Tax Deffered Vs. Tax Free

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This is the Truth Network. Welcome to Finishing Well, brought to you by cardinalguide.com, with certified financial planner, Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing 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. Well, welcome to Finishing Well, with certified financial planner, Hans Scheil, and today's show, very cool, when it comes to IRAs and Roth IRAs, tax-deferred versus tax-free. And so I was thinking about this whole idea of tax-free. Well, you know, if you give something to God, let me just point out that it is completely tax-free. And oh, does he multiply it.

You know, I don't know if you've had that experience. I hope you have with your tithe or your offerings of some kind, and they give those to God, and then they multiply. Well, you may remember that the Jews were to give offerings that were without blemish. And part of the reason is that is by all means, Jesus was without sin, and he was completely the spotless lamb completely.

And that's a big part of it, that picture that Jesus was that God was trying to paint. But there's another thing that I don't know if you've ever considered, that if you give something to God, he multiplies it. Well, if you gave him a diseased sheep and you're a sheep herder, guess what's going to happen to your flock? Or if you gave him one with bad legs, the next thing you know, God's going to multiply that. And he wants to bless you like he wanted to bless Abel, and Cain just didn't get the picture, with what—he wants to multiply what you give him.

And so this show today has a lot to do with giving God your best, and oh my goodness, will he multiply it? I think you're going to see, there's this unbelievable rule of 72s that Hans is going to—it's a rule of 72 that Hans is going to go into. And at some point in time, you might want to consider the rule of 490, which Jesus did along the same idea. And that was when Peter asked how many times he should forgive his friend. He said 70 times 70, right? And that's the rule, from what I understand, of 490.

So go ahead, Hans. Okay, so the rule of 72 is a simple thing that you learn if you do the kind of work I do, and I've been doing it as long as I'm doing. Before we had computers, the younger people that work with me, they don't know all this stuff, but it's just, it's a simple thing. If you take an interest rate that you're receiving on your savings, and you divide it into 72, it's going to tell you the number of years that it's going to take for your savings to double. So, you know, in other words, if you put $100 in the bank, and you were earning 6% interest on it, it will be $200 in 12 years. So if you divide 6 into 72, you get the number 12, and the $100 will become $200 in 12 years. Now, if you increase that to 8% interest, which nobody's ever heard of 8% interest, unless you're paying on a mortgage these days, but, you know, I'm just making these numbers work, and if you're earning stock market returns, or that kind of thing, maybe that would be a reasonable assumption, you know, and just kind of a rosy assumption, but yet one. 8% interest, if you divide 8 into 72, it takes 9 years. So if you earned 8% interest, your $100 would take 9 years, would take 9 years to turn into $200.

What good is this? You know, and it's just, when you think long term, which we do in financial planning, I'm able to do, and I still do it to this day while I'm sitting there with people, and I'm looking at, a lot of times it's a younger person, and I'm looking at an amount of money that they have saved, and then I'm thinking of the return that they're getting, and it just, in my head, I can see how long it's going to take that particular amount that they have saved to double, and then double again, and double again, and double again, if you've got a 30 year old person, and we're looking at what's going to happen for them at 65. So we don't really, this is a skill that's not really needed anymore, but, because we have computers to do all this stuff and make projections, but where it's useful on this video that we're doing today, is I want to show somebody the power of tax free, or the benefit of tax free savings, which is a Roth, versus tax deferred, which is a traditional IRA, or a traditional 401k.

And they sound kind of like the same, like they're cousins, but they're vastly different. So, you know, if you put your money in a Roth, right from the beginning, your contribution, you know, not only are you not going to pay tax on the principal that you put in there, but all the earnings over all the years, if you're going to leave it there for a long time, that's going to be tax free too. So the whole thing is, it's a tax free savings account, and it's very unique.

So, yeah, well I, when I was listening to the video, or I should say watching the video, but being a radio person, I was listening. Anyway, I loved this idea that, you know, if you took somebody, and, you know, they were 50 years old, and they had acquired $100,000 in their Roth IRA at that point in time, when they were 50. Well, by the time they were 60, right, based on what you're saying, they would now have 200,000, right, 62. If they were 50, by the time they were 62, at six percent, they would now have $200,000. And by the time they were 74, they would have $400,000 if they never invested another penny. In other words, if they just started out with that 100, by the time they were 74, they would have $400,000 just from that original $100,000 without investing another penny. And the beautiful thing if that's a Roth IRA, not only is it $400,000, but there's no tax lien against it, right? So that $400,000, you could take it out, there's no minimum distribution.

In other words, you know, you're free to move about the country with the money that God's more than double. Well, yeah. And when you really look at this, like we're looking at it today, it's amazing that I have such a hard time selling this concept to people. Here to my own son, who's a brilliant engineer, you know, and he's very good with numbers. He didn't know anything about Roth versus 401k. But I convinced him to put his 401k contribution, his first year and his real job into the Roth side of things. And I showed him this, but he just kind of listened. He said, Dad knows what he's doing.

So he put it there. But then he started researching it and saving his own money. And then he decided if somebody else told him, he'd be better off doing the traditional side and getting the tax deduction for it now.

And then he's going to be paying less taxes when he's retired. Okay. And that's kind of the common wisdom. And I'm not going to argue with that. But the point I want to show him and show anybody and I used a person age 50, because the people listen, we don't have a lot of 25 year olds listening to us. So I don't think so as most of us are, you know, 60, 65, 70, 75, some 50 year olds. So I'm just showing you know, in the video, and I got the example of, you know, if you put $20,000 in there at age 50, and you have 20 grand in there, and that's this year's contribution, and you're age 50, and then we're not going to look at any other money you put in before or after, we're just going to look at that $20,000.

And we're going to look at it two ways. One way is if you do it as a Roth. The other way is if you take a tax deduction for it, and you do it as a traditional and the tax deduction sounds great. But when you look at the thing, this person at age 86, because you could just leave the money there if you put it in a Roth at age 80 to age 86, you'd have 160,000, your 20,000 will have turned into $160,000. Okay, and you will owe no taxes on that $160,000. And you know, if you go to the traditional side, you're going to have minimum distributions to deal with, but let's just pretend that this age 51, you put in there into the traditional side, you put 20,000 in, you got a tax deduction. So it really only costs you about, well, let's just say you got the tax deduction, so it's tax deferred. It's going to grow to the same $160,000 at age 86, but you're going to owe income taxes on it.

And so it's going to wipe out like a third of it. And so it just, I could talk over and over and over again about this point is, is it just, it is, it is God multiplying your money on the Roth side, and not leaving any of it for the government. Right. And it not only is going to, if I'm not mistaken, increase your taxes, if on, you know, the money that you took out, but it's liable to change your bracket that you're in as well.

Right. If, if you're, if you're got a lot of money coming out that, you know, there's all sorts of possibilities and state taxes. In other words, depending on the state you live in, you're going to have to pay those taxes. There's all kinds of stuff, right?

Well, sure. And then social security is taxed to the extent of your other income besides social security. So if your other income is from a Roth or partially from a Roth, that part is not counted to calculate whether you pay tax on your social security or not. So there's a whole bunch of stuff going on when you're retired that the ability to get tax-free income in retirement is just, it's priceless. And the Medicare is taxed by your taxable income. So if you have social security income, and then you have other income like withdrawals from your IRA, and you put all that stuff together, Medicare is taxed that way as well, is that you have this thing called Irma. And so there's all kinds of advantages when you're retired to if you're relying on your retirement account for your supplemental income on top of social security is to have it tax-free. And so we don't even put all those in the calculations.

I'm just saying from right from the beginning, if you use the Roth, your money's going to double at the same rate, which is pretty amazing when you look at the benefits and the how money of compound interest or the power of compound interest. It's clearly got to work. Right. And so you can see this is quite a topic.

It's a phenomenal thing that we're talking about today on Finishing Well. But we want to remind you that it shows brought to you by CardinalGuide at cardinalguide.com. There you're going to find, of course, the contact information for Hans and Tom, as well as the Seven Worries tabs. And at the Seven Worries tab, they have the fourth worry, which today we're talking about IRAs, you know, Roth versus traditional, that kind of thing. And then that you're going to find a video along these same lines with a beautiful board with all these numbers kind of illustrated all in the show notes on that video at the IRA tab under the Seven Worries and all that information, as well as Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement.

So we got so much more on this, the difference between tax deferred and tax free IRAs. When we come back, investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner, Hans Scheil. And today's show is just an amazing topic to me and so cool when you begin to see the advantage of this, especially for those of us who are still working while receiving Social Security and the difference between tax free and tax deferred. And I know this a little off of what you want to talk about immediately, but it's very important to me because as I'm still working, right, I'm still putting money in a Roth IRA, you know, which I'm so excited about the fact that, you know, that thing is continuing to grow and all that. And, you know, however it works, it's going to be tax free, right?

Well, it's just, it's fabulous. And to, you know, to reap the benefits of a Roth or to anticipate reaping the benefits, especially to a financial planner like me, I mean, we're, I help people, you know, in attempt to help people reduce their tax bill over the rest of their life. And then for their heirs, afterward, I mean, that's what we're a financial planner, that's what we do.

And with a Roth, to have the ability to have a tax free savings account is just, it's, I mean, it's, it's just wonderful. And so what I try to do is convince people to get working on the Roth thing as early as they can. Now, that being said, most of the market, most of the people coming to me for help are in their 60s. Okay, the average person, we have plenty come in their 50s.

I mean, just some come in that, that they're planners and they're early and that's great. We have some in their early 60s, some in their mid 60s, a lot in their mid to late 60s. And then we have people come to us in their 70s because they worked that long, they're still working or they're people that just kind of slept through financial planning and they made little decisions as they go. And now they're in their 70s and they're thinking, boy, I better try to put some, put some math to this stuff and get a plan together.

Regardless what I wanted to, for, for a lot of people, the ship has already left the station. They've got a pretty large traditional IRA balance. And, you know, it's fine to think back, boy, I wish 30 years ago I'd put all this in a Roth and I wouldn't have this tax problem now. Well, uh, and first of all, you couldn't have done it back then cause the Roth didn't even come out till the late 90s.

Okay. And you know, the, the Roth, the name comes from the guy who is named Roth and he was the sponsor of the bill to create the tax free, uh, retirement account. And so, what does all this mean about the advantage of a Roth to a person who says, say 60 or 65?

Well, you have the benefit, if you're still working, you can go right now. And most of them let you do this, even in between payroll periods, cause you can start making your contribution to your 401k. They take out of your paycheck to the Roth account. And you can start making your contribution to your 401k. They take out of your paycheck to the Roth account instead of the, um, traditional account. So, you know, and you can put, if you're over 50, you can put over $30,000 of your pay into a Roth in one year.

Cause that includes the 50 catch up amount. Now, some of you afford to put $30,000. That's why I'm still working.

Okay. So even after tax, so I'm not telling everybody to do that. I'm just telling you that you can get quite a bit of money.

I have plenty of people come to me that are in their sixties. They could afford to retire now, but they still want to build up things. And they're talking to me about Roth conversions and you can create the same effect just through your contribution. Okay. And it's going to seriously dent your paycheck, but you know, you do that even for a couple, three years and you've got a hundred thousand dollars, um, perhaps in the Roth side of things.

Okay. So that's, that's one thing you can do. The other thing you can do is you can take a look at your traditional account and have me take a look at it and we can look at tax rates and we can look at the amount to have looked at when you're going to retire and we can get on a Roth conversion strategy so that by the time you do retire, you've built up a portion.

You've just converted a portion of it, say 50,000 or a hundred thousand a year. Um, and we've moved it over year by year, by year, if you're five years away from retirement, you could have 250 or $500,000 worth of tax free savings account just from the money you've already saved. So I've always loved the idea of a Roth, especially for those people who are leaving their money to the next generation that, you know, I would hate for my kids to inherit, you know, this big, huge tax bomb. And so it's kind of cool to think that even, uh, if I were to die prematurely or whatever, uh, as, as I'm investing this money in the Roth now, even though I am, you know, on social security and all that stuff, uh, you know, what I'm passing on to my kids or my wife or whoever would get it is completely tax free as well. Right?

Well, yeah. And if you were to die prematurely, it's going to go to your wife and your wife is now going to live off of one social security check instead of two, she's going to be the survivor. And then secondly, she's going to be paying single payer tax rates. So it's going to be real beneficial for the survivor, which would be her in marriage to have a tax free savings account that she can draw from.

So she can mitigate some of that tax problem, uh, and lower income problem with a tax free check. I mean, you can spend a hundred percent of the money you pull out of a Roth, whereas you pull it out of a traditional, you've only got 60, 70% of that money. That's actually available to you because you got to pay tax with the rest of it.

So that's the first thing. And if the money is in the Roth until you die and you don't have to access it, and it goes to your kids or the next generation, they have 10 years to pull it out and turn it into just regular money. And they have to pay no tax. Whereas if they, it was a traditional account, they're going to have to pay tax on it.

And it's going to be smaller because you will have had to take minimum distributions starting at 73 and beyond. I mean, um, there's just clear benefits to having some of your money that's in your retirement account where the taxes are already paid on it and it's compounding tax free. It's just, and it's very comforting to know that.

Right. And the other thing, you know, of course, hopefully my income would be such that this would be an issue. I don't think it would be, but it's still nice to know, you know, for Tammy, that Irma, that whole idea of Irma that when it drops down, there's only one check and, and all of a sudden, wow, now she'd have to deal with that as well, because everything changes when you go down to one taxpayer.

Oh, it does. And the Irma limits come down and the minimum distributions don't go down. I mean, for some of my affluent clients, they have these large balance IRAs and they gotten that way.

There's a lot of times these are frugal people. They live off their social security and a little more, everything's paid for, and they got this big taxable account and then they get to minimum distributions. At least if it's one spouse that has the big account, at least they're paying taxes at married filing jointly, tax rates on these large minimum distributions and their social security check and whatever other earnings they have.

When one of them dies, the minimum distribution doesn't go down unless the spouse is substantially younger. Yet it, you know, it's pretty much the same, but now it's single taxpayer rates. So, I mean, there's all kinds of issues with having a taxable or a pre-tax retirement account.

And I don't want to describe it as bad for those of you that are listening. If you've saved up a big account and you haven't paid tax on it, but it's a big account and it's therefore to add financial security and it perhaps is your kid's inheritance. If you don't use it, you don't have to, if you don't use it during your lifetime, that's not a bad thing.

It just inherently has a problem with it within it. And that's a tax problem. And so I'm just, we can solve some of this through Roth conversions, through planning, through perhaps life insurance.

I mean, there's all types of strategies that can be used to effectively lower the tax for you during retirement and after you pass on. Yeah. And again, you know, I unfortunately saw, you know, with my father who, you know, a lot of his, you know, he was very excited about to give this, but unfortunately, you know, some of my siblings needed that money immediately.

And in doing so, oh my goodness, you know, how it affected them and their taxes and all that stuff. And it just seems like, you know, that Roth IRA makes it such a cleaner situation, especially for an inheritance, or I would really think in the case of a widow, that would just be critical. Oh, yeah, it is. Yeah.

There's more stuff that we can do. I mean, we can push a Roth into an annuity that's going to kick out a check. That's going to, the check is going to last for life of two people of a married couple. So, you know, where a person can take a hunk of money that they already have in a Roth, move it into an annuity. Those things are best if they bake for a while and you don't start the income for five or seven or 10 years.

But if you're of an age, you can do all of that. Then when the income starts, it's a guarantee that it's not going to stop until both spouses have passed away. So if just one of them lives into their nineties, there's just going to be checks coming in and then tax free checks. Furthermore, you can take a hunk of traditional IRA money or traditional 401k money, or pre-tax, you haven't paid tax on it yet. You can buy this annuity with that pre-tax money, and then you can convert it in pieces to a Roth.

No, it's absolutely beautiful. And as usual, we've run out of time before we ran out of show, but we want to remind you that this show is brought to you by cardinalguide.com. And there at cardinalguide.com is the seven worries tab and the seven worries tab we're talking about today is worry number four, which is your IRA.

And there, you're going to see all sorts of resources, especially there's a video on this very idea of tax deferred versus tax free with all sorts of illustrations and stuff that you can see in plenty of other videos or audio that you may want to listen to along that way. And then of course, there's how to contact Hans or Tom. It's there at the contact information at cardinalguide.com and Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. Amazing show Hans, thank you. Thank you.

And God bless you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

Any statements or opinions are subject to change without notice. Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Again, for dozens of free resources, past shows, or to get Han's book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Whale radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.