Afford Anything - The Tax Risks That Could Blow Up Your Retirement Plan, with Ed Slott

Episode Date: March 24, 2021

#307: “Taxes are the single biggest factor that separates people from their retirement dreams.” That’s a quote from today’s guest, Ed Slott, a nationally recognized IRA distribution expert, practicing CPA, and bestselling author. He argues that there’s a high likelihood that tax rates could rise in the future, and as a result, we need to shovel more money into tax-exempt accounts like Roth IRA and Roth 401k’s. Ed says taxes are one of the biggest threats to our retirement plans, and draws attention to tax events that catch seniors by surprise, such as the so-called “widow/widower” tax. If you’re wondering how taxes could derail your retirement -- and what you should do about it -- you’ll learn an enormous amount from this episode. For more information, visit the show notes at https://affordanything.com/episode307 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, anything in your life. That's a scarce or limited resource. And that opens up two questions. First, what matters most to you? And second, how do you align your daily, weekly, monthly, annual decisions to reflect that which matters most? Answering those two questions is a lifetime practice.

and that is what this podcast is here to explore. My name is Paula Pan. I am the host of the Afford Anything podcast, and today we're going to hear from a nationally renowned IRA distribution expert on the surprising case in favor of Roth IRAs and Roth 401Ks, Roth tax-exempt retirement accounts. The case for them is stronger than you may realize, and we're going to hear that argument put forth by today's guest

Ed Slot. Ed is a practicing CPA, a best-selling author, and, as I mentioned, an IRA distribution expert. The Wall Street Journal calls him, quote, the best source for IRA advice. Ed is often quoted in the New York Times, The Wall Street Journal, Forbes, USA Today, Kiplinger, Investors Business Daily, and numerous additional national publications and financial publications. He provides a monthly Q&A column to AARP, and he is a contributing columnist to financial planning and financial advisor and investment news magazines. He's appeared on many national TV and radio programs, including NBC, ABC, ABC, CNN, Fox, Fox Business, NPR, Bloomberg, and Morningstar, to name a few. He is a professor of practice at the American College of Financial Services and a practicing CPA based in New York.

He joins us today to discuss his newest book, The New Retirement Savings Time Bomb. So what is this time, Bob? We'll learn that right now. Before we get into today's episode, we have a transcript. So today's episode is very dense. It's very heady. We discuss a lot of information. And if you want to see it in writing, if you want a written record, if you want to download the transcript, you can get that for free by going to the show notes at afford anything.com slash episode 307. That's affordanything.com slash episode 307, download a transcript of today's interview, completely free. Highlight it, mark it up, send it to your friends. All right, with that said, here is Ed Slot to discuss the risks that could blow up your retirement plan. Hi, Ed. Hi, great to be here. Thanks, Paula. Oh, thank you so much for coming on the show. Ed, your book is called The New Retirement Savings Time Bomb. What is this time bomb? Sounds daunting, right? Yeah, it sounds scary. A retirement savings time bomb. Yeah, that's what most people don't realize. realize that that's the growing, compounding, building, unpaid debt in your retirement account.

I call it the ticking tax time bomb. Say that three times fast. The ticking tax time bomb. What's happening is most people save the way they were supposed to in their 401ks and then they retire, they roll it over to their IRAs, and they have all this money saved from maybe 20, 30, even 40 years of work. But what they don't really pick up on most of the time is not all of that money is theirs. A lot of it is owed right back to the government. That's what I call the ticking tax time bomb. And the reason I call this the new retirement savings time bomb, because it might make you ask, Ed, was there an old one? Yes. But now they're on new and even more severe

threats to your retirement savings, thanks to a number of factors, but one of them being Congress changing the rules. You know, anytime Congress needs money, they almost always look to raid your retirement savings. Why do you think they do that? For the same reason that Willie Sutton robbed the bank, because that's where the money is. There's somewhere around 20 trillion at this point with a T. Forget about billions. That's for Pikers now. Forget that. That's minor stuff. T. 20 trillion in retirement accounts untaxed. So to Congress, it looks like a big, juicy steak. It's the low-hanging fruit anytime they need money. That was the deal we made.

Everybody was kind of aware of it that every time I put into my 401k, I got a tax deduction, or same thing with my IRA. And I knew that in retirement, it would be payback time. But nobody knew it would be this bad, why the changes in the tax law, the increasing in account balances. Just look at the market over the last 10 years or so, over the last 10 minutes. Yes. I mean, these gains, remember, these gains partially already belong to the government, to IRS. That's why I say that time bomb is the growth in the IRA. Now, people might say, look, my account went up $10,000 today. All right. Maybe that's $6,000 for you and $4,000 for the government. It's not all your money. Years ago, I used to have clients come in and they were so happy. They would bring their statements. They said, I can't believe it. I've got a million dollars in my IRA.

And I would look at them. I said, I would look at the statement and said, that's not your money. It's just temporarily on your letterhead. You're not keeping all of that. Well, how much do I keep? That's the trick here. That's the problem. That's the time bomb.

How much of your hard-earned money will you get to keep? And that's a function of the tax law. That's the function of what future rates might do. taxes are the single biggest factor that separates people from their retirement dreams. And if we expect, like I do, as you may have read in the book, I expect taxes to go way up at some point to pay off these exploding deficits and the debt. We are building up as a country living on a credit card at some point. That bill has got to get paid. And where do you think Congress will go to the money that has not yet been taxed?

like I said, the low-hanging fruit. That's a ticking tax time bomb in your retirement savings. So that's the theme of the book, to move your money from accounts that I call off forever tax to accounts that are never taxed. Do planning to keep more of your hard-earned money and do it now. From what you've just said, a couple of thoughts strike me right off the bat. First, for as long as I've been an adult who's contributed to retirement accounts, I've always been aware that what I put into a traditional IRA or a traditional 401k is tax deferred,

and I'll have to pay taxes on that at the time of withdrawal, whereas the money I put into a Roth IRA or Roth 401k is money that I'm taxed on right now, but the capital gains and the growth within those accounts will be tax exempt at the time of withdrawal. And so I've always known, as have most of the people who are listening to this, we've always known that those two types of accounts are at our disposal, and we have to tax plan accordingly based on the structure of the accounts that we are making contributions to. So other than speculation that tax rates may rise in the future, how is this any different? It's not different. Like I said, the account balances have grown, and I'm afraid of future higher taxes taking a larger share of your savings that you may not have counted on.

You know, one of the things, I do lots of consumer programs, or I should say I used to do them. Now we do them all virtually. It's been about a year since I've been out in the public. But people would say, but Ed, the deal was, just like you said, Paul, I would make these tax-deferred contributions, knowing it's tax-deferred, knowing I received a tax deduction up front. But the plan was that I would be in a lower bracket in retirement. so I really would be pulling it out at a lower rate. And that's the foundational principle of all good tax planning. That's where you make all your money on taxes. It's my always rule.

And it means always pay taxes at the lowest rates, when the rates are the lowest. It's a tax arbitrage game. That's all this whole thing with retirement accounts is to get the deduction at a high rate, pull it out at a low rate. So for all the people that think, that will be in a lower bracket in retirement, I call it a myth because it doesn't often happen. People who save the most have large balances.

And when it comes to retirement, I've had many clients over the years. When we do their taxes, they're amazed. They always look at it and say, how is this possible? I'm making more now in my best working years. How could my income be so much higher now? Well, because at age 72 now, you're forced to take it out. So if the market has done well to you, your investments have done well and it's grown. You may have some big required distributions that are forced out at whatever the current rate is.

Now, it may actually be for some people, and I take you through this in the book, not every idea is for everybody. It's to make you think and do an evaluation, the pluses, the minuses, the benefits, drawbacks, and see what plan is best for you. Actually, for most people, I think moderation might be a good tactic. For example, over the years, do a series of annual smaller Roth conversion. So over time, you're taking down that large, the taxable IRA and building up your tax-free money.

But back to people who think they'll be in a lower bracket in retirement. If you think that's true, then maybe a Roth conversion is not for you. and maybe it won't be so bad. But two things against you. Again, the larger balances mean larger taxes when you take it out and the unknown what future rates might be. Plus, there's another thing. Married couples tend to say this.

They say, well, in retirement, neither one of us will be working, so we'll be in a much lower bracket. That's only temporarily so, even if that's true, because at some point, the first spouse is going to die. And then what happens in almost every couple, because most couples leave everything to each other, which is fine. That's probably what most people should do. So let's say the husband dies first. He leaves everything to his wife.

Now she has all the assets, all the funds, the money, all the net worth, whatever they had together, she has. Now she also has the same income that they both had when they were together other than maybe an adjustment for social security. But essentially she has the same income they both had when they're together. But now her tax rate goes through the roof because now she's filing as a single individual. So she's got a higher tax on the same income. So that I call in the book the widow's penalty. Most people don't think about that. They just think we, husband and wife, we will be in a lower bracket until one dies.

and then the one who needs it most. And the last thing you want is your taxes to go up after you've lost a spouse. The loss, it's like a double loss. You lost your spouse and now more of your remaining income that you're relying on will be taxed. And we don't even know what future rates are. That's why, Paul, I put in, if you look at the book, I put in the history of tax rates. I don't know if you noticed that in the book. I gave you a full history of tax rates from the 16th Amendment in 1913.

So the reason I did that is because Mark Twain had a saying, history doesn't repeat itself, but it rhymes, or that other saying, those who don't learn from history are bound to repeat it. I did that and to show you how high taxes could get. and I highlighted the years many of the listeners on here might be born, people like me, the baby boomers, 1946 through 1964. Those are the years the baby boomers were born. And if you look at that, the top federal tax rate, the top rate, not what most people would be, but the top rate exceeded 90, 90% every one of those years, except the last year, 1964, when it dropped way down to only 77%. Right, but that's the top marginal tax rate.

Right, the top rate. But you could follow it down, too. The point is, when the government needs money, they can jack the rates up. That's true. That's what I say that, the top federal tax rates. It's clear in the book, just to give people a frame of reference. Remember, a large savings account can push you into a higher rate. And not only that, there's other things that add to the tax bill, something I call, actually all

accountants call it this, stealth taxes. You ever hear that term, Paula, stealth taxes? Yeah. These are sneaky taxes that cost you more money because you have higher income. So if you're taking down your acquired distribution, say it's 72 or older, you may be increasing income to the point that other things become more taxable. For example, your Social Security, your Medicare, parts B&D, surcharges can go through the roof. You may not qualify for as many benefits, tax credits, deductions like medical deductions, or even things like these stimulus payments or whatever the government brings us in the form of

tax credits, benefits, or deductions can be lost. So that's an extra tax caused by having to take money. money out because of the required minimum distribution. See, that's when I say your plan's kind of out of control. I always say you want your plan, not the government plan. People sometimes ask, what do you mean by the government plan? It means doing absolutely nothing, letting it happen to you, you know, burying your head in the sand. And at 72, you just say, I'm not going to do anything. In fact, I just got an email from somebody who read the book, said, I'm not going to do anything until I'm sure I'll be in a lower bracket.

Maybe, maybe not. But I might look at some planning now to reduce the future tax hit because you never know. And that's why I talk about things like Roth IRAs, which I think is the simplest solution for most people. But maybe in moderation, when you talk about investing, anybody who talks about investing always talks about balancing and diversification, not having all your eggs in one basket. I feel the same way with taxes. I believe you should have tax risk diversification. For example, not have all your retirement savings in one big taxable account. Just in case rates do go up.

So you want to diversify and have something in tax-free territory. And I give you a few ways to do it in the book. But I think the easiest way for most people is to start moving to Roth IRAs, especially when rates are at rock. bottom prices now. You could say taxes are on sale now. I don't think we'll ever see them go lower. So even if they stay the same or go higher, the Roth advantage really wins out over time. Right. On this show, we often talk about building out the tax triangle of having assets in Roth accounts, traditional accounts, and taxable brokerage accounts. Do you have a recommended proportion of how it should be balanced along that triangle? For example, a third. For example, a

third, a third, a third? It depends on your age. Let me start with young people. There is no triangle. I don't know what the opposite of everything in a Roth is. What shape would that be? I don't know. I guess a point, a single point, a singular point.

Anolith or something? I don't know. But young people should only be doing Roth IRAs. The greatest money-making asset any individual can possess is time. And young people have more of it than anyone else. and the way to capitalize on it is to start from dollar one Roth only, start building from the first dollar a tax-free retirement account. First of all, when rates are low, deductions aren't even worth that much. And most young people starting out are not in their peak earnings years.

So the deductions, again, are not worth as much. Better to forego the deductions, start building up in a Roth. Imagine I'm in that baby. boomer era. I'm in my late 60s. I can only imagine if I was able from dollar one to start building tax-free. Can you imagine that, Paula, like people in their 60s and 70s, if they had the ability that young people have to start out from your first dollar you put in a retirement account to be growing tax-free your entire life. I can't even imagine how good that could be. Two follow-up questions. Yeah, go ahead.

First, does this apply to young people who are high-ins? income? Because certainly there are many people who are listening to this who are in their 20s, but they make significant six-figure incomes in high-paying jobs. So that's the first question. The second question is, how do you define young in this context? Is it only 20s? Is it 20s and 30s? Well, 20s, 30s, 40s, I would say is young. It's your frame of reference, I guess. 2030s, 40s. But take that other question. A lot of young people do have nice salaries. To me, that means they're going to have even much more later on. They're building a strong foundation, and it would still go raw, because rates are still

relatively low. Even if you're in the top rate, it's only 37%. These are the kind of people that may be in the top rates for the rest of their lives. And, you know, so if they forego the deduction at relatively low rates, I believe they'll have more later on, because if they're already doing well now, I would get a little bit. they're going to continue that path and build up a high net worth. And that's the kind of net worth you would like to have a good chunk of that be tax-free. We'll come back to this episode after this word from our sponsors.

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Now, I don't know how long these rates will be here. it depends what future rates are. But in general, I believe, and everybody can make their own decision, it's best to get rid of this mortgage. That's what I call the taxes, this time bomb, the taxes on the IRA. It's like a mortgage on your IRA. It just drags it down. And you'd rather have it free and clear. You know, I learned this years ago. I think a lot of people learned it from their parents years ago. My father bought our house, the first only house we had, he bought in 1957 for $16,000. He took a $12,000 30-year mortgage, and it took him 30 years to pay off that $12,000. And I remember in 1987, I was in my early 30s then.

When he finally paid off that $12,000 mortgage over 30 years, he was so happy and proud to own is own home free and clear. For many people, their IRAs and 401Ks will be larger than the value of their home. If you like the idea of owning your own home free and clear, I think you'd love the idea of owning 100% of your retirement account free and clear. Here's the downside, because I always look at every financial decision, any decision in life you should probably look at this way, but works well for financial decisions. What's the worst case scenario? What if I'm wrong?

What if Ed Slott is wrong? What if taxes don't go up? What if they even go down? I doubt that happening. But let's say I'm wrong about everything. And the worst case scenario is you converted everything. The worst case scenario, you converted everything to a Roth and taxes didn't go up. Here's the great thing.

The worst thing that can happen, your consolation prize, is that you've lost. in a 0% tax rate on your retirement savings for the rest of your life. And even beyond to your beneficiaries, you've locked in today's low rates. You never, ever have to worry about the uncertainty of what future higher rates can do to your retirement savings. You've locked in a 0% rate. I think that's a pretty good consolation price. You can't beat a 0% rate. So to me, that's the worst-case scenario. In fact, I had an advisor. I was doing one of these virtual, you know, our webcast, we trained lots of advisors. And a guy got on the program and he said, Ed, you keep saying, same thing I just said to you, convert to a raw, take advantage of low

rates because that's good tax planning. He said, I was at your big two-day program in Las Vegas 10 years ago. And you said the same thing that rates would go up. Well, they didn't. In fact, Rates went down. So you were wrong. What do you have to say about that? I said, well, if you had listened to me and converted 10 years ago, think of the gains you've had the last 10 years. They would all have been tax free now. Okay. Additional follow-up question. One of the things that you said about a person who's in their 20s who's making a very high income, we'll say someone in their 20s who's making a solid six-figure income or multiple six-figure income, they have a high likelihood of having a high income throughout the rest of their career. However, there are a number of people who are listening to this episode who have ambitions of early retirement and hope that when they turn 40 or when they turn 45, they may be able to either stop work entirely or make the conscious decision to switch to a lower-paying, higher fulfillment career and to do so from a position of financial strength because they

spent their 20s and 30s accumulating. Should those people also be prioritizing Roth accounts? Well, I think there's a moderation, but if they've done all of that, they will probably have a healthy net worth because I don't think you, I know about the fire thing that you're talking about. I know about it. Financial independence retire early. Is that it? Yes, that's it. Yeah. Chances are you're not going to do that unless you've built up a good, healthy net worth because what's the point of retiring at 40 if you don't have enough money to last you another 30? of 40 years. Remember, under that strategy, many people will be retired, not many, the people who do this, will be retired more years than they were ever working. So they were scrimping and saving and putting away. They still, they might be in a lower bracket in retirement, but what might happen is they may have a higher standard of living based on the wealth they've accumulated and need more

spending and end up taking more out. And again, they're at the mercy of the future higher rates. if rates go up. So maybe there's a moderation. That's why I say tax risk diversification. I think everyone should have something in tax-free vehicles as a hedge against future potential higher taxes. How else can you protect against that? If you have again all your eggs in one basket and one taxable IRA, maybe you'll be in a lower

bracket, maybe, but maybe not. And, you know, I know some people who do the Roth, just for peace of mind, they need. never have to worry about taxes ever again. And they love the idea that every time the market goes up or their account goes up, it goes up 100% for them. They don't have to share anything with the government ever. Now, I'm not anti-tax or anti-government, by the way. It sounds like, some people say that. So I always say, I'm more in the Arthur Godfrey school. Do you ever hear of him, Paula? Nope, never heard of him. An old entertainer from the 50s and 60s. He was a famous TV host. Arthur Godfrey, he had a famous saying, he said, I'm proud to be an American paying taxes.

The only thing is, I could be just as proud for half the money. And that's how I feel. Anything you can do to keep more money in your pocket, that's where you can make a lot of money in tax planning. You could also lose a lot of money in poor tax planning. And I go through that in the book, too, a lot of traps, mistakes people make that this area. As you said, at the opening, You said the book is very dense because this area is loaded, almost strangled with a labyrinth of tax rules. Messing up on any one of them, hitting what I call these tax landmines, can blow up your IRA. So you want to be sure not to fall into those traps too. The tax rules here are not only complex, I try to make them easy to understand.

But they're not only complex, they're rigid and unforgiving. and sometimes you don't get a second chance. For example, Roth IRAs. That's why I would be very careful. I would do an evaluation, but I wouldn't go all in on Roth so quickly because Roth IRA, a conversion, which is what we're talking about, is permanent. It used to be, do you remember where you could go back and forth and back and forth? Can't do that anymore. For the last few years after the Tax Cuts and Jobs Act, Roth conversions are permanent.

Now, that would not be a reason to deter you from government. converting. But you'd better know do an evaluation, a tax projection, so you know what it's going to cost you to convert. The best way to do it is to always use up these very low brackets. You get these brackets, these low tax brackets as a gift from Congress every year. If you don't use them, you'll lose them. So I think some plan of pushing some money into a Roth, maybe little by little over a period of time, you'll feel very happy knowing you're building in your Roth IRA account. I feel the same way now. I watch my Roth. And then there's a different, you know, what you have. I was going to go into investments. But I have my more aggressive stock type investments in my Roth.

So when the market goes up, it goes way up all tax free. I have my more fixed stuff in outside of my Roth. Yeah. I essentially do the same as well in that I use rental properties as a quote, quote, fixed income portion of my portfolio, so to speak. And those are all held outside of any type of retirement account, whereas in tax-advantaged accounts, I have a much greater equities exposure. So that's asset location. Yeah, me too. Yeah. You mentioned if you're in your 20s, 30s or 40s, then you're young, which I think a lot of people are going to appreciate hearing that. What if you... I think as you get to your late 40s, I think the decade of your 50s is where it powers on. I don't

know why it always seems to. That's where you start really hitting it. with your career, with your family, maybe some big debts are behind you. And it seems like the 50s is where your earnings years just burst out. I mean, possibly. But I do want to make sure that this conversation includes people whose peak earning years happen when they're in their 20s or 30s. It can be. That's great if it can happen. And all the more reason to secure more of your money tax advantaged if you can. Right. So what about people who are in their 50s or 60s, should they be as focused on the Roth at that time? Well, it depends what they want to accomplish. Some people, I'll go even further. Some people

ask me in their 70s, should I convert? And for those people, I tell them, well, why would you convert? For example, I was just working with a doctor. She's in her late 60s. She's converting everything and paying a big tax. Why? Because she'll never need that money. I said, what are you converting for because at your age, the cost up front of paying the taxes might not be worth the benefit giving your life expectancy. And she said, I don't care about that. I'm never going to use that money. I have plenty of other money. That's all for my grandchildren. So I'm effectively paying the tax for them as a gift. And that's a great move. So you could have that same feeling at 80 or 90 years old. you're doing it for the next generation.

That's a great gift to give children or grandchildren. Even if they inherit under the Secure Act with the 10-year rule, they're still getting it all tax-free. And it doesn't even count as a real gift. You're paying the tax that they would have otherwise paid. In the 60s and 70s, that's where you might be more moderate. Remember, at 72, you're forced to start taking money out. So you want to try and keep that. amount somewhat lower to keep your tax rate lower going into retirement. So maybe, again, a moderate

approach. It's not all or nothing. It's one thing with the Roth. You have to do what you're comfortable with. But I think everybody should have something just tax-free in a Roth as a hedge against future tax risk. Do you have any recommended proportions of broadly what percentage of your money should be in Roth accounts versus traditional retirement accounts? Well, I think young people should be 100% Roth. And that's just me because they have the time on their side and to power it up accumulate a lifetime of tax-free. Remember, Roth money always grows the fastest because it's never eroded by current or future taxes. So for younger people, I think that's a no-brainer. Only do the Roth at work, do the Roth 401k, wherever you can. Just start piling up your retirement

savings and never having to worry about what to do if Congress jacks up the tax rates. Actually, if Congress raises the rates, whenever tax rates go up, anything tax-free, like a Roth, becomes immediately more valuable. For example, let's say, I hope it never happens, but let's say tax, just to make an easy example, if tax rates go up to 50%, if you have a Roth IRA, your money's worth double what an IRA is worth because now an IRA is only worth half. For the top marginal tax bracket, that would be true. Right.

Or whatever, if that's the amount you're paying. It depends where you fall in. So I don't know if there's a general rule. Everybody has to do what they're comfortable with. Look, I may be an outlier, but I have, I'll tell you how much I have. I usually don't give away my network, but I'll tell you how much I have in my traditional IRA. Zero. Well, in 2010, when I was telling everybody to do it, do you remember what happened in 2010, Paula?

In 2010, that was right after the Great Recession. So to my recollection, we were in the process of recovering from the Great Recession. All right. Congress opened up the floodgates. It used to be, if you made more than $100,000, you didn't qualify for a Roth conversion. In 2010, they removed that barrier, and the floodgates opened. up. They even gave people the deal of the century. I was on programs just like this saying, take that deal. You're talking about the backdoor Roth? No, no. You got to convert. You didn't even have

to pay tax in 2010. You got to spread the income over 11 and 12 over two years. I used to tell people do that. The government is giving you an interest-free loan to build a tax-free savings account. So I converted everything in 2010. I didn't even pay any tax on it in 2010. I included half an 11 and half 12 like everybody. So I went extreme. I did all in. And all those gains from 2010 till 10 minutes ago, I haven't checked, I've been on with you,

have all been tax-free. And I love that feeling. But maybe that's not for everyone. Maybe not everybody wants to part with the money. See, that's the key. A lot of people don't like the idea of paying a tax before they have to paying up front. In fact, as a CPA, a tax accountant, which is what I am, we were trained from the first day in college in accounting 101, and they banged it over your head every year. Never, ever pay a tax before you have to always defer, defer, defer, put it off. That was the mantra. That's how all businesses ran. Defer. Defer. defer, defer, defer. In fact, if when you were a kid and your mother told you to do something and you said, not now, Ma, I'll do it later. You would have been an accountant because you were trained to defer and put things off. But over the years, I became when I saw what tax rates can do, how you could

make money on the tax rate arbitrage, I became a recovering accountant. That was the watershed moment in 2010 when I went all in, paid the tax up front. I took the deal of the century that Congress gave us. In fact, I named the chapter of my book, Congress's single greatest gift or Congress's best gift. I call it something like that. And I'm pretty tough on Congress in the book. But that was a watershed moment, the ability to just dump that in. But not everybody is comfortable paying a tax up front. Why? Even accountants today tell me that. they're still in that school. Ed, why would you pay taxes up front? They would always hit me. I remember I did a program a couple of years ago in an accountant. It was for consumers, but there was an

accountant in the audience and he had to stand up in front of everybody. And he said, you're wrong. You didn't figure the opportunity cost, the time value of money. And I said, tell me what you're talking. I know what he's talking about, but I wanted him to explain so everybody else would know what he's talking about. He said, well, if I pay a tax now, I'm giving money now that I don't have to to the IRS. I've lost the use of that money. I could have invested that money and had more later. The math, it's not true.

That's a misconception. Mathematically, that is absolutely not the case. If the tax rates, mathematically, if the tax rates are the same at conversion and when you take the money out and you're comparing apples to apples, tax rates are the same and your investment return is the same, the outcome is exactly the same. There is no lost opportunity cost. But if rates go up, then the Roth is a big winner. Right. Well, and the other piece of it is that in your book, you run through the math showing how if a person were to invest equivalent amounts in a Roth account versus a traditional account, it would come out the same. But with a Roth account, all right, let me.

back up a bit. So you make $1,000 with a... Well, let me give you the simple example I gave you in the book. Is that what you were going at, that example for the opportunity cost example? I was about to say something slightly different. Okay, go ahead. So you make $1,000. If in scenario A, you invest all $1,000 because that's tax deferred money into a traditional IRA, or invest $700, which is that thousand after taxes, into a Roth IRA, and then you let that ride for 30 years. And then you let that ride for 30 years, at the end of those 30 years, you have the same amount of money. But if you were to invest the full, in this alternate scenario, if you were to invest the full $1,000 into a Roth IRA, meaning that you do not make that adjustment, you're functionally

investing even more money because it's unadjusted and therefore you come out ahead with the Roth. Oh, yeah, way ahead. I did the worst case scenario. I said you took the tax out of the Roth. I did the worst case scenario and you're exactly the same. So there's no opportunity cost. So this is the secret to the whole book.

The secret to having more later on to use the tax code is to pay the taxes now up front, the tax rate arbitrage. That's the secret to the book. You know these books, Paula, that are out there. They tell you the secret at the end or they never tell you the secret and you have to figure it out yourself. One of my favorite books does that. the book I've been reading since college, Napoleon Hills, Think and Grow Rich.

Every chapter he tells you, he reminds you there's a secret, but never tells you what it is. I'm telling you the secret. And this reminds me of an old saying on secrets. I don't know if you remember the old saying by Benjamin Franklin. He said, three people can keep a secret if two of them are dead. I've never heard that. Yeah, yeah. But I'm giving you the secret.

So you could share it with everybody. To get rid of that mortgage, pay it off. now, then your money can explode and compound for the rest of your life. In almost every case, you'll have more later. But if I'm wrong, the worst case scenario is a zero percent tax rate for the rest of your life. We'll come back to this episode in just a minute. But first, okay, let's discuss what's new and what's next. Can you tell us about the changes to the tax code that resulted from the passage of the Secure Act, which passed at the end of 2019? Yeah. was effective in 2020, and it upended planning for people that had been planning on constant rules

they relied on because that's what you have to do for retirement. It's a long-term plan. And they were relying on rules that they thought would stay stable and in place. They wanted certainty. And they set up their plans to do something called the stretch IRA. It's not a real thing. It's just a name that was given to the ability in the tax law for decades. to be able to leave whatever you have left over of your IRA or 401K or other retirement account to your children or even young grandchildren, and they could stretch or extend the tax deferral and the payouts over the rest of their lives going out if you had a young grandchild, 60, 70 years.

Imagine the power of that deferral and the growth on that account. What a legacy to leave to children and grandchildren. children. Well, Congress didn't like that. They felt, of course, it goes back to the same thing. They needed money. Where did they go? They raid retirement accounts. Why? Because that's where the money is. So they saw an opportunity to accelerate the tax, not wait 70, 80 years. So they eliminated in the Secure Act, the stretch IRA. Now, a lot of people were bent out of shape that made plans relying on it. And there's an old CPA saying, we always say tax laws are written in pencil. So you really can't trust Congress to keep their word on tax laws when things happen.

And that's exactly what happened here. What Congress did in the tax law by eliminating the stretch IRA, why did they do it? They felt retirement accounts like IRAs and 401Ks should be for retirement, not as a wealth transfer vehicle or a state planning vehicle to transfer funds to the next generation, children or grandchildren. So they devalue the IRA as a wealth transfer vehicle by eliminating the stretch IRA and replacing it with a 10-year rule for most non-spouse beneficiaries. spouses are exempt. They'll never have a problem. But even with spouses being exempt at some point, the first spouse is going to die, then they'll be single, and the beneficiaries, again, will be a non-spouse. So they will have to take that money out by the end of the 10th year after death, which means all of that tax building up in these accounts will be accelerated or bunched into a 10-year period after death. There are planning alternatives one way around that somewhat. is the Roth IRA because at least there's no tax, still has to come out in 10 years. Life insurance turns out to be a better solution because with a life insurance, even if you're

naming a trust for it, you could simulate the stretch IRA and you never have to worry about RMDs or tax rules or even the tax because it comes out tax free. So all Congress did, as usual, is shoot themselves in the foot playing catch up. All they did is incentivize all of us to do the better planning we should have been doing all along. So IRAs are now a less valuable asset to leave to beneficiaries and life insurance stepped up as a more valuable asset. I'm talking about permanent cash value life insurance, which can double as a retirement account, a tax-free retirement account. Again, I do not sell life insurance, but I look at the long-term big picture. When a client tells me, and every client I ever had that saved a substantial,

amount in their retirement savings. They wanted three things. Larger inheritances, more control, less tax. You can get that with life insurance where you can have this windfall come in tax-free. You may be able to access the cash value tax-free during your lifetime. You could even use it to cover yourself for long-term care expenses. That's what I did personally. I have one of these new policies. I just upgraded about five or six years ago. And I have this cash-value policy. but it also has a long-term care rider. So if I happen to need long-term care, this is the thing everybody's the most afraid of, running out of money, the big ticket items, the nursing home, the nurses, aids,

all these heavy medical expenses, it can be taken out of a life insurance policy. Why did I do that? Because the last thing I want to worry about, if I need that kind of expensive care, is to rely on my kids to come up with the thousands of dollars every month that might be needed for my care. I wanted to have this taken care of on my own. They'll still get plenty. I'm not worried about them. And neither should you. You always worry about yourself first. One of the things you should know, the greatest gift you can give to your family is the gift of your own financial security, your own. You have to take care of yourself first. So this is where this can help.

You can actually dip in. I'm oversimplifying it, but with the cash value policy. And you You should always speak to professional advisors on this. Remember, I'm giving you a 30,000-foot view, big ideas, but you carve them in. I'm giving you kind of a block of clay, and you have to carve it and customize it to your own family dynamics, your own wealth, your own personal situation, the facts and circumstances. Everybody's different. But these are big ideas that can leave you with more, leave you with more for you to enjoy during your life, more for your retirement. More for your retirement, more for your loved ones. And my favorite, more of it tax-free. Okay, I have two follow-up questions. And this goes back to our conversation about Roths.

The first one is that you made the comment a few minutes ago that the tax code is written in pencil. That's right. How is it, then, that we can be confident that the assets inside of a Roth account will be tax-exempt at the time of withdrawal, that Congress won't pass some type of a law in the future that says, just kidding, we're pulling the rug out from under you and that 0% rate you, thought you'd locked in is no longer so. That is the best question you ever asked, and that's the number one question I get at every consumer seminar.

Somebody will always stand up and ask that same question just not as nicely as you said it. Well, thank you. The question is, Ed, can you trust the government to keep their word that Ross will always be tax-free? and I say this in the exact same words in the book. Of course not. You can't trust Congress as far as you can throw them. They can change the laws any time. But it's here now.

And now you want to take advantage of it. They won't double tax people. That would just be outrageous. So they would grandfather people that are in. You're not going to pay tax twice on the money. But they could trim around the edges, kind of like they did with Social Security. I'm telling you, if you ever speak to some people on Social Security,

or older people, they will never let you forget that when Congress changed the law, I don't even remember when that was. I think it was in two stages in the 80s and 90s, but they're like an elephant. They never forget. They say, oh, but remember Congress, and they always bring that up. Congress, they made Social Security partly taxable, and that wasn't supposed to be. How can we trust them here? Well, you can't, but the laws are here now to take advantage of it.

I think they will grandfather anybody that's in it. I would say get it while it's here. but I have another reason why I don't think they're going to tinker with it. They might fiddle with it around the edges. In other words, they won't tax it per se, but they'll use it to create, remember I talked about those stealth taxes earlier, Paula? Yeah. They'll say, yeah, your Roth money is tax-free.

You paid for it. We're not going to touch that. But we're going to add it into the calculation to see what other items might be more taxable. You know what I mean? The stealth taxes. What benefits you qualify for? that sort of a thing. Yeah, that's the sneaky way. That's why they call it the stealth taxes. But here's the reason I don't think they're going to do anything to hurt the power of the tax-free power of the

Roth. You know why? Congress won't touch it because they're the worst financial planners on earth. Here's what I mean. If I was, you ever see the movie, Dave, it's an old movie where he takes the place of the president because he looks like the president? No, no, I haven't seen it. Klein. And he's an accountant. Not Dave. Dave is the president, but he has to meet with his cabinet. He's not the real president, just somebody that looks like him. He doesn't know what he's doing. So he has to meet with his cabinet about the budget. So he doesn't know what to say. He brings his accountant Murray, you know, the typical stereotypical, I don't know if it's Murray, but something like that, accountant's name. And he brings Murray in to sit at the cabinet meeting and he takes out a piece of paper and goes

through the budget. So if I was that person sitting with Congress, I would say to Congress, I said, you guys should kill, if I was, you know, on the government side, you know, advocating. If you were advising them. Right. Congress to show how to bring in revenue. I said, you guys got to get rid of this Roth IRA. It's the worst deal for the government ever. And you know what Congress would say to me? But it brings in money up front. I said, yes. But imagine if everybody did a Roth conversion. And in two years, you'd get all this money in. For the rest, now you'd have a whole country of tax-free millionaires. They'd never be bringing a dime of revenue into the government ever again. And you know what Congress would tell me? We're okay with that. We only care

about the two years the money comes in. They're so short-sighted that if I was the account for the government, I would say get rid of it. But I'm not. I'm here for everybody else to take advantage of their short-sightedness. They use the Roth as a revenue raiser because they know it brings in money. In almost every tax bill recently, that's what happened when I told you about it in 2010. When they opened the floodgates and let wealthier people convert, they got a ton of money. Why do you think they did that? Why do you think over the years they've been relaxing Roth rules, opening up Roth 401Ks,

Roth 403Bs, encouraging people to put money in the Ross because they get their tax money up front. They're short-term thinkers. Just like I say on the show here, don't be short-term, short-sighted and worry about paying tax now when you can have more later. They're on the other side. So in a lot of the tax laws, the way they're written is they have all these things that cost money. At the end of each tax law, or most of them, they have, how are they going to pay?

for it, except these last few, they just gave up. There's no way to pay for it. But most of them, they have the revenue provisions at the end, how they're going to pay for it. In almost every case, that's where they put the enhanced Roth provisions. They put it in, that's what Congress looks at the Roth as, the Golden Goose, the thing that raises revenue, even if it's only short term. So that's a reason I don't think they'll ever touch the tax-free feature of the Roth, because it brings in money to the government. Yes. So what you're saying is that we've historically seen, at least over the past decade, we've historically seen a pattern. Expansion of the Roth. We've seen a pattern of expansion. Yeah. Matter of fact, in the last go-round of tax negotiations, back to the

Tax Cuts and Jobs Act a few years ago, do you remember a provision being bandied about called Rothification? Rothification. I've heard the term, but I don't recall the debate around it. The government, Congress came up with that. They said, let's get rid of 401ks and IRAs. Let's force everybody to go Roth so we get all this money up front. And I was saying, good. But it never happened. But that's how they look at the Roth.

That's why I don't think anybody will ever touch it. It brings in too much money. And they're too short-sighted to look beyond the two-year budget cycle. Okay. So I've got one more question about the Roth. And after that, we're going to go to a question from an audience member. You had mentioned earlier that you have zero in your traditional IRA. That's right.

And I'm very similar. I have precisely $1.59 in my traditional IRA. I have used the backdoor Roth strategy to put the bulk of my IRA contributions into a Roth account. Now, for my 401K, my employee contributions all go to a Roth 401K, but the employer contributions, which I pay myself through my own company, have to go to a tax deferred account. for people who are listening who are in situations where their 401k or a portion of their 401k, because it comes from their company, has to go into a pre-tax account. Is there anything that we can do to rothify that?

Well, if they want to go to a Roth, they can do an in-plan Roth conversion. They can convert those funds. They can't be contributed to the Roth because it has to go to the pre-tax. But if the plan allows, not all due, but most do, they may allow you to do an in-plan Roth conversion where you transfer the funds from the 401k side to the Roth 401k side. And you'll pay tax on that like any Roth conversion. And it might be a good idea if you're in a low bracket like this year. Right, right. Okay. So for the people who are listening, would the next steps be to talk to their HR department to find out if their plan allows for an in-plan Roth conversion? Right. First, you have to

make sure they have a Roth 401k, obviously. Right. Exactly. Okay, well, I will talk to my HR department which is myself, and I will figure that out. Let's move to a question from an audience member. So this question is actually a three-part question, but all three parts are related to different elements of tax planning. And this question comes from an audience member named PEP. Now, because PEP asks three very different questions, we're going to play this question in three pieces

so that you can answer each of PEP's three questions individually. Okay. So let's start with the first portion of PEP's question. here we go. Hey, Paula. My nickname is PEP, short for peppermint. First, I want to shout out to you and all of the Afford Anything community. Thank you so much for sharing your knowledge and just being a wonderful human being. I'm also a student in your first rental property and acquired my first rental property during a pandemic. And it's still worth it, challenging, but worth it. So again, thank you. My question is centered around retirement. My current job offers a 401k where we can invest in a 401k as well as a Roth 401.

And I am wondering what your thoughts are around percentages between those two types of accounts. My future income in retirement is a big question mark. I'm in my mid-40s. I don't anticipate to retire for another 15 plus years if I ever retire. I have no idea if my tax bracket is going to be higher or lower in the future. So if you don't really know the future, what would you say would be a way to think about your split between a Roth and a regular IRA inside my 401K? Well, that's a good question. You have a 401k and a Roth 401k, and it goes back to what's best for you. You know, there's no right answer for everyone, but I still like the idea of converting some of it, building up that Roth 401k. You're in your 40s.

You say you're going to go for 15 years, maybe more. I think as you get closer to retirement, you will like looking at that Roth 401k building, knowing you'll never have to pay tax on that money and you'll never have to take it out. You know, that's one of the big benefits of the Roth. Well, not in a Roth 401K. Actually, a little anomaly, if you leave it in the Roth 401K, the Roth 401K, is subject to require distributions, even though Roth IRAs are not. But before you retire, you might roll it over to a Roth IRA and then you would never have to take distributions.

And if you need the money, it's tax-free. But on the other hand, you might feel you'll be in a very low tax bracket in retirement, but we don't know what taxes are. So that's why I always err on the side of putting more into a Roth that eliminates the uncertainty of what future higher tax rates can do to your spending ability in retirement. but you never want to convert more than you can afford. Once you convert, it's permanent. So you have to do what you can afford. Probably a better idea is, like I said before, a series of smaller annual conversions, using up lower brackets, maybe doing a little more if you have lower income years or years with more deductions, for example, and do less when you can't afford as much. You could change it every year. But over time, you should be piling some, amount to build up that Roth 401K because that's going to be your most valuable asset in retirement. Let's go to the second part of PEP's question. I'm a little concerned with the new Secure Act that went into effect December 2019. I do actually have a Benny IRA.

I inherited from my father. I intend to pass on a legacy as well to my son. But the Secure Act is stating that you have to drain your Benny IRA within 10 years. this makes me think that perhaps putting more funds into a Roth would be smarter if I'm looking at sending any kind of gift to my son later in life. You're talking about two different things. Let's just explain the Secure Act again. I know we went through it, but for you and the other people listening in, you say you inherited from your father. You didn't say when, but it sounds like it was a while ago. If you inherited before 2020,

In other words, in 2019 or earlier, you still qualified for the stretch IRA. Remember I said the Secure Act did away with the stretch IRA only for deaths or inheritances, you might say, beginning in 2020. If you inherited earlier in your 40s, let's say, you may have a 40-year life expectancy. You still get the stretch. But when you die, then the 10-year-old rule kicks in for your beneficiary. year, you're a child or children or a grandchild, whoever you want to leave it to, it's a 10-year rule. So as long as you're around, you still qualify for the stretch. It's always a good idea to put some

money into a Roth back to that again, because when you leave that to your children, they will still be stuck with the 10-year rule, but they don't have to take the money out until the end of the 10th year after death. So for every day you hold it, and for the 10 years they hold it, it's going to be accumulating absolutely tax-free. So that would be a nice gift to give them because you never know. By the time they inherit, they may be in their own highest earning years and tax rates may go up. That would be a great gift to get something from you that's absolutely tax-free. All right. Thank you, Ed. Pep has one more question, which we'll play right now. The third part of my question is dealing with Roth conversions. I'm kind of digging into

to this pro rata rule, and I'm really confused about how that works if you do in plan 401k conversions when you have a bini IRA that I think doesn't factor into that. But I also still have an individual IRA that I rolled over from a previous 401k into just a regular IRA account. So I have a balance in that as well. So kind of factoring into whether I should contribute more to my 401k and then do some sort of conversions to Roth within the plan or just what other considerations around any of that. Thank you so much for all that you do again. Look forward to hearing the response. All right. The first part, let's deconstruct this. You talk about a beneficiary IRA, which is an inherited IRA. First, an inherited IRA can never, never be converted to a Roth.

in an anomaly in the tax law, actually an inherited 401k can be converted to an inherited IRA, but an inherited IRA cannot be converted to a Roth, your beneficiary IRA. Then the other part was having the beneficiary IRA, does that impact any ability to convert, say, your 401K to a Roth 401K or your own IRAs to your own Roth IRAs? Absolutely not. It's a separate account. You keep them separate. By law, you have to keep them separate. In fact, if you mix a beneficiary IRA with your own, the whole thing becomes taxable. You can't do that. So it's a separate account. Beneficiary IRA can never be commingled or mixed with your own IRA. They have nothing to do with your own IRA or your own 401K. Does the balance inside of that IRA get counted in any pro-rata rule calculations?

All right, on the pro rata rule, that only involves if you have non-deductible contributions. So let's take the beneficiary. You could have a pro-rata rule. In other words, you said you inherited that from your father. If your father had non-deductible contributions in there, then you get credit for that percentage based on this prorata rule. Let's say 10% of his contributions were made as non-deductible. then whatever you take out of that inherited IRA, 10% will be tax-free.

On your own IRA, it's the same thing. If you have non-deductible contributions, the pro rata percentage amount of your non-deductibles will come out tax-free. Same thing with taking money out of a 401K. 401K can have after-tax money too. So you always have to take after-tax money into account when seeing, how much of what you withdraw or convert is taxable. And on the topic of the pro-radar rule, Pep has an individual IRA that stems from a previous

conversion of a 401k balance into an IRA. So should PEP be contributing more money into a 401k in order to later do Roth conversions within the plan? Well, since you cannot convert a beneficiary IRA to a Roth, that's the only option. So if you want to beef up your Roth, the only one, the only option would be your own IRA or a 401k at work converting to a Roth 401k. Right. Given the fact that PEP has a previous 401K that has been converted into an IRA, should PEP's strategy be to then convert the balance of that IRA into a Roth IRA and then simultaneously also make new contributions into a 401K with a plan of later converting

that into a Roth 401K? It all comes down to how much money. is available to pay the tax. Remember, conversions are great, but you have to pay the tax up front. So you can't take on the world at one shot, maybe over time, like I keep saying in moderation, do it over time. First, the IRA, which came from the 401k over time, maybe convert a little of that. And maybe when you can afford it, convert the 401k to a Roth 401k over time. Or maybe you have a low tax year and you can push more into the Roth. I think, as I keep saying through the program, because I'm a big proponent of building tax-free for the long-term benefit, whenever you can, you should, but you shouldn't

overdo it. You'd never want to go broke converting. That's the point. Right. But assuming adequate funds to pay the tax bill, that would be the strategy? Oh, yeah, because again, you're taking advantage of low rates as long as they're here. Get taxes while they're on sale. everybody likes the sale. Here's the difference. When they have a sale at a store or an Amazon and everybody runs to it, here's the truth. You don't actually have to buy that thing at the store just because it's on sale. Nobody forcing you to buy it.

With taxes, you do. It's not if you're paying the tax. It's when. So as long as you know, that bill will have to be paid at some point. May as well get it on sale, which is right now. Excellent. Well, thank you so much, Ed, for answering PEP's question and for this discussion on the power of Roth accounts to help people build wealth for the long term. Thank you, Ed, and you can pick up a copy of Ed's book, The New Retirement Savings Time Bomb, wherever books are found.

What are some of the key takeaways that we got from this conversation? Here are four. Number one, Roth retirement accounts are an excellent way to beat up. the ticking time bomb. There's a reasonable likelihood that tax rates could increase. Tax rates are currently at historic lows when viewed as a comparison of top marginal tax rates over the span of the last century. Given that tax rates are at or near historic lows, there's a reasonable likelihood that tax rates will increase in the future. Therefore, it makes sense to put at least a portion of your money,

and if you're young, a significant portion of your money, into Roth retirement accounts, such as Roth 401ks and Roth IRAs. Ed says that this holds true even if you are earning a high salary, if you're earning six figures. If they forego the deduction at relatively low rates, I believe they'll have more later on, because if they're already doing well now, I would guess they're going to continue that path and build up a high net worth. and that's the kind of net worth you would like to have a good chunk of that be tax-free.

If you're younger and you're not earning a high salary, then Ed says the deductions from other types of accounts, such as traditional 401K's traditional IRAs, are not worthwhile when compared to the benefits of a Roth account. That's another way of saying the people who get the biggest advantage are people who are young, 20s and 30s, and who don't make a lot of money. But even if you're young and you do make a lot of money, money, you still get a big benefit. Now, if you're in your 50s and 60s, then Ed says it depends on

your goal. He cited an example of a doctor who converted to a Roth because she wanted the money to be tax-free for her grandchildren, given that she didn't need the money. So making the Roth versus not decision when you're in your 50s and 60s depends on timeline, since age and timeline are not necessarily synonymous. Now, with all of that said, Ed says, to still be careful. You don't need to go all in on Roths immediately. Do your own research or speak with a tax professional to see what strategy works best for your situation, your age, your goals, your timeline, and your comfort level. And so that is key takeaway number one. There's a reasonable likelihood that tax rates may rise at some point in the future and as a result, it behooves many of us,

even those of us in our 50s and 60s and even those of us who make high salaries to look at putting a portion of our assets into Roth accounts. Key takeaway number two. Beware of the widow or widower tax. Many couples plan for retirement together without thinking about the consequences of one of them passing. Most couples leave everything to each other, and when that happens,

unexpected tax penalties may not be far behind. So let's say the husband dies first, he leaves everything to his wife. now she has all the assets, all the funds, the money, all the net worth, whatever they had together, she has. Now she also has the same income that they both had when they were together, other than maybe an adjustment for Social Security. But essentially, she has the same income they both had when they're together. But now her tax rate goes through the roof because now she's filing as a single individual. So she's got a higher tax on the same income.

The surviving spouse is likely to be pushed into a higher tax bracket on the same basket of assets, given that they will now be filing as single rather than married filing jointly. And this is another case for why tax risk diversification is important, not keeping all of your retirement savings in one big taxable account or one big tax deferred account. Keeping a portion of your money in tax-exempt accounts, meaning Roth IRAs, Roth 401K's, Roth accounts, is another way of managing the risk of the widow or widower being stuck with a higher tax rate than the one that they anticipated having. And so that is key takeaway number two, make sure that your tax planning considers the tax rate of the surviving spouse. Key takeaway number three. Own your retirement account free and clear. Ed says that the taxes on your IRA are analogous to having a mortgage.

For many people, their IRAs and 401Ks will be larger than the value of their home. If you like the idea of owning your own home free and clear, I think you'd love the idea of owning 100% of your retirement account free and clear. What he means is this. When you own a home and you have a mortgage on it, then the home isn't fully yours, there's still a payment that you need to make. And while it's not a perfect analogy, when you own a retirement account and you look at the balance inside of that account, that balance is not fully yours. There is still a tax burden that needs to be paid from any money that you withdraw.

By contrast, when you have a portfolio that is tax exempt, then there is no tax burden. The money that's inside of your Roth IRA is fully yours. Now, of course it's not a perfect analogy, and after all, even free and clear homes still have property tax, but the idea that the broad strokes analogy at the high 30,000 foot level, that there is a degree of psychological freedom that comes from looking at the balance in a Roth IRA or a Roth 401k and knowing that you don't have to mentally subtract a portion of it to figure out how much of it you can use for your cost of living. your daily spending. So that is key takeaway number three. Think of the assets inside of a Roth account as assets that you hold free and clear, metaphorically speaking. Finally, key takeaway number four. The worst case scenario is you lock in a zero percent tax rate on your retirement savings.

If you're skeptical about any of the points in this episode, Ed says that the worst case scenario in which you convert everything to Roth and taxes don't increase in the future. future, that worst case scenario is still pretty good. The worst thing that can happen, your consolation prize, is that you've locked in a 0% tax rate on your retirement savings for the rest of your life. And even beyond to your beneficiaries, you've locked in today's low rates. You never, ever have to worry about the uncertainty of what future higher rates can do to your retirement savings.

Ed told a story about an investment advisor who pointed out that tax rates decreased within the last 10 years. Ed argued that if this advisor had converted to Roth, all of the gains in his portfolio would have been tax-free now. That's another way of saying that even in an environment in which tax rates decrease rather than increase, you still haven't lost money because the gains that you've accumulated during that time are tax-exempt. Now, as to the argument that Congress could change the law and make the Roth taxable upon withdrawal, Ed says that's unlikely for two reasons. Number one, those taxes have already been paid, money that's put into a Roth account, the income tax is paid at the time in which that money is contributed, and so that would be double taxation. It would not only create a public outrage, but it would also create such a disincentive to put any money into a Roth account, that no one would ever do so in the future.

And if that were to happen, then Congress would lose out on short-term money. They would lose out on immediate money. Historically, what we've seen is that Congress is moving towards prioritizing the Roth and encouraging people to put their money in Roth accounts rather than vice versa because of the fact that money that's contributed to a Roth account gives the federal government upfront tax money today. And so all of that is to say that even if we, are in an environment in which tax rates decrease in the future rather than increase,

even if that premise is proved wrong. That assumption is proved wrong. The worst-case scenario is still that money inside of a Roth account has locked in an exemption from any taxation on the gains that accrue inside of that account. So locking in a 0% tax rate, that is still the worst-case scenario, even if tax rates decrease in the future. And what that means, fundamentally, is that putting money in a Roth account has a very managed downside. Those are four key takeaways from this conversation with Ed Slot. Thank you so much for tuning in. If you'd like to discuss today's episode with members of the

community, just head to afford anything.com slash community. And if you would like a free transcript of today's episode, go to our show notes page. The show notes are at available at afford anything.com slash episode 307. Go to our show notes page and you will get the raw transcript. It is the completely raw, unedited. We haven't done anything like, you know, formatted or make it beautiful or gussy it up. It's, it even has all of the, it's like the uncut, directors cut. It's got all of the background talk, the stuff that, when we're planning, like, all right, cue up that question here. It's got the complete behind the scenes. If you'd like read that if you'd like to get that transcript. Since I know today's conversation was a little

heady, so you might want the written form just as something that you can read, something you can highlight, something you can file away, something that you can copy-paste and email excerpts of it to people that you know and like and people who you think should learn about this stuff, you can get this transcript by heading to Afford Anything.com slash episode 307. That's Affordanthing.com slash episode 307 to download a transcript of today's episode for free. If you are interested, changing gears a little bit, if you're interested in learning about rental property investing, we have a course called Your First Rental Property Property. It is our flagship course.

We put so much work and sweat into this course, and it shows the students who have come through the course, the alumni who have graduated, have gone on to be very successful rental property investors. I just finished teaching the previous cohort. That class wrapped up a few weeks ago, and I'm so impressed by the students who are in there and the community that we've built. So our course, it's called Your First Rental Property, and it's reopening for enrollment April 12th through April 19th. That's the week that you're allowed to enroll, April 12th through 19th, 2021. After April 19, we're going to shut our doors and focus all of our attention on the current cohort of students. So if you want to enroll, you've got that one week to do so, April 12th

through 19, that's your window of enrollment. This is the last time that we will be offering the course at our current tuition rate. After this spring, after spring 2021, the tuition rate will increase forever. We will never decrease it again. We don't offer sales or discounts. So if you do, you get lifetime access and if you do want to lock in today's tuition rate, I would highly encourage you to join the cohort now. Again, you've got lifetime access. We still actively work with students who enrolled back in 2018. So if you'd like to learn more about it, head to afford anything.com slash VIP list.

And that is where you can sign up for our VIP list. you'll get a free email series, a seven-day email series, with information about rental property investing, and you'll also get updates about the course. So again, afford anything.com slash VIP list to learn more about it. And hopefully I will see you in class. Thanks again for tuning in. My name is Paula Pant. This is the Afford Anything podcast.

If you enjoyed today's episode, please share it with a friend or a family member. Join our VIP list or download a transcript. Thanks for being part of this community, and I will catch you in the next episode. Hey, just a quick reminder that we're doing bonus interviews every Friday on stereo. So in the past, we talked to GameStop investors. We talked to Aaron, who is the chief sanity officer here to afford anything. So she and I talked behind the scenes, how we run things. We talked to Rich Carey, who is a rental property investor who owns 30 rental units in Montgomery, Alabama,

20 of which he bought when he was stationed in South Korea or stationed overseas with the military. He was in South Korea for most of the time. He was in Germany for part of it. So from overseas, he was buying these rental properties, site unseen, in Montgomery, Alabama. We interviewed him. We interviewed J.D. Roth about the seven stages of financial independence. We also did that episode here on the podcast, but we did a bonus interview on stereo. So those are the types of great conversations that we do on stereo.

These are live interviews. in order to listen to it, just go to Stereo.com slash Paula Pant, download the app, and you will be able to listen to our Friday bonus interviews. So again, stereo.com slash Paula Pant, P-A-U-L-A-P-A-P-A-N-T, download the app, and I'll see you in the Friday bonus interview.