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Roth IRAs: Tax Free vs Tax Deferred

Finishing Well / Hans Scheil
The Truth Network Radio
May 1, 2021 8:30 am

Roth IRAs: Tax Free vs Tax Deferred

Finishing Well / Hans Scheil

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May 1, 2021 8:30 am

There are some IRAs that allow you to take out money tax-free, while others make you pay taxes when you make withdrawals. Hans goes over why you should consider looking into the tax-free IRAs and how they could help your family! 


Don’t forget to get your copy of “The Complete Cardinal Guide to Planning for and Living in Retirement” on Amazon or on for free!


You can contact Hans and Cardinal by emailing or calling 919-535-8261. Learn more at 

Planning Matters Radio
Peter Richon
Finishing Well
Hans Scheil
Finishing Well
Hans Scheil
Focus on the Family
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Woodrow Kroll here. When you train one pastor in Ecuador, some donor friends are standing by to train a second pastor. Call 833-443-5467 or go online at Every gift counts and now every gift is doubled. for just seconds. Enjoy it, share it, but most of all, thank you for listening and for choosing the Truth Podcast Network. Well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now, let's get started with Finishing Well.

So, today, Finishing Well, we're going to talk about Roth IRAs, tax-free versus tax-deferred. So, in Matthew 5.25, Jesus gave us some advice. He says, settle matters quickly, you know, with your adversary before he takes you to court. And that, you know, you may have seen Andy Griffith once or twice and Barney Fife was famous for making this, you know, particular statement which speaks to this on a great level as nip it in the bud. Actually, there's a reference to that in the Song of Solomon.

But, you know, in so much of life, it's a matter of do you want to nip it in the bud or do you want to wait till this thing completely goes to flower? And so, when it comes to Roth IRAs and the traditional IRAs, there are two words. They sound like cousins, but they actually are diametrically opposed and one is tax-deferred and the other is tax-free. But they sound so similar and they're actually used by people to me. We always want to make our stuff sound so nice and beautiful, you know, investments, life insurance, cash values, you know, and we just tax-deferred, you know. And then very seldom can we say tax-free. We actually can do that with some life insurance, but you think about these two words and never are they more clear than in the Roth IRA and the traditional IRA.

So, let's just do a little definition here. So, most IRA money starts as a traditional IRA money and most money in IRAs is still on the traditional side. It's not even close how much people have in Roths and the Roth version has been around since about 1998 and it really didn't get adopted too quickly.

A lot of people didn't even understand what it is, but it's pretty much out there. People know what it is and it's an option, but it's not used nearly as much as I'd like to see it and this is the difference between the two is a traditional IRA where most of the money is and probably most of your money if you have an IRA or a 401K is on the traditional side. Meaning you've never paid tax on that money, but you will and it's tax-deferred. So, that's the flower that's blooming. Yeah, and it's been blooming for many, many years and it keeps getting new flowers added to it through contributions and they're all tax-deferred.

Even the contribution, the original balance, the first hundred bucks you put in there is all tax-deferred. You've never paid tax on any of that money and the earnings and so it's blooming exponentially and it's fun to watch. People get a lot of joy.

It wasn't too fun to watch in 2008. In 2009 when that stuff went way down and then it again did that just last year, this time it recovered much more quickly, but that's tax-deferred and people get a lot of joy out of that and financial advisors get a lot of joy. I've gotten a lot of joy sitting down with people and saying, boy, this is like a gift from the government because we're going to put your money in there and then they're putting their money because if you didn't do this, you'd have to pay taxes on that money and that would eat up 40% of it. So it's almost like you're putting in 60 cents of your money, 40 cents of their money, but it's not really like that because you're just putting in your money and you're postponing taxes, but they're going to get their money and they're going to get their money at some point in the future. And maybe even after you die, but it's going to be even more money then, possibly paid by your kids. But just so you understand, that's tax-deferred.

That means we don't have to pay it now, but we're going to. Now the Roth on the other hand, it is money right from the beginning, you deposit into the Roth after tax money. So when we used an example of 100 bucks where if it was taxed, $40 would go to taxes and then you'd have 60 left, but on the traditional side you get to put the whole 100 into the thing and defer the tax. On the Roth side, you only get to put 60 in or you still put in 100, but you had to make 180 or something or 150 to net 100.

So the money is after tax or paid tax going in, but now all the growth is tax-free. So the whole balance just sits there and it's available to you. You can't get at it without penalty until 59 and a half. So you got that. So you got to leave it there for a while. There are some exceptions of borrowing a home, getting your first home and you can take money out.

I don't necessarily recommend it, but just for purposes to understand, you got to leave it there till you're 59 and a half. But once you're 59 and a half, you can take any money out of that and no taxes. Those things sound like cousin tax-free tax defer.

They're not even from the same family. From my standpoint, the first time I did this show and you mentioned the word Roth, I was like, what in the world? And I understand that there was actually somebody called Roth, his idea to create a way that you could clearly make this kind of deposit into your retirement where you didn't have an upcoming tax bomb.

And of course, we'll later on in the show go into why that's completely necessary. He was a legislator from Texas. I'm not sure he even thought of it, but he certainly sponsored the bill and put his name on it and it stuck.

It doesn't really matter. It's the Roth IRA. And the whole idea of the thing is so not only are you going to have retirement money available to you and you're not going to have to pay tax on the growth, it's going to be available to you in retirement tax-free. And if you don't use it for your retirement, you can leave it to your kids. I mean, it's just a wonderful thing that he created. Really, God created it. He did the work.

Because as it's growing, it's growing with a tax-free increase. Absolutely. And if you put the same amount in, because my son is 23, he's just graduating with engineering and he's starting his first job. He already got it. It's pretty gratifying.

The money they're paying him is unbelievable. And he's being smart about it, so he asked me about all the benefits. And I convinced him to put in a Roth. And I even showed him, this is going to make your paycheck worse. As your buddies, other people starting, they're going to tell you, oh, you made a mistake because you're going to get less of your paycheck because you're not getting a tax deduction, essentially. But I said, just what you're doing is you're setting up a tax-free slush fund.

It's essentially that. And my guess is he's going to make a lot of money over his lifetime. Once he gets started at that way, he's going to be Roth.

He's going to have some kind of gigantic balance when he's my age. And it's all going to be sitting there tax-free. Right. Compared to his buddy. So let's just project it out and say it's a million and a half dollars there 50 years from now. And there he is. And his buddy, he might have $2 million, right?

Maybe, maybe not. But the thing is my son can still put in as much after tax as his buddy can in before tax. So the limit of the contribution, if he took it right to the limit, they should have the same amount. The difference is the buddy is all taxable. So his buddy has an estate tax problem. He's got just a tax on his income problem. He's also probably is going to hate paying taxes by that point. And so he's going to be inclined to just take out minimums and he's going to just hold it until he dies. And then, you know, his buddy's kids are going to have a gigantic tax problem because they're going to probably draw all the money out and pay all the tax at once and it's going to eat up half of it. Whereas my guy, if he's got the same million and a half or whatever they have, he doesn't have to take any of it out at any time.

He can start at 59 and a half. He wants to buy something. He can go buy it. He wants to leave it there, leave it to his kids. His kids won't even have to pay taxes on it.

They'll have to distribute it. But, I mean, it's sweet. It's sweet.

And so this is completely applicable to you, you know, as we've discovered when people are in their 70s and still making contributions as it is to the person that's in their 30s or in their 20s. I had a guy call me the other day. He's going to become a client. He's an awesome guy.

He gives a lot to missions, the Baptist Church mission in a particular state. And I really, really like this guy. And he got a hold of our show on the podcast. He watched our videos on YouTube.

And so I started to get assessment. This guy's got plenty of money. He doesn't need his retirement money. I mean, he's got a home at the lake. He's got a home where they live. He's still got employed by two corporations doing stuff. 80 years old.

His wife's 79. And he's watching my videos and getting onto this concept. And he says, you know, now I'm sitting here. I'm looking at this money.

And, you know, didn't have to pay minimum distributions last year or take them because of the coronavirus, but I got to take them this year. And he says, you know, I need you to tell me what to do with this money. You know, or I need you to tell me how to lower the taxes on this. And I said, well, you know, I can't really do that until I find out what you want to do with this money. Because it's entirely different if you want to give it to your kids than if you want to give it to your wife or if you want to give it because some of it's hers already.

So it's just but if you want to give it to the church, those things are all different. So, you know, I think when we get in the second part of the show, I'll tell you a little bit more about him and like where we're going and what he told me. But he's just now realizing this. He's created this big pot of money and he told me how he did it and all the things very he said good advice. So he's deferred taxes. I mean, he's just that's been his game is because he didn't need all the money he was making in these jobs to live. He needed a good bit of it because he has a lot. He has other money and investments and things going on. But now he's got this big pot of money and he's realized he doesn't need it. And now he's thinking about converting it to a Roth at 80.

And we actually might do some of that. Yeah. Plus he's now making his contributions into a new Roth.

Well, he's going to do that. Yeah. Yeah. I mean, even though he may only have two or three more years, he's like, well, why would I keep putting money into this traditional IRA when I could, you know, create a certain amount? So we got all that coming up in today's show.

Right. Which is talking about IRAs. One of the seven worries in Conz's book, The Complete Cardinal Guide to Planning for Living and Retirement. It's all there at You can just email Hans as well as listen to past shows or look at his videos.

It's all at We'll be right back with more of Roth IRAs tax free versus tax deferred. Well, welcome back to Finishing Well.

Today's show is IRA, Roth IRA, specifically tax free versus tax deferred. And when we left our hero, he was OK. This guy is 80. He's still working. Oh, he's 80. He's 80.

Oh, wow. He's very well versed on it. He has an estate plan. He's already done some things back when he was 65. We had the old estate tax laws. He owns some life insurance. He's got all kinds of things, but all his old estate planning isn't necessarily applicable anymore because that's all changed. And it may possibly is fixing to change again now under the current administration.

That'll take a while to work out. What he specifically called me about is this three million bucks that he's got in his IRA. He didn't have to take minimum distributions last year.

I'm sure it's done well. He has it invested conservatively, but he wants me to tell him, like, what should he do with this? And I just said, well, I can't tell you what to do to lower taxes until I. You tell me what you want to do with this money because it's apparent to me all you've wanted to do is accumulate it to this point. And he said, yeah, you talk about minimum distributions like they are the tax. I mean, just remember that when you took in a minimum distribution two years ago, I mean, you gave that money to you and then they deducted the tax and you were left with most of it.

So it's not really a tax, but like it's a bad thing. So your goal has been tax deferral. You thought you were avoiding taxes.

You were just postponing them. This is what I told him. And he got that and he wanted me to talk to him like that. And I said, so now you've got this money there and we need to decide who's going to get it because you certainly don't want it and aren't going to need it.

Because he's got other stuff going, a lot of other stuff going on. Lakehouse, really neat guy. His grandchildren are up there using that and his children. So I said, who's this money for? What's this money for?

And he said, you know, and so we started breaking it down. As it sits right now, 25% of it is going to go to the church, which is, that's really cool. Now, I explained QCDs to him and QCDs for him and QCDs for his wife.

So we can start right now and we can give to any charity he wants, and it sounds like it's going to be the church, $100,000 of that money from him and $100,000 from her. So we can give $200,000 to the church tomorrow by doing a QCD. And no tax on the QCD. No taxes. No taxes. That's tax free. He balances his minimum distribution that he didn't want.

Yeah. Now the balance is going to be $2.8 million. I think he's fudging it down. I think he's actually got more when we add everything up. But let's just go with the $3 million.

As I said, well, that's the first thing. If you're wanting to give 25% of it at the end, well, we need to think about giving $100,000 twice because you and the Mrs. right now. So we can give $200,000. We don't have to send that all to one church. We can send it to missions. We can send it to the association that he told me about.

We can send it to your church. We can just, you know, we can go several places, but it needs to be the first distribution from the IRA. Now, we're not even talking about Roths now. If this $3 million was in a Roth, he could do anything he wants with it. But it's not.

It's in the traditional side like most people. So but anyhow, he's interested in converting some of it to a Roth. But I got real clear is the part we're going to give to the church or any charity. We don't want to convert that because if we convert it and pay the tax and then give it to the charity, well, we haven't accomplished anything. We're better off the charity would rather you give them the money before you pay it because they're not going to pay any taxes.

And you're not going to either. And you're going to get credit for a minimum distribution. But when you still got $2.8 million and I said you could draw some of it out, pay the taxes and give some of it to your kids now. That would be an option. You could buy a life insurance policy.

You could still do that at 80s in good health. I'm not sure I'm recommending this, but it's a possibility that and so we could pull out that minimum distribution or more than the minimum distribution and pay a life insurance premium for 10 years on a 10 pay life. And then drain this thing down, pay the taxes a little bit at a time and then it would have a life insurance benefit more than $2.8 million at least for the kids portion of it. Because we want to leave some of this in there to give to the church. And the kids wouldn't have to pay any taxes on that life insurance.

No. No, that'll go to them. And we can even pay that out over time through the life insurance company. So if you're concerned about a spends thrift thing or them squandering it or whatever, then we can set up through the life insurance company through the beneficiaries that they're just going to get paid so much for so many years.

We can do all kinds of things with that that we can't do with other things. Well, he was really warming up to that idea. I said we could do some Roth conversions, but just keep in mind we probably want to segregate this IRA and we want to say this is for the church, this is the 25% that goes to the church and we're going to segregate that and we're going to start giving them some of that now under QCDs. Right.

And then we're going to decide what's going to go to the kids. And boy, he was liking all this. The thing that I thought was really cool in the story was that here he was at 80 still making income, right? And now his contribution is for the next couple of years at 80, he's putting into a Roth and you did this math for him.

I thought that would be helpful for the listeners to hear. Well, yeah. I mean, and actually I think it was a different client that I was talking about on the math. So I had another client in just this week.

We just got up, these people were in the office and this gentleman is a doctor. Almost all of his money is in a traditional IRA 401k. So, and he's got a good bit of it. He's got like say a million bucks. Then they have a home and he has a good salary and a good income.

And the thing that I found, he's not retiring for a couple of years, okay? But he's in here, he wants to get things lined up. And the thing that I found, one of his biggest problems is he doesn't have any money he can go put his hands on or enough money for somebody of his means. He's got a small amount of savings. So I told him that we need to build up somehow, some way $100,000 of savings that's not in a retirement account that he could go withdraw and use just at his will at any time.

So we need to do that over the next couple of years. And he liked that. Then I got in deeper and I said, you know, he's putting $18,000 a year, 1,500 bucks a month into his IRA 401k. I mean, they're just deducting out of his paycheck. So what I recommended he do, and I think he's probably already done it, he did it that afternoon is he changed his contribution in his 401k from traditional to Roth. So now he's putting 1,500 bucks a month in the Roth side of the thing, and he has no Roth money. And he's sure going to work two more years. He may work longer. But if he just works two years at 1,500 a month, he's going to have $72,000 in his 401k on the Roth side where he's already paid tax on the money. And it's just like a savings account that you can withdraw without tax implications at will. Right.

And the beauty of this, you know, that I can see, I guess, because I'm sitting here, I want to make sure the listeners can see is Hans, how much do you make on that right there? You're at your advice, you know, helped him to do that. But in other words, this is completely a gift, right?

Well, to a degree. I mean, first of all, he's still deciding whether he's going to be a client. So when I have people meet with me, I think this is what you're talking about.

People come in to see me like, we've got a lady coming in here just in a little bit that listens to the show, and she's here locally, and she's coming in to see me. I give people as much advice as I can when they call me or we have an initial meeting to talk about a plan, and that's just free. I mean, this guy, we could never see him again.

I have a feeling we will. But I walked him through all that, and very seldom do I give like advice on the spot before I go through the whole process. But this was just an obvious, this was a slam dunk. I give it to a lot of people. Well, the thing is, you know, if you're sitting there listening to this, you go, oh, where's his cut?

There is no cut in this. Well, ultimately, he's going to do a plan with us. Well, I hope so, and I get that. But in other words, when you're listening, this is completely like, oh, my goodness, this is just good stewardship. Like understanding the real need for tax-free versus tax-deferred, what Roth IRAs really are a benefit. Well, you know, what you're bringing up is the difference between a fiduciary and a commission-based salesperson, okay? And believe me, I make commissions on some things that I sell. But because I'm a fiduciary, I have to disclose to my clients, first of all, that I am making a commission. And then secondly, that that commission could create a conflict of interest. It could cause me to be looking harder at that than I am my client's needs. And then I have to mitigate that in writing in my notes that because I'm a fiduciary, that the fiduciary requirement supersedes all that. And of course, any recommendations I'm going to make in spite of it. So, you know, obviously, I'm going to earn some money doing business with this client or some other clients, but that's just not top of my mind.

And you're listening to that, and I just like stuff on the radio show, and people call me up. I have all kinds of people that I – like, I'm not in charge of this lady this afternoon. I mean, I just – I already told her that because she really doesn't have enough to pay me.

She's got some retirement savings and all that, but she's – you know, I just want to help her. And so that's why I love the topics here on finishing well is it just sound things to help families finish well. You know, hopefully, you know, you make a great living. God blesses you in all sorts of different ways. But the beauty of it is, like, oh, my goodness, God has gifted you with all this information to help families. And so here we have this opportunity to share what God has given you in ways that are unique. And I don't want anybody to not see the whole picture of, look at how God is blessing all of us with this information to be able to take – be a better steward of what God gives us in all sorts of ways as we finish well financially, you know, showing Jesus and the generosity of Jesus, right? Because he wants us all to live in a kingdom and, you know, making our houses like our homes like a kingdom, you know, is part of the way that we have an opportunity to reflect our Redeemer. And what a beautiful thing.

So, again, today's show is brought to you by Cardinal Guide,, where you can get Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. We ran out of time again. It's always the case. Too much fun. Thanks.

Yeah. Thank you. We hope you enjoyed Finishing Well, brought to you by Visit for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments and taxes, as well as Hans' bestselling book, The Complete Cardinal Guide to Planning for and Living in Retirement, and The Workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to If you have a question, comment, or suggestion for future shows, click on The Finishing Well radio show on the website and send us a word. Once again, that's, This is the Truth Network.
Whisper: medium.en / 2023-11-23 17:08:46 / 2023-11-23 17:19:36 / 11

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