Motley Fool Money - The Many Reasons to Roth, and How Long You'll Live

Episode Date: November 15, 2025

When saving for retirement, the first decision is how much. But the next decision is where: Do you contribute to a traditional retirement account or a Roth? By far, the majority of retirement assets are in traditional accounts, but that may not be the right choice for you. Motley Fool retirement experts Robert Brokamp and Dan Caplinger discuss five reasons why you might want to go with the Roth. Also in this episode: -Life expectancy is a crucial variable in retirement calculations – what should you assume?-The ratio of household wealth to income is at an all-time high-Almost 1 in 4 adults provide financial support to aging parents, often to their detriment-Aim to max out your retirement accounts in 2025, but don’t wait until Dec. 31 – especially with 401(k)s Host: Robert BrokampGuest: Dan CaplingerEngineer: Bart Shannon Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Why it might make sense to pay taxes today to reduce taxes of retirement and how long you should expect to live. That and more on this Saturday personal finance edition of Motley Full Money. I'm Robert Brokamp, but my nickname around these parts is Bro, which you'll hear during my conversation this week with full contributor Dan Kaplanar about the many benefits of Roth retirement accounts. But first, let's look back on some recent news in money. Let's start with a question. How long will a typical 65-year-old live? Go ahead, come up with an estimate in your head. If you guessed 19 years for a male and 22 years for a female,

you're in the less than a third of people who got the question right in a survey from the TIAA Institute and the Global Financial Literacy Excellence Center and highlighted in the current issue of Kiplinger's magazine. The largest percentage of respondents underestimated life expectancy and one in four chose the I don't know option. but understanding how long you could live is an important variable when calculating whether you're saving enough to retire, when you can retire, and how much you can spend in retirement while not running out of money. When analyzing retirement plan, you probably shouldn't assume the average life expectancy. After all, half of people live longer.

Plus, if you're listening to this podcast, you likely have above average education and above average wealth, two factors that are strongly correlated without living the averages. You're also probably really good looking, but that's just the cherry on top. Nowadays, a reasonable default option for retirement plan is living to age 95, since there's a 20 to 25% chance that one member of a 65-year-old couple will live to their mid-90s. But to get a more individualized estimate of your life expectancy and to see your odds of making it to various ages, visit longevity illustrator.org, a tool co-created by the American Academy of Actuaries and the Society of Actuaries. And speaking of wealth, our next item comes from a post on X from Mark Zandi, the chief economist

for Moody's analytics. According to Zandi, household net worth is now more than eight times after tax income compared with an average of 5.5 times after tax income in the decades between World War II and the great financial crisis of 2008. This ratio of wealth to income is at an all-time high. It reached over six during the dot-com days and almost seven during the real estate bubble, but the subsequent downturns brought the ratios back down to that average of 5.5. Of course, not everyone has seen their wealth increase so much. The main beneficiaries have been homeowners and investors in stocks, particularly the wealthiest of investors. According to the Federal Reserve, the top 10% own 87% of all equities and mutual funds. But the good news is that many people of all income

levels have benefited from the current bull market. According to our recent study from BlackRock, more than half of Americans living on low and moderate incomes, defined as annual incomes ranging from $30,000 to $80,000, now owns stocks. The majority are new investors who began investing within the past five years. And now for the number of the week, which is 23%. That's the percentage of Americans providing financial support to aging parents, according to a survey from Lending Tree, and another 23% expect to have to provide such support in the future. 58% of respondents who financially support parents have taken on debt to do so, and 74% say it prevents them from achieving their own financial goals. I don't know about you, but my wife and I don't want to be financial burdens to our kids, which is additional motivation for making sure that we have more than enough to pay for our retirements, potential long-term care expenses, and possibly living well into our 90s. When saving for your retirement, which type of account should you choose?

That's our next topic of discussion when Motley for Money continues. These days I'm all about quality over quantity, especially in my closet. If it's not well-made and versatile, it's just not worth it. That's honestly why I love Quince. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense. Quince makes high-quality wardrobe staples using premium fabrics like 100% European linen, silk and organic cotton poplin. They work directly with safe ethical factories and cut off the middlemen, so you aren't paying for brand markups or fancy stores, just quality clothing.

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Now available in Canada, too. Don't keep settling for clothes that don't last. Go to QINCE.com slash Motley for free shipping and 365-day returns. Quince.com slash motley. When saving for retirement, the first decision is how much. But the next decision is where? Do you contribute to a traditional retirement account or a Roth? By far, the majority of retirement assets are in traditional accounts.

But here to talk about the benefits of contributing to a Roth or converting, a traditional account to a Roth is full contributor Dan Kaplanar. Dan, welcome. Great to be with you, bro. All right, so let's start with the basics. With the traditional account, you get a tax break today because contributions are pre-tax in most situations, not all but most. The money grows taxed deferred, but the withdrawals are taxes ordinary income. With Roth contributions, there are no tax breaks today. Money goes in after tax. And when you convert traditional assets to Roth assets, that amount gets added to your taxable income in the year of the conversion. So by choosing the Roth, you are going to pay higher taxes this year.

But we're going to discuss five reasons why it still might make sense to go with the Roth, starting with the biggest one, withdrawals are tax-free if you follow the rules. That's a huge impact that Roth have, bro, because that's really the whole point is, like you said, if you go with the Roth, you forego the tax benefit that you would get from a traditional IRA. But in exchange for that, you don't have to pay taxes. in retirement on those withdrawals. That's different from the traditional IRA. Traditional IRA, yeah, you get the tax break now, but you have to pay the taxes later.

For a lot of folks, including a lot of Motley Fool members, those later tax rates can be higher than what you're paying now, especially if you're early in your career, not paying much in taxes yet. The benefit of basically putting off the tax benefit until later can outweigh what you're giving up today. To quote IRA expert Ed Slot, when you have money in a traditional account, you basically have a co-owner of the account, that co-owner being Uncle Sam. But with the Roth, you own everything, which is a nice benefit. But there are other benefits, such as number two, no required minimum distributions. RMDs are a huge headache for a lot of retirees because once you bridge age 73, like it or not, need it or not, you have to start taking money out of those traditional IRA accounts. accounts, traditional 401 accounts, and paying the tax.

So yet another reason why using a Roth lets you choose when you're paying the tax and get tax-free benefits later on. Yeah, and just to give folks a little framework for what RMDs are. So at age 73, for most people, it's only 3.8% of your account. But it goes up pretty significantly. So by age 80, it's 5%. By age 90, it's 8.2%. And you have to take that out of the traditional accounts, whether you're not.

you need or not and pay taxes. So again, another benefit of the Roth. So let's move on to benefit number three, possibly pay lower taxes on Social Security and lower Medicare premiums. So what a lot of retirees don't realize is that their taxable income goes toward determining more than just what they pay in taxes. It also can trigger some other things. For instance, with Medicare, if your income is above a certain amount, you're going to pay an extra amount. on your Medicare monthly premiums for Part B medical coverage for Part D prescription drug coverage. And so your withdrawals from a traditional IRA from a traditional 401K, they count towards those income thresholds.

And so if you can put yourself in a situation where you are not necessarily having to take that taxable income because it's coming from a Roth where it's not going to be added to those thresholds, then you may be able to avoid the higher Medicare premium. Same thing with Social Security. A lot of retirees don't realize part of your Social Security can be taxable, add to your taxable income, increase the amount that you have to pay Uncle Sam. And again, the withdrawals that you take from traditional retirement accounts count toward meeting that threshold. When you use Roth IRAs, Roth 401Ks, that puts you where you can take those withdrawals. It will not affect your taxable income in that way. It will therefore potentially protect more of your social security from being

taxed as well. Yeah. And those tax brackets for the taxation of Social Security, it's based on something called provisional income. They're pretty low because they haven't been adjusted for inflation in a very long time. So when you look at those, you might think, well, I'll probably still pay taxes on my Social Security, but the premiums for Medicare are higher this year for a single $106,000, married $212,000. So some folks may look at those and I'm like, I don't have to worry about paying higher premiums for Medicare. I think what happens is there might be a single year where in retirement you have a big expense.

You bought that RV or you took the family on a trip. You took a lot of money out of the traditional account and poof. You now are going to have to pay higher premiums for your Medicare. But if you have money in a Roth, you have the... optionality to say, you know what, I have this big ticket expense, I'm going to take it out of the Roth and therefore not affect my Medicare premiums and maybe Social Security taxation if you're in a lower tax bracket. All right, let's move on to reason number four.

And this has maybe a double-edged benefit to it, but easier access to the money before age 59 and a half. This is more for Roth IRAs than 401ks. And I'll qualify this by saying, you know, the tax-free withdrawals from a Roth, there are some rules, right? The account has to have been open for five years and you have to be age 59.5. Except with the Roth, you might be able to access some of that money earlier. That's right.

When you make contributions to a Roth, you can always withdraw the contributed amount without a tax impact. And the IRS is pretty generous with that. The ordering rules when you take money out, the IRS is willing to say, okay, yeah, we're going to treat it like you're taking those contributions back out first. And so a lot of folks end up using Roth IRAs as much as savings account as for a retirement account, kind of that optionality you're talking about, bro, you always say, you know, ideally you keep it in there until retirement. But if you need it before, you can always get those contributions back. With the traditional IRA, that is not the case.

You try to take those contributions out. You can get whacked with not just the taxes, but also a penalty on top of that. Yeah, and just for clarification, you did point out that that is about Roth IRAs. Roth 401ks are a little more complicated. The withdrawals that come out are a rateable proportion of contributions and earnings, but even so, those contributions will come out tax and penalty-free. And I think this is important to think about, especially for people, if you're sort of on the edge, you're like, I'd like to contribute to my Roth IRA, but I might need that money

sooner for an emergency fund, or I'm sending kids to college or something like that. I just think it makes you feel better knowing, like, okay, I'm going to put this money in this Roth IRA. I hope to leave it alone until I am 59.5 or until I retire. But I know I can get to it if I have to. And I think that just makes people a little bit more comfortable contributing to the account. All right. Let's move on to benefit number five, leaving tax-free assets to your heirs.

So one of the things that a lot of families end up being surprised by is when a person has a big traditional IRA, traditional 401K balance, and they pass away and they leave it. to kids, the kids end up having to pay the taxes on the distributions. And in a lot of those cases, the retiree, they weren't working. Their income was relatively low. The kids might be in the prime of their career. Highest earning potential, highest tax brackets. One benefit of the Roth is the heirs who take the Roth after you pass away, they also get that tax-free treatment. There's a limited amount of time. Some of the rules are a little bit complex, but you do get to, grandfather in, in many cases, 10 years of tax-free treatment above and beyond what the person who passed away would have gotten. Yeah, you touch it on that 10-year rule, right? And this is the

issue with many people who inherit retirement accounts. They do have to be distributed within 10 years. And if that money is in a traditional IRA and the heirs are in their peak earning years, that is really going to be a big tax bill. Okay. So those are the benefits. But are there any sort of hidden traps to contributing to or converting to a Roth that you think people should be aware of. Yeah, I came up with four of them. The first one is that there's always a chance when you make a contribution or especially when you do a conversion that the market is going to drop immediately after you do it. There used to be a rule that said you could kind of undo the conversion or the contribution

in that situation. That rule went away. And so what happens is that oftentimes, especially the conversion, you're paying tax on the amount that you convert. If you convert at a time when the market was high and then the market drops, you still have to pay the tax on the higher amount. So that can be a, that can be a disappointment. Secondly, if your tax rate ends up being lower in retirement than what you paid at the time of the conversion, then it might well have been a smarter move just to kind of leave that money in the traditional IRA in the first place. Again, though, there are those offsetting benefits.

So it's not such a clear-cut answer even in that situation. Thirdly, bro, and you touched on this, the fact that you can touch those Roth IRA contributions, having that easier access can be a temptation. Sometimes it leads people to take money out for reasons other than retirement. That hurts their retirement prospects down the road. And then lastly, when you do that Roth conversion, you have to pay attention. It can be a big taxable event. and again, those second order impacts, the converted amount can be what kicks you up into additional

Medicare payments into more taxation on Social Security as well, depending on when the timing of the conversion is. Yeah, and I'll sort of double down on that, maybe broaden it out in that by contributing to a Roth or converting to a Roth, you're not only paying more taxes this year, but it may make you ineligible for all kinds of deductions and credits that are based on your AGI. So you have to look at the whole picture. All right, Dan, do you have any final thoughts or recommendations? Last thing I'd say is just, you know, when you're considering a Roth conversion,

don't look at it as an all or nothing proposition. You can do it a little bit at a time. And a lot of the time that is the smartest strategy because you can take advantage of low tax brackets without paying tax in the higher tax brackets. Little by little sometimes is the bus way to get these things done. It's something to pay attention to in those years before the requirement or distribution kick in, but after you have decided to retire, sometimes that's the best time to consider a Roth conversion.

Well, I'd my own final thoughts here. There are plenty of online tools that can help you run the numbers on whether you should contribute or convert to a Roth. So use a few of those. And then if you're still not sure, seek out the advice of a tax professional or a financial advisor. They will know all the rules and probably have some fancy software to help you make the decision. If you're early in your career and looking for insight, inspiration, and honest advice,

Listen to the Capital Ideas podcast hear from Capital Group professionals about leaning into the differences that make you unique, making decisions that last, and what it means to lead with purpose. The Capital Ideas Podcast from Capital Group, available wherever you listen,

published by Capital Client Group, Inc. It's time to get it done, fools, and with less than seven weeks left in 2025, now is a good time to aim for topping off your retirement accounts. For most employer-sponsored accounts like 401Ks, the deadline for 2025 contributions is December 31st, and in most situations, those contributions must come through your company's payroll. You usually can't just send a check to the 401k provider, so you have to change your withholding before the final pay cycle to get that money into the

account, which means it needs to be done a week or two before the end of the year. Check with your HR department to learn the cutoff date for your company. Now with IRAs, you have until April 15th of next year to make a 2025 contribution, but why wait? The sooner you get the money the account, the sooner it gets to work. As a reminder, here are the contribution limits for 2025. For IRAs, it's $7,000 plus another $1,000 if you'll be 50 or older on December 31st. For 401Ks, 403Bs, and the federal TSP, it's $23,500 plus another $7,500 for the 50 and better crowd, or another $11,250 if you'll be 60 to 63 years old on December 31st. And that, my friends, is the show.

spending part of your weekend with us, and thanks to Bart Shannon, the engineer for this episode. As always, people on the program may have interest in the stocks they talked about, and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Full on, everybody.