account in retirement, you'll owe ordinary income tax on all the money as it comes out. With Roth accounts, we flip that it's the opposite. So money that you contribute today doesn't lower your taxable income right now. But down the road in retirement, no taxes are due when you take that money out of the Roth account. Yeah, so another way to summarize it might be do you want to pay taxes now or later?

Mark, what's the conventional wisdom on how to make that decision? Yeah, so the conventional wisdom is Roth accounts are great for younger workers who are typically lower paid and have reason to believe their income might be higher in retirement. So the idea is pay taxes on your contributions now when you're in a low tax bracket, and then enjoy the tax free income in retirement when you may be in a higher bracket. Again, that flips for higher income, often older workers, especially if they think they might have lower income in retirement like many people do. So again, the idea there is take the tax break now on traditional contributions while you're in a high tax bracket, then pay taxes on withdrawals in retirement when you may be in a lower tax bracket.

Yeah, that makes complete sense. All right, we're going to continue to unpack this just around the corner, the pros and cons of traditional versus Roth IRA and 401k. Mark Biller back with us right after this. Stay tuned. If you enjoy this radio program, you're going to love all of the many different resources waiting for you at faithfi.com and the FaithFi app. You'll find powerful wisdom, free podcasts, articles, videos and more from leading voices such as Randy Alcorn, Howard Dayton, Ron Blue and our own Rob West. Grow in wisdom and knowledge by connecting with a community of thousands of Christians striving to be good and faithful stewards at faithfi.com or by downloading the FaithFi app. Have you downloaded the FaithFi app yet? You need to do that today because this is going to make your life easier. Yes, you can manage your money through the in app envelope feature, but also plan out future goals.

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So why don't you grab your phone right now and download the FaithFi app. Good to have you with us today on faith and finance. I'm Rob West.

Joining me today, Mark Biller. He's executive editor at Sound Mind Investing. We're talking about a new article in the SMI newsletter called Should You Use a Roth Account Even If You Prefer Traditional?

Mark, as we were sharing before the break, this is a question that we're asked a lot and there's some conventional wisdom on it, but perhaps we can help folks explore this beyond just the surface level answer and really think about which makes the most sense for them. For higher earners, typically they prefer the traditional tax treatment because they're the ones being pushed by the new rules into Roth contributions, right? Yeah, that's exactly right. A lot of older higher earning folks prefer traditional tax treatment today, but these new rules are saying that starting in 2026, they're going to have to put any what they call catch up contributions. These are extra contributions that are allowed by the government for older folks. Those are going to have to go into a Roth account under these new rules. Until now, workers could choose either one, but now they're going to be directed into these Roth accounts and the government's doing that because they want to collect more of the tax revenue sooner. Unfortunately, for these impacted workers, that's going to mean higher tax bills today. So for some of those, of course, this new tax law change is pretty unwelcome news. But there is a silver lining pertaining to the Roth, right? Oh, absolutely. Because like you've told your listeners for years, Rob, there's a lot to like about Roth accounts. So much so, really, that we're posing this question in this article this month, whether even those who aren't impacted by this new law should consider putting at least some of their contributions into Roth accounts. I totally agree. So let's unpack the pros and cons here.

Yeah. So the big idea really is that having some of each type, Roth and traditional, is probably a good idea for most people because that's going to give them a diversified tax strategy. So the overall standard thinking about traditional versus Roth is still accurate.

You want to pay taxes when you're in a lower tax bracket. So Roth accounts still make sense for younger workers who haven't hit their peak earnings years yet. And traditional accounts still make a lot of sense for higher earning investors. But if all of your retirement savings is going into a traditional account, there really are some good reasons to mix in some Roth contributions. Number one, nobody knows the future, including how long they're going to work or how high their income is going to be in retirement. So if your retirement income turns out to be higher than you expect, you're going to be glad to have some money in a Roth account that you can tap into without it raising your tax bill. Another reason is nobody knows how tax laws might change.

This is really where the article heads. And we talk about these researchers at the University of Arizona who tell us that since 1913, the tax rate has changed 39 times for a couple making an inflation adjusted $100,000 a year. So the point is, if tax rates were to go up again, and the odds seem pretty decent that that could happen, having some of your retirement savings in a Roth could definitely be beneficial. Well, and certainly with the Tax Cuts and Jobs Act due to expire in 2025, we can assume that if they don't at least stay flat, they're probably going up from here, right? Yeah, I mean, it's right there on the horizon. It's right in front of our eyes. Yeah, no doubt about it.

All right. And then of course, Mark, you also have to factor in required minimum distributions, right? Oh, absolutely. So once those required minimum distributions kick in at age 73, that income can push you into a higher tax bracket. Those distributions can also push you into a higher Medicare tier, which can mean paying higher premiums for Medicare Parts B and D. Another thing people don't think about is that if one of the spouses and a couple passes away, the survivors new single filer tax status can push them into a higher tax rate, even at a lower income. So in any of these cases, it would be great to have a little bit of money at least in a Roth account, which isn't subject to required minimum distributions every year. And neither do you have to pay any taxes on any of the money that you're pulling out of that Roth. Hmm. You know, the other thing to consider here, Mark, is for some folks, you know, having both affords them great flexibility, also including that qualified charitable distribution.

So if we're pulling money out of the Roth bucket that we're going to live on, but then we're giving out of the traditional IRA through a qualified charitable distribution, we don't pay tax on either of them, right? Yeah, that's exactly right. And I think that, you know, all of these examples, it can kind of make somebody's head spin, probably listening to this. But the point really is, if you've got some money in each type, it gives you a lot of flexibility to work around any of these particular cases that you and I are bringing up. It just, it gives you that diversification, which translates into flexibility.

And that's usually a good thing. And that may be the big new idea here is that perhaps instead of landing on one versus the other, it's the both and that gives you the flexibility, especially due to the uncertainties in that season of life. All right, Mark, so how do you find then the right balance between your traditional and Roth accounts? Yeah, so this article talks about the University of Arizona researchers I mentioned a moment ago, and their main idea is really built around this, this idea that income tax rates may change in the future. Yeah, so they've studied this deeply, and they've come up with a rule of thumb that they say produces nearly ideal results.

And it really is pretty simple. This rule of thumb says, all you have to do is add 20 to your age and put that percentage into a traditional account and put the rest into a Roth. So for example, if you're 40 years old, add 20 to that, contribute 60% of the total into a traditional account, the other 40% would go into a Roth. And they say that the common advice that most older workers get to put most of their contributions into traditional accounts really doesn't consider the risk of those tax rates increasing. And that investing some into the Roth is going to eliminate some of that risk. Now we talked about a couple of other reasons in the article to like a little bit of Roth exposure even for older workers. So if this is a topic that applies to a particular listener, I'd really encourage them to take a look at this article to kind of go through the details. I know it's hard to get all of that from a verbal conversation like this.

But it's all laid out there pretty clearly. Yeah, and you know how I love a good rule of thumb. So that's great.

20 plus your age that goes into traditional the rest in the Roth. That's great. Mark, just about 10 seconds left tie a bow on this for us. Yeah, so you know, like with most investing topics, diversification is a good thing. It's a biblical principle, and it applies to your taxes as well as the investments that you put into your portfolio. Well said. You've really made a great case for us today.

And this has been incredibly insightful. Thanks for stopping by. Thank you, Rob. That's Mark Diller, executive editor at Soundmind Investing. Read this article should you use a Roth account, even if you prefer traditional at soundmindinvesting.org. Back with your questions right around the corner.

Stick around. We are grateful for support from Soundmind Investing in the faith and finance program. For more than 30 years, they've been helping Christians reach their financial goals with step by step guidance for investors at every stage, from those just getting started to those getting ready for retirement. Through scriptural principles and practical suggestions, SMI offers financial wisdom for living well.

More information, including the short video webinar on profit and peace of mind, no matter what's happening in the market, is available at soundmindinvesting.org. Because of my past health history, finding affordable health care was nearly impossible. But then I found CHM, where costs are not adjusted based on medical history. Christian Health Care Ministries even provides the freedom to choose my own providers. And the best part, CHM members pray for me. Too good to be true?

It's not. I'm a proud member of Christian Health Care Ministries, and if you think it could be right for you, learn more at chministries.org slash faithfi. Welcome back to faith and finance. I'm Rob West. All right, let's head back to the phones here in our final segment to Indianapolis. Hey, Marty, thanks for calling.

How can I help? Thank you. I recently just went through a divorce and I'm living in my aunt and uncle's house while I'm helping him remodel it. And I've got a few more dollars that I got through my divorce. I was just wondering how should I save that?

What should I put that in? Eventually, within five years, I'd like to buy me a piece of property. Yeah, yeah. Well, I wouldn't invest that, Marty, just given that you said within five years, which tells me that potentially could be three years.

Is that right? Yeah, I'm just kind of watching and if something comes along that's a good deal, I'd like to be able to jump on it. Okay, yeah. So the last thing you'd want would be to drop a lot of this in stocks and all of a sudden you're ready to make that purchase, you find that property and now you're having to sell them at a loss because we don't know whether the market's going up or down in the next year or two. We're investing based on long-term trends, not near-term trends, and something less than five years, I would say, is too short of a timeline. So I think the key for you right now is just to kind of reset spiritually but also financially and really take a look at your spending plan first because that's really the cornerstone of every financial success from a dollars and cents standpoint. I mean, we've got to really begin with our hearts and just say, do we understand God owns it all and we're stewards and am I free from the grip that money can have over me and am I giving? That's going to break the grip of money over my life.

But then once we have our belief system right, that's going to inform our behaviors. Kind of the cornerstone to any good financial plan is a spending plan that allows you to live within your means. So putting down what income sources do I have and especially now while you're living in your aunt's place, helping them out, maybe your expenses are reduced more than they will be certainly when you buy your own place. And so how do I take full advantage of that? What expenses do you have?

Where can you cut back and how much margin can you free up every month that you can use to accomplish your goals, which should be aligned with your values and priorities? And if that primary financial goal is socking away money for a home purchase, well, great. Let's open an online savings account, probably at an online bank.

You can check out bankrate.com to find the online bank for you. You're probably going to be earning four and a half percent interest. It's FDIC insured. You link it to your checking account. And every time you get paid, you just automatically transfer whatever you can over to that savings account, which is your down payment fund. And let's try to build that up. But I think the key for you is, you know, let's try to get your spending right so that you've got that margin. You don't have any debt. Is that right, Marty?

That is correct. All right. What about long term investments like retirement savings? Are you working right now or are you just working by way of helping? No, I am working full time and I've got about $800,000 in my retirement. I'm 40 years old. And I've got about $30,000 that once we had to sell everything, that was my part. So I just kind of, okay, I got this little bit of chunk of change.

I don't want to just go on a spending spree and waste it away. But housing markets are pretty wild right now. They are. Yeah.

Well, that changes things a little bit. I mean, you still need a spending plan, but you're well on your way to having everything you need with an $800,000 401k at age 30 or 40, whichever you said. So I think the key for you right now is, yeah, as you're socking away money for that home purchase, just put that in a savings account. It'll be safe.

It'll be liquid. Get it out of your spending account so you don't, as you said, spend it on just extra frivolous stuff. And that way you'll be well and on your way to making that purchase when the right place comes along. Hey, listen, all the best to you, my friend. I know you're in a challenging season right now, but draw near to the Lord. Really invest in a great Bible-believing church. Spend some time in God's Word.

And we'll trust that he gives you a new vision for what he has in this next season. Let's head to Shererville, Indiana. Michelle, go ahead.

Hello. I am 52 years old. I have never been married. I do not have any children and I am an only child. My father has passed away. I am currently the caregiver to my mother. The time has come that I will need to stop working and be a full-time caregiver for her. I currently do have a 401k, but since I will be leaving that job, I would like to roll it over, but I don't know where to roll it over to since I will be putting money into it. Well, Michelle, this really honors the Lord.

I believe the Bible is clear that we need to take care of our parents and our family, and you're certainly doing that at a time where your mom needs you, and I'm delighted to hear that. What do you have in that 401k, roughly, right now? To be honest with you, I don't know. I'm going to say it's about $80,000. Okay.

All right. Yeah, so you may be slightly under a minimum for an advisor. A lot of times they'll have a minimum of $100,000, in some cases $200,000 or $250,000, but I think you're right. You do want to roll it to an IRA, and you can either manage it yourself and pick those investments, or I would encourage you to hire an advisor to manage it for you. Our friends at soundmindinvesting.org could give you some advice on some good high-quality mutual funds to select, soundmindinvesting.org, or if you wanted to invest yourself and you wanted some faith-based investing options, there's some wonderful mutual funds in the faith-based investing space on our website at faithfind.com. Just click on the show, and you'll see funds like Eventide and One Ascent and Guidestone and Praxis and Lightpoint Portfolios.

There's some great options there. So I would say either a do-it-yourself faith-based approach or check out soundmindinvesting.org, and then you'll open that IRA, probably Fidelity or Schwab. You'll roll it out from the 401k.

That's not a taxable distribution, and then you'll just deploy it in those investments at that point. Okay. Sounds good. Thank you so much. All right. You're welcome, Michelle. Thanks for calling.

We appreciate it. Let's head to Pennsylvania. Hi, Pamela. Go right ahead.

Hi. Quick question. My husband and I are retired, looking at selling our home next spring, and looking to profit about $300,000 to $400,000, we are going to be going overseas for a year. So my question is, what to do with that money in the meantime? What do you plan to do with it when you get back? Buy another house? Probably.

Yeah. So I think you just need to keep it safe and try to earn as much as you can on it. I'd probably drop it in a one-year CD. And so what I do is go to bankrate.com. Click on the button that says Certificates of Deposit. It will sort by the banks and institutions that have the very best rates.

Pick two that have the highest rates that are highly rated, and you'd open two different CDs in your name. Okay. Very good. Thank you. Okay.

You're welcome. Well, once again, our time went by way too fast. But tune in next time, and we'll do it all over again. Before we go, I'd like to thank our incredible production team, Amy, Devin, Jim, Robert, Brandi, Rob, and Ben. Couldn't do it without them. Have a great rest of your day, and I'll see you again next time for another edition of Faith and Finance. Faith and Finance is provided by Faith Buy and listeners like you.