Choices make decisions difficult. Brilliant statement of the year right there Mr. B&B, but it is the truth. The more choices we get the longer it will take us as humans to make a decision. Like a virus, the emergence and spread of craft/microbrew beer has even a seasoned drinker like me having a difficult time making a decision. The Belgian dubbel or the chocolate stout? Well, it is getting warm out maybe I should try the shandy. Damn, who has time to make all these difficult decisions?! When the choices start to become complex and affect the rest of our lives like choosing between a Roth or Traditional 401k /403b, it can leave us feeling hopeless or in the typical human fashion many of us will just ignore it. Fear not, Mr. B&B is here to help!
Many, many people have written at great length about the pros and cons of the epic battle between Traditional or Roth retirement accounts. It’s all about the taxes or more specifically, your taxes. “…in this world nothing can be said to be certain, except death and taxes.” – Ben Franklin. Old Benny boy is right and we will love him anyway even though he was more of a wino than a beer nerd. The government will get a portion of your money one way or the other. Well, how much do you want to give them? You are probably shouting at the screen “Not a damn penny!”. That might be a little irrational so pour yourself another beer and pay attention.
The Traditional 401k plan will give your paycheck a boost. You will pay out 15% (yes 15%, don’t be a slacker when it comes to your future) of your income into your retirement account before your taxes are calculated. Then after you have put money into your retirement account your taxes will be calculated on the remaining money left in your paycheck. The 15% that you put into your account will not be taxed. A very simple example: your $1000 paycheck has $150 put into your retirement account and the taxes you owe are calculated on the remaining $850 instead of the larger $1000, thereby putting you in a lower tax bracket. This is called tax-deferred. This plan is very useful if you are a high earner and could really use the tax benefit upfront or are planning to retire soon. Sweet, right? Not so fast, Uncle Sam will get his due. When you hit retirement age you will pay taxes on your contributions (the 15% you put in all your working life) AND on any earnings you made. If you diligently saved for your 30-40 working years this could be a significant amount and seriously put a dent into your beer fund come retirement.
The new kid on the block is the Roth plan. This is a “non tax-deferred” account or the complete opposite of its Traditional cousin. Here you pay your taxes up front. No procrastinating. When you get your paycheck your taxable income will be calculated first before any money is taken out and deposited in your retirement account. So using the same simple example from above you would be taxed on the entire $1000 instead of the $850. You might be saying “but Mr. B&B that’s less money I will get each paycheck!” and that is true but here is where the beauty of the Roth plan shines. All that income earned in your Roth account can be withdrawn tax free come retirement time. That includes interest, dividends, and capital gains. So if you are already in a lower tax bracket or are early in your career 30 years of tax free growth could look very appealing!
We all have our own tastes in life. As you can tell I like Belgians, stouts, and Roth retirement accounts. This does not mean that a Traditional account may still be right for you. So why do I heavily lean towards the Roth? Being of the Millennial generation I will have plenty of time to grow my retirement fund and most certainly hope that nice nest egg of an account will put me in a much higher tax bracket than I am now. I want to add one more thing to Ben Franklin’s quote. Not only are taxes a certainty but I am hedging my bets that my taxes will certainly increase as well. Over the course of time, whether through my awesome investing skills or, the more likely way, through our lovely United States government’s increasing of taxes; I am sure I will be in a higher bracket somehow. Hence the Roth is my best option and possibly yours too.
It all really comes down to where do you want your tax break for saving money? Holy crap! Tax breaks while saving money! I should drink and blog more often because that sounds genius. If there is one thing ALL the experts can agree upon is if your company offers any 401k/403b match freaking take it. If you don’t you are leaving free money on the table. The plus side is, by law, your company match has to be placed into a Traditional account. Look you are diversifying your tax benefits without even knowing it. Well played.
My Beer of the Blog today is Citrus Pearls by Shock Top Brewing Company. Are you a Shandy or are you a Radler? Yet, you have the citrus aroma of an IPA, but where did the wheat come from? See sometimes even a beer cannot decide what they want to do. Sometimes it’s not bad to dabble in a little bit of everything. Great citrus aroma reminding me of a nice double IPA with the unfiltered wheat flavor a warm spring day craves. Citrus peels, coriander, and lime give a 1-2-3 punch of citrus flavors on your palate that is delicious and refreshing. For all of you yelling at me Ben Franklin is a beer nerd remember his quote of “Beer is proof that God loves us and wants us to be happy”. He did not say it. Do not believe everything you read on the internet. Well, except this blog and maybe Wikipedia. Cheers!
Budgets and Beer 
One big advantage of Roth’s for aggressive savers is that the total $ amount allowed is the same as a regular 401K, $18,000. Putting $18,000 into a Roth is equivalent to putting $26,000 into a regulalr 401K so it is sort of a loophole that lets you save more. Not many people are saving that much but the FIRE crowd is often saving that or more. After twenty years the amount in the account will be the same if the same investment choices are made but the Roth will be tax free money which of course is worth way more than taxable money. I’ve never seen anyone make that point but as someone that always contributed the maximum dollar amount to my 401k I always wished it had been a Roth, but my company never offered one. I put additional money to max out a private Roth above maxing out the 401K but the limits for a non-401k Roth were and still are pretty small. Plus after my career developed I earned too much to qualify for a private Roth. Roth 401k’s don’t have an earning limit.
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And i m not sure how saving 18k in a roth is the same as 26k in a traditional. Been involved in this from several angles for a lot of years (and mr b&b u know me n my hubby have been pretty successful at it). So u r now confusing me cause my info is different then yours n steveark.
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Ok, I’ll say it backwards. The most you can put in is $18k either regular or Roth. Let’s say that grows to one million by retirement. If you put it in a Roth you get to spend all one million on you. If it was in a regular 401k you’d get to spend more like $700,000 and the IRS would collect about $300,000 in taxes. So you get to save more usable money in the Roth. It isn’t free, you just pay the taxes now, not later. But since the Roth limit doesnt count the taxes you paid against the $18,000 it has the impact of letting you save more, if you can afford it. That’s only an advantage if you are hitting the $18,000 limit like I was.
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Similar to a delicious craft beer tasting, I do agree that you should dabble (diversify) in multiple investment vehicles – both tax-deferred and tax-free. In the last few years, I have been a significant effort to move money into tax-free vehicles and figure out how I can minimize taxes in retirement. Seeing my parents deal with taxes in retirement is crazy. They have zero itemized deductions (good citizens who paid their mortgage off after 30 yrs) and more income (mainly due to RMDs) that pushed them over Social Security’s threshold which taxes 85% of their social security income (can be verified on SSA dot gov). Maybe that is why the politicians let the debt run up, they knew the tax-deferred accounts would bring in so much tax revenue when the baby boomers retired that social security would also be recouped in some manner to pay down debt.
A discussion for another time. Good article B&B, time for a County Line IPA by Neshaminy Creek.
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