Episode Transcript
[00:00:00] Speaker A: Any examples used are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
Welcome to Reyna Retirement. Reyna Reyes has dedicated her career to helping people make small, smarter financial decisions. Rayna retirement is all about breaking down complex financial concepts into language you can actually understand. Now here's the co founder of American Federal Benefits Consultants, Reyna Reyes. Well, Reyna is here once again to like, I guess, take the wool off of our eyes. What is that saying? I don't know. Don't pull the wool over our eyes. Take the wool off of our eyes. Help us see clearly through the fog of smoke, something retirement related. And this time around, Raina, we're talking about Roths, right?
[00:00:58] Speaker B: Absolutely. And I think maybe we'll pull off the rose colored glasses while we're at it. That. We'll go with those.
[00:01:03] Speaker A: Any, any other metaphors you want to put in there?
[00:01:06] Speaker B: Yeah, absolutely. So it's interesting. Many people are accustomed to the idea of saving in a savings account and then they want to sort of graduate and then they find a job and they say, we want a job with Benny's, we want the benefits. Right. And that 401k is a great benefit of, of, of the job that we're accustomed to. That's kind of the, kind of an echelon maker, right. And then after the 401k, when people leave the job, they're then considering moving from being at the whim of the administration that was chosen by their job. And many people will take their 401k and move it over into an IRA, which is great. That's pretty standard. I manage tons of them. We can do all of those things. But then as we're realizing that we're, we're, we're earning money, we're making money, but then we realize we have to pay the piper. And Uncle Sam is always, I always have this image of Uncle Sam as the big bad wolf ready to huff and puff and blow our house down and take all the bricks from our house or the stones or the, whatever it is. And he's got this bucket of money that he's waiting outside the door of. And it's your bucket of money. Who put the money there? You did. But who hasn't been taxed yet? Uncle Sam has not been taxed in a 401k. So you put the money in and let's say you're making 100 grand a year, but you've put in, say, 20,000 into your 401k during that time period, you are contributing 20% because you are gung ho about saving. What? Well, you did not get taxed on $100,000 that year. You actually only got taxed on $80,000 because 20 went into your 401. Well, every year you do this for a time period and then Uncle Sam starts salivating over your bucket of money that he's ready to tax. Because it is inevitable, right? It's going to happen. At some point, the piper will get paid. But a Roth is very different. The piper still gets paid, but he commonly will get paid much less when you use a Roth than if you use a traditional because of the snowballing effect. Now, a Roth can be really great when you have time on your side. So let's first define it. Maybe let's pull up this screen and we'll show you what it is. What does it even mean? What is a Roth? So the Roth says, I already paid tax on the, on the contribution, but as time went by, I earned interest and I can't be taxed on the growth as long as. What are the rules? I have to leave that money alone from $1 for five years. One, two, three, four, five years. And the age is 59 and a half. 59 and a half. And that's a pretty common age. We've heard it over and over again. Because that's all. Also when Uncle Stan. Uncle Stan, Uncle Sam, whatever. He's a horrible uncle in terms of taxes. When somebody's got a bucket of money ready to be taxed and he, he says, okay, you're 59 and a half, you're able to start taking money out of either traditional or Roth. But if you start taking it out of the Roth, as long as you've had it for five years, how much tax will you pay on that? Not one cent. And people love being able to say to Uncle Sam, and I quote, nanny, nanny, boo, boo, you can't tax me. They love it. But you also have to set the stage. You can't just wake up and say, I'm going to magically turn my stuff into a Roth today and then pull it right out. No, it doesn't work that way. So if you were, if you don't have TSB or a 401k that you can put a Roth into, you could do an ira and those have maximum. So you see, if you're under age 50 this year, you can put up to $7,000 per year. If you're over 50, you can contribute $8,000. And this maximum is totally fine. Just remember, anything Uncle Sam's going to put his thumb on is probably a benefit to who, you. Because if he's going to limit what you can do with it, it means he's scurred. He is scared of what can happen as this growth snowballs. So when you've got a lot of time on your side and go ahead and look at your clock and say, how old am I? What kind of time do I have? You might consider a Roth. If you're in the spring or summer of your career, or let's just call it what it is, life, right? For example, my 10 year old daughter is an amazing candidate for a Roth because she has a ton of time on her side. So I've got her a little Roth waiting. So when she's what, 50 years from now, she can pull out a bunch of money, not pay tax on it. You're welcome, daughter, you're welcome. But you can also convert, right? What that means is, okay, I never contributed to a Roth. Now I wake up and I don't have so much time on my side, but I'm over 59 and a half. What could I do? A conversion. This bit you see on the bottom, a conversion means I'm going to grab some money out of my Pre tax bucket. 401k or IRA, never paid tax on it yet. I'm going to go ahead and grab say $10,000 and I'm going to put it in a Roth IRA. The limits don't matter anymore. When you're converting, you can choose the dollar amount that you convert as high as you want to. But really you're saying, how much tax am I cool with paying this year? Because remember, if I grabbed $10,000 and I still made 100 grand in my job, my taxes will reflect $110,000 of earnings. Or in that other example where I put 20 grand into the 401 I contribute, I really am being taxed on 80. But then I did a 10,000 conversion, so now I'm at a $90,000 income for that year. For tax purposes. I hope you're following. Hope you're picking up what I'm putting down. The point would be, hmm, taxes are inevitable. They're going to have to happen. So maybe I'll go ahead and get him out of the way a little bit at a time, pop him into a Roth IRA and let the puppy grow. And then I wake up 5 years, 10 years, 15, 20 from now, and I have a bucket of money that Uncle Sam can't touch. Now how cool is that?
So on the next page I believe, and you've heard the saying, a picture is worth a thousand words.
So I developed this lovely little image to sort of show you how 401ks or TSPS. And I, I'm a federal employee specialist. So I bring this up with TSP specifically, but the concept is the same universally, traditional versus Roth. So if you see on the left hand side, maybe not everybody's a coffee drinker, maybe people drink tea, but I've heard the way the British drink tea and they put some creamer in it anyway. So whatever your drink of choice is, the concept remains. So let's say the coffee is my contribution from my 401, that 20,000 a year. Well, I've got a pretty cool company and they're matching me. So that's the creamer. They're popping some money in there. The TSP matches you up to 5%. So let's say I'm putting in 20. The tsp is still going to only match me 5. So my coffee goes in, their creamer goes in. What do you do? You grab the spoon. And what? Absolutely. You stir it up. It all becomes your bucket of money. That is all. As my Arkansas, my grandma from Arkansas would say, it's all yarn, it's all yn, it's all yours. Because I'm from Florida. So it all goes in. But that. Has it ever been taxed? Absolutely not. No one's taxed this. And Uncle Stan, Uncle Sam knows it because he knows exactly how much you have in your bucket.
So there's how the traditional goes. Now one day you're going to want to start drinking your coffee, but before you can, Uncle Sam's going to grab his portion. Every single time you take it out, every single time you take it out, you got to pay tax. And some administrations like the tsp, who administers your war funds to you, they have a mandatory tax withholding. What is it from tsp? 20%, which is actually the right amount because most of my federal employees are going to be in a 20%, 20 to 24% tax rate anyway.
And you're paying it anyway every pay period. Right, because it comes out of your paycheck. But there's something about seeing tax in a lump sum as compared to that little every pay period that just blows people away. What they say they're taking how much it is painful. So there you have it. That's your traditional snowball waiting for the day you're going to grab cash out of there on the right hand side. Remember, oil and water don't mix. Now, in your bucket, clearly, they're going to all be your bucket. But the point is, you have already paid tax on what in this image is the water. You already paid the tax.
You handled it. Uncle Sam's happy. He already got his money.
But as time goes by, you're earning interest, and let's say it's a pretty substantial interest rate, too. As time goes by, fast forward, you've got a bucket of money that Uncle Sam can't touch any of. And you see that oil there. Let's say you earned, I don't know, maybe an average of 6%, 3%, 10%, who cares? 10 years down the road, 20 years down the road, what could be in your bucket? What's in your wallet? What could be in your bucket that you can grab out of and have no tax implication? I will pound the desk on that one because there's no tax implication, and that's huge. What else in money has no tax implication? Life insurance. And that's about it. That's about it.
No tax implication to. To you, though, and you were the original owner. Life insurance is kind of a bummer because you don't really see that yourself in some exclusionary situations. But you see the note at the bottom. The government matches. Now, in a tsp, specifically, I can contribute all of my own contribution into the Roth tsp.
I'm still going to get my match of 5%, but they're not going to tax themselves. They are going to put their match to my bucket over there in the coffee side. In the traditional. It's inevitable. Most. If I speak to my federal employees and postal employees, it's inevitable. Most of y'all started with traditional. It just was what it was. What was the commercial Parts is parts. It just is what it is.
And that's fine. So everyone has a significantly higher balance than in their traditional tsp.
Some of you have a 401k that also has the ability to have a Roth contribution. Your story is probably going to be the same.
People are accustomed to traditional and they feel this great accomplishment for lowering their tax rate while they're working.
But remember, there's the idea that there's been propaganda that when you retire or when you're no longer working, you're going to be in a lower tax bracket. And a lot of people felt that that made Sense. Well, I'm not making money anymore.
Well, are you?
Social Security is going to be an income and right now it's taxable.
Pension if you have one. Taxable.
And money you take from your 401k.
Remember coffee side. Taxable. And so you've got these multiple different variations of, of money that is taxable and Uncle Sam is ready to tax you in comparison to a Roth. Uncle Sam can't touch it. So there's a big difference there between the two. Now, you can convert your TSP money into an outside Roth ira. You cannot convert traditional TSP into a TSP Roth that they've just put a moratorium. Well, there's no moratorium. It was never available to begin with. You just can't. Can't. Never could, as they say. So that's a big no. Negatory, good buddy. I'll stop with the nos. But you see the point. You can put it to a roth outside your 401k or your TSP, but you cannot convert it within the TSP. There may be some 401ks that allow it, but you probably want to check that first. So why would a Roth not be good for you? Well, let's say I'm retiring you or having our meeting and you say, Raina, I'm 70 years old and I am maybe married, but the spouse has their own money. Would it be good to do a Roth for me?
I might not see a great value in trying to tax yourself to put money in a bucket that you've got to leave alone for five years because you're only a couple of years away from what they call RMDs required minimum distributions, where you have to start taxing yourself out of your coffee side, the traditional side anyway. So it's fairly inevitable. So it's fairly inevitable. So essentially everyone's different. As you know, there's no one size fits all. There's no, everyone should have a Roth. There's no, no one needs a Roth. There's no one answer like that. As you know, that's how life works. But it would be definitely good to consider a Roth if you're in that younger echelon. And I'm not even going to put an age limit. I'm not going to say, oh, if you're under 60, if you're in 65. No, because here's the deal. What if that 70 year old said to me, I want to start converting money from my TSP or my 401 for the sole purpose of handling the tax on this amount of money for my grandchildren. Now, that would make perfect sense. And sometimes in our meetings, I'll ask you the question, why?
Four to seven times to the point of irritation, what would the Latin say? Ad nauseam? To the point of just, hey, Reina, why are you asking me this? Because I've had people say to me, hey, Raina, I want to open a Roth ira. I say, great. Why? Well, a friend of mine said it was good. Okay. Why? Well, because they have one. Okay. Why? Right. Well, because they're 50 and they have time on their side and they want to contribute for a long time so they can grow money that has it, that won't be taxed. Okay, that's cool. But that's them, why do you want it? And then we go back to this and say, oh, well, I want to also have a big bucket of money that's not taxable. Great. Now we know why we're doing it. I've had people come to me with buzzwords and all this stuff, and that's fine. Buzzwords are buzzy for a reason, right? Because sometimes they're great for you, but sometimes they're. They're. There may be a wasted effort, you understand? So it's definitely worth considering. I am a huge advocate for the Roth ira, or tsp, as long as it makes sense. We definitely want to make sure that it is of benefit to you and that it's worth the effort, because you're still creating another bucket of money. Remember, you can have a TSP bucket of money and traditional IRA bucket of money, a Roth IRA bucket of money. And then your spouse could have the same set of four different buckets. And then we have to deal with them. We have to think about them. We have to look at the statements. We have to maybe take distributions at some point, right? So ultimately, you want to kind of review what you have for your whole family, because as we age, remember, I handle retirement very often. Sometimes we'll start consolidating those buckets for ease of management for yourself and for ease of management for your heirs. So these are all things to take into consideration when it's time to start growing your buckets, but then also when you start taking distribution from them. So if you haven't considered a Roth ira, reach out. I can help you make sense. And I'll go ahead and ask you all my annoying why questions and see why we want to do something or why we might not or why maybe it's a great thing for a spouse and maybe not yourself. Everyone's different. Life is different, but that I'm a big fan of not allowing Uncle Sam to tax me more than is absolutely necessary. So here's to saving on taxes, my friend. I'll retire you soon.
[00:17:45] Speaker A: Thanks for listening to Reyna Retirement With a strong commitment to ethical standards, Raina works hard to find the right solution for each individual or family who reaches out for advice. To contact reina directly, call 850-450-6500. That's 854, 456,500. Or to reach the team at American Federal Benefits Consultants, call 1-800-872-8857. That's 1-800-872- 8857. You can also go online to americanfederal.org not affiliated with the United States Government. Opinions expressed are subject to change without notice. These opinions are not intended as investment advice, nor do they predict future performance of any product. All information provided is believed to be from reliable, reliable sources. However, we make no representation or warranty as to the accuracy of any statement. The information is intended to be educational in nature and does not provide a guarantee or specific result. All copyrights and trademarks are the property of their respective owners. American Federal Benefits Consultants is an independent organization, not a government agency or affiliated with the federal government or any state government. The terms CSRs, FERs, FELI, and FEHB are all registered trademarks of the U.S. office of Personnel Management. American Federal Benefits Consultants, Agents Consultants, or any independent contractors do not provide tax, legal or investment advice and do not engage in the solicitation or sale of securities. Consult with your tax advisor or attorney regarding specific situations.
