More Knowledge, More Wealth Ep 200: 2023 - Roth IRA vs. Traditional IRA

[00:00:00] Good day. This is Gabriel Shane, certified financial planner. And your host of more knowledge, more wealth here on every weekend, talking about all important topics of personal finance. My goal is to go over the knowledge you need to increase your wealth now to the listener. You can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning.

[00:00:56] Our phone number's (855) 963-2526. That's 8 5 5 96. Falcon like the Bird, or go to our website@falconwealthplanning.com. That's Falcon wp.com for short and visit our knowledge center to get this episode or any one of our previous episodes, including our video cast of them and our knowledge center has fantastic resources and tools to help with strategy that can help in your specific.

[00:01:23] Investment situation. Now I'm the president of Falcon Wealth Planning. We are fee only non-commissioned true fiduciary posts. Where you help with anything involves a dollar sign. And if you wanna help relate this show to your specific situation, give us a call. We'll be happy to help. It doesn't matter what it is.

[00:01:38] Could be where you are today, how investments look like for you, questions that you may have, taxes, retirement, estate planning, insurance, folks, you name it. Anything involves that dollar sign. We are happy to help and we have offices. All over and we can help nationwide folks. Doesn't matter, quite frankly, anywhere in the world.

[00:01:56] Give us a call. We were just found out, we were ranked in the hundredth, uh, top show in Italy. Uh, we got an email on that recently. We thought that was, uh, pretty, uh, unique. Uh, but we would love to help folks. Give us a call. Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon. Like the bird. We'll be happy to put a personal assessment for you yet again to relate this show to your specific situation, but I wanted to talk today.

[00:02:25] Uh, as by the way, folks, if you have questions on the show, you want us to read 'em on air, please send it to radio@falconwp.com. That is radio@falconwp.com. This is a note from Pete over in Arizona. Asked a question of if he had extra money and he actually specifically said $20,000. Can he put that in his Roth?

[00:02:48] I r a and he specifically said Roth i r a and $20,000. So let me answer this question, Pete, 'cause it's a pretty complicated answer. Number one, I don't know how old you are, Pete, so let's start there. But a Roth I r a. You only have a limitation to put in there $6,500, or if you're over the age of 50, an extra a thousand dollars catch up, which is $7,500.

[00:03:12] Now, if you still haven't followed your 2022 taxes, and maybe you live in a state like California where they gave you an automatic extension, or you did do extension and you have not completed your taxes, you could still put in for 2022 and 2023. So technically you could put in $7,500 assuming you're over the age.

[00:03:32] Of 50 and $7,000 for 2022. And that is assuming you were the last year, uh, over the age of 50 as well. That's 14,500. But your question is $20,000. Where could you put 20,000? Can you put in a Roth? Well, here's where it gets a little interesting. Are you currently worth working? Pete? Now don't go emailing me and sending me a bunch more items.

[00:03:53] If you want help, please one of our, uh, advisors could, I'll make sure they reach out to you. But the question now for everybody is, do you have a Roth 4 0 1 K or 4 0 3 B or retirement account available for you through your employer? If you do, you can go ahead. Now, think about this for a second. I got people all the time saying they wish they could put more into Roth.

[00:04:12] You technically can through your employer, assuming you're not maxing out on the traditional side or currently. So you can actually save a max of 22,500. Or 30,000 if you are over the age of 50 into your Roth account. Now, you may say, well, listen, I can't afford to put $2,000 a month and not have it in your paycheck.

[00:04:35] All I'm suggesting is live off the cash. Let the ca it's kind of the same thing. Instead of writing a check for $20,000, let me actually change it up. Let make it easier for all of us. I know Pete said 20,000, let's say, call it 24,000. That's $2,000 a month. And let's just say you wanted to save 2000 a month inside your Roth 4 0 1 K.

[00:04:55] Essentially, all I'm saying is take the 2000 that normally gets direct deposited into your bank account and take the 2000 and do an auto transfer into that bank account. And that $2,000 that now gets withheld under your pay goes into your Roth. Now you're able to say this, se let's just assume here, Pete is over the age of 50.

[00:05:15] 'cause I was going with 7,500. 7,500 into a Roth regular. And guess what? Pete didn't mention if he was married, Pete's spouse can also do 7,500 as well. That's 15,000 there. Plus Pete can put an additional $30,000 yet again assuming he's over the age of 50. Into his Roth 4 0 1 K. You're just shifting it.

[00:05:35] You're shifting the money. You are utilizing cashflow versus writing a check for you to be able to do it. It's all a psychic. It's a mentality. It's a way to do it in a way where you could strategically put money in a retirement account, and yes, you can put money into a Roth and a Roth 4 0 1 K at your work, depending on how much you make.

[00:05:58] So if your adjusted gross income is over 200,000 or 130,000, whether you're married or single respectively, then you can in addition put that in yet again, I don't know how much Pete's making, so this is how you can take such a simple question and really get into the minutia, the details of it, of what makes sense for you.

[00:06:18] By, by the way, folks, if you're just joining me, you're listening to Gabriel Shane, certified financial planner, and you're host of more knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. And today we're just talking about the simple concept. What is supposed to be simple, a Roth versus traditional.

[00:06:33] And in this case, what do you do with extra money? I'm here showing you a way where you could put money into a Roth. Through your employer by just taking money outta your savings, not just saving. Let's just say you had a brokerage account. Essentially it would be the same exact thing. That brokerage account is an after tax liquid savings account that just so happens to be investing.

[00:06:54] You could technically just take the money from the brokerage account to pay you, and then when it withholds outta your paycheck to go ahead and pay into the Roth, you're shifting money. Why pay taxes in your brokerage account on stocks? Bonds mutual fund, or excuse me, on interest, dividends, capital gains.

[00:07:13] Why pay taxes on that in the brokerage account? My point is you won't need to if you shifted into the Rob, this is why people love the Rob. This is why you should be taking advantage of it, and I'll take it a step further. Maybe you're currently saving into a traditional account. It may make sense for you to go Roth because in 2026, yes, just a few years from now, tax rates are set to go up for everybody.

[00:07:37] Let me give you an example. The 12% bracket today is gonna go up to 15%. Now, that might not seem like a big deal, but that's a 3% increase, but that's a 3% increase on 12. What's three divided by 12? That's a 25% increase in taxes for you. Just in that racket alone, the 22% currently goes up to 25%. The 24 goes up to 28.

[00:08:02] The top bracket of 37 goes to 39.6, almost 40. And by the way, alternative minimum tax. Do you remember that? Were you subject to that while back? It comes back in 2026. They temporarily moved it up to about a million dollars if you're married. So that most, that barely anybody is subject to that. And even then, where before it would take effect in the 28% bracket, which is today's 24, that's income over taxable income over about $170,000.

[00:08:38] This is the time. Now you can see why I'm bringing this up, where simplicity to investment management to tax planning isn't so simple. This is where you should take a look at your situation. I go as far as saying, reevaluate if a Roth versus traditional makes sense for you, especially in years like this, especially in years where you.

[00:09:00] Know that this is a temporary reduction in tax, whether you feel it or not, it is. If you're complaining now, try complaining later. It's gonna be worse. Use the cash that's in savings to be able to put into the Roth. This could be the best time to do it, especially with all the talk about wanting to change capital gains rate to your ordinary income bracket for those that make over $400,000, that was a conversation, but you know what?

[00:09:22] Eight did get traction. You have a little bit more of a competent president and that may be able to get pushed. True. This is why there is no substitute to talk in a meeting with a professional that has their pulse on all these items to be able to take advantage. I'm not telling you to save more. I'm not telling you to invest more.

[00:09:41] I'm just saying shift some of the money that you have. In a situation like Pete in Arizona who wanted to take $20,000, that's a no brainer. That's an easy one. Technically, his paycheck goes less. And he's replacing his reduction in pay with the cash of 20,000 he was already going to write a check for, and it was gonna be out of savings account anyway.

[00:10:02] So there are ways to do this in a strategic manner, folks, and I just don't see people doing it. They get nervous, they don't understand the rules, the tax codes, the so on and so forth. And quite frankly, even if you make too much to saving a regular Roth, I r a, there are backdoor ways of doing it. These are important concepts, folks that yet again, a lot of people don't understand.

[00:10:27] This is why we're offering a free financial assessment. This is why we got offices all over and we would love to help relate this show to your specific situation. Give us a call. Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for short.

[00:10:50] You can put an inquiry right there on our website and you can even call us right now as we are open seven days a week. Ooh, lots to discuss folks. Um, we're gonna come, we're gonna go on a quick break. When we come back, we're gonna talk about the benefits of a Roth, and then where you should invest your money and how you should invest your money.

[00:11:07] And the basic rule, not opinion, a rule of why you should invest stocks in Roth. And bonds in a traditional, and I'll give a couple examples of why that's the case. There's about 15 examples, but I will give you the top maybe five or six reasons why you should. And it's funny 'cause a lot of people think your stocks should actually go in your bro, your I r A, your four oh K, your retirement account.

[00:11:33] And I'm here to show that is a misinformation on your end. And it's not your fault. The i r s wants you to do that 'cause they get to taxi later on that money folks. We're gonna go on a quick break and we'll be right back after a few words.

[00:11:48] This is Gabriel Shaheen, certified financial Planner, your host of More Knowledge, more Wealth. That's on every weekend. We're going over all important topics of personal finance. We're going over retirement planning, making sure you're prepared for retirement, social security and strategies, real estate taxes, avoiding them now and in the future, investments reducing.

[00:12:07] Fees, commissions, and so on. Insurance and estate planning. Folks, we are offering a free financial assessment that you could take advantage of. We have offices all across Southern California, including the Inland Empire. Give us a call to take advantage. Our phone number is (855) 963-2526. That's 8 5 5 9 6.

[00:12:25] Falcon like the bird, or visit our website, falcon wealth planning.com. That's falcon wp.com for short. Enjoy the show. We look forward to serving you.

[00:12:35] Welcome back folks. This is Gabriel Shane, certified financial planner and your host of More Knowledge, more Wealth here every weekend, talking about all important topics of personal finance. My goal is to go over the knowledge you need to increase your wealth. And through that we're just talking about something simple as Roth versus traditional.

[00:12:49] And in that first segment, I made something so simple from a question from Pete in Arizona to discuss. The complications of that simple answer, and it went into the conversation of saying how there is ways you can still put money into a Roth, especially if you're looking to invest long term. Now, the conversation I wanna now mold into is the simple basics of having both money in Roth and traditional and where you should invest stocks for bonds.

[00:13:14] Now that might be an easier question. Lemme make it a little bit more complex. Now I'll take a step back. Roth is tax free. You want all your growth in the Roth. It's common sense. I put 'em on bonds in the Roth. I want growth, focus investments there as simple as that. Easy peasy. Does that make sense? Now, the traditional, you've never paid taxes on that money.

[00:13:40] So that money actually you would want to maybe grow in more a conservative fashion. Now, let's just say your target rate of return is seven, eight, 9% a year. Let's just say that is what it is for you. Okay? Alright, that makes sense. Kind of simple, easy peasy. Alright, well if that's what it is, well you can't have everything invested in the stock market.

[00:14:00] Right, so you do need some conservative investments. All I'm suggesting is the retirement account should be the most conservative investments. That's where should be your bonds. The things earning 3, 4, 5, 6 plus percent should be in there. Now let's back up. Let's just say you got a million bucks in your I R A and $6,000 in your.

[00:14:23] Roth, well, obviously you're gonna have to have stocks also in your ira 'cause you only have 6,000 if your portfolio is 60 to 70% stocks, well that 6,000 is nothing. It's 0.6% of your overall portfolio. So yes, 60 to 70% of your portfolio should still be in stocks in that i r A, but now let me make it a little bit more complicated.

[00:14:44] Let's just say you have a million bucks and you have 500,000 in a taxable brokerage account. And you have 500,000 in an I R A or 4 0 1 k. Hmm. And you want half your money invested in stocks and half your money in bonds. Okay? And half your money's in tax deferred and half your money's in a taxable brokerage.

[00:15:03] Okay? Where are you going with this? Now? This is interesting. Well, the conversation goes like this. Where would you rather have stocks and where would you rather have bonds? Would you rather have the stocks and the tax deferred or the taxable? Well, let me reverse engineer the question. Let's say bonds or would you rather have bonds, the tax deferred or the taxable?

[00:15:29] The answer, and this is not an opinion, this is an absolute fact, is your bond should always be in the tax deferred because of what we just said. Wouldn't you rather have a million? If you had a million dollars magic wand, where would you rather have it tax free, Roth or tax deferred? IRA Of course you would rather have it in a Roth.

[00:15:49] Hello? Okay. You had a Roth, or excuse me, you had a million dollars. Where would you rather have it tax free, Roth or taxable brokerage? Absolutely. You would rather have it in a taxable or a tax free Roth. Now, let's say you had a million dollars. Where would you rather have it tax deferred IRA or a taxable brokerage account?

[00:16:10] You would want it in the taxable brokerage account, folks. Why? Pretty simple. You only pay taxes on the gains in that. Well, let's just say your gain. You started with a dollar and went to a million, so you have $999,999 of gains. Well, guess what? It's at capital gains rate, which is lower. Assuming you held onto it for over a year, and with that growth, I would sure imagine so, but your growth, you would only pay taxes on at a lower qualified capital gain rate, which is always lower than your ordinary income bracket.

[00:16:46] For example, if you're in the 12% or ordinary income, capital gains is tax free in your brokerage, let's say in your 22% bracket. Capital gains is 15. 15 is over than 22. 24% brackets, let's just say 15% again, then they incorporate this 3.8% surtax, but still 18.8 is still lower than 24, still lower than 32, still lower than 35.

[00:17:16] Then eventually they incorporate the 20% cap gain rate with the 3.8 23.8. Any way you slice it, it's lower. That is why you want your growth focus investments there. Would you also agree bonds? Don't grow as much as stocks, so you're losing out on those capital gains beneficial. Where in the I R A, you never pay taxes until you take it out.

[00:17:40] And bonds by the way. Now some people are out there saying, well, that's why I invest in municipal bonds 'cause those are tax free interest. But did you know regular corporate bonds? The interest yes, is tax ordinary income, which why you're saying municipal bonds, but guess what? Corporate bonds, assuming the same risk level, the same duration, the same, uh, credit quality and so on and so forth.

[00:18:01] Corporate bonds will always pay higher than municipal bonds. Well, That's why you want the corporate bonds and the tax deferred yet again. Another reason. Would you also say stocks, historically speaking earn more than bonds? Yes. That's why you want the stocks. 'cause remember, more beneficial. I would rather have my stocks grow at 10%.

[00:18:20] My bonds grow at four. You get your average, a trade of return of seven still, but you've strategically done it in the taxable brokerage account. And you get to step up in cost basis, right? 'cause stocks grow more than bonds, so you get to step up in cost basis upon somebody's passing, which is more tax beneficial.

[00:18:38] Bonds don't do that la I mean, lastly, I can keep going. By the way, would you also agree stocks are more volatile than bonds? I know 2022 was crazy, but still stocks, we still more volatile than bonds. Long story short or loss, more, I should say. Long story short, gives you more opportunity for tax sales harvesting as well in that brokerage account.

[00:18:57] It's just crazy to me how some people don't understand this and this is why it's crazy that some of you who have a financial professional out there never even looked at the your tax return. Why is that important? Because of what I just said earlier. Let's just say in the lower tax bracket, 'cause you're in early retirement, before social security, before required minimum distributions, not many write-offs, and you're in the 12% bracket.

[00:19:17] Capital gains of qualified dividends is tax free for you. Tax free. I would purposely be selling things because it's tax. Free to do it. By the way, folks, if you're just joining me, you're listening to Gabriel Sheen, certified Financial Planner. You're host of more Knowledge, more Wealth here every week and talking about all important topics and personal finance.

[00:19:34] And I was just going over the basic concepts of strategy for you. And a lot of people miss this out and it's crazy to me, and they work with professionals as well, and they're still missing it. I don't understand how this happens, but this is the reality of how it happens, is people are not, Professionals.

[00:19:53] Investment professionals are not allowed to give financial and professional tax advice. They tell you and it rolls off their tongue. Please meet with a tax advisor. We're here. Me as a tax advisor, I am telling you what you should be doing, and it's unfortunate that you're missing this opportunity. This is why we're offering a free financial assessment to help relate this show to your specific situation, especially if you have money in a brokerage account, especially if you have money in an ira, especially if you have a Roth, especially if you're still working, especially if you have eligibility, especially if you're in a lower income situation.

[00:20:23] This is where you really should be giving us a call, especially no obligation. We'll give you one to two meetings, one to two hours of our time, folks at no cost to answer these questions that you may have, because it is sad. I see a lot of people miss opportunity and they wish they met us five to 10 years ago.

[00:20:41] There's no time to wait. This is the perfect time to meet with us. The end of the year gets busy. A lot of these tax strategies have to be done by the end of the year. You're talking less than five months away. Some of these strategies take time to put together, Hey, this makes sense if you're charitable as well.

[00:20:57] This makes sense. Even if you're older than 72 years old or 73 years old, it makes sense If you're under as well, I you get, you get where I'm going with this. This is crazy. It's crazy because you've never heard tax advice in the investment setting and your accountant's not doing it. Their hands are full doing other things.

[00:21:15] They just get a 10 99 R, 10 99 diviv. They just see that you have investments. They don't know what you're invested in. They don't know the cost basis behind it Anyway. How many times have they actually given recommendation on that? And I feel sorry for the ones where their accountant is the advisor. Talk about a train wreck there where they outside the whole thing or just sell you a shares.

[00:21:35] That's just sad. My point, folks, is this, this is the time to act. And this is why we're offering a pre-financial assessment. We wanna be able to be that hero to show you not so much what you have missed, but to show you the opportunity that you have going forward. 'cause in the past is water under the bridge.

[00:21:56] I don't care about that. Heck, we can highlight it. So you know, but more importantly, how could you save moving forward? Folks, give us a call. We would love to help. Our phone number is eight five five. 9 6 3 25 26. That's 8 5 5 96 Falcon like the bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for short where we can help answer these questions that you may have.

[00:22:24] And we have an you can put in an inquiry on our website as well. And there's a knowledge center. You can learn all about this as we have dis discussed this strategy before. And we have discussed this on that YouTube site, and I'm sure it probably has thousands of views as well as we have over a million views in less than a year through our YouTube channel, because our jobs just give information.

[00:22:48] And we want you, once you feel you're at that point to give us a call, we wanna be that contact. We wanna be the good guys. We wanna be the ones that help. As you see in the backdrop. For those in the video cast, we are fee only, not fee-based. Don't say fee-based. Fee-based can still charge a commission. We are fee only.

[00:23:04] We sell brain at Falcon wall planning. That's what separates us, amongst our peers against the competition. We like to be the ones that stand out. Yeah, sure. We don't make as much as the other guys. That's fine. But we grow outta volume. We are blessed. We get hundreds and hundreds and hundreds of clients on an annual basis and growing.

[00:23:28] 'cause the word is spreading of what we're doing. Just look at our Google reviews. We got hundreds of Google reviews, five star and just, you could read the notes on there, talking about specific advisors, specific strategies and specific firms. And our firm is quality when it comes to that. Folks, that was a fast, fast show.

[00:23:45] I wanna thank you for tuning in with us. Feel free to, if you have any questions, reach out to myself or any one of our colleagues at 8 5 5. 9 6 3 25 26. That's 8 5 5 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for short, and you can go to our knowledge center, get this episode or any one of our previous episodes along with the videocast and go look at our YouTube channel as well, which is through our website where you can get a lot of cool strategies that can help you in your situation, folks.

[00:24:19] I want to thank you for tuning in with us. I want you to have a fantastic week and God bless.