2024 Top Guest Replay - Roth vs. Traditional - Which is Better? with Sean Mullaney
Jan 02, 2025Navigating the maze of retirement planning can be daunting, especially when deciding between Roth and Traditional retirement accounts. Financial planner Sean Mullaney and Shannon delved into this topic on a recent episode of Keep What You Earn, offering valuable insights for securing your financial future.
Shannon started by explaining the fundamental difference between the two types of accounts. Traditional accounts allow for a tax deduction on contributions today, with the funds growing tax-deferred until withdrawal. Roth accounts, on the other hand, offer no initial tax deduction, but investments grow tax-free, and withdrawals in retirement are tax-free, provided certain conditions are met.
Sean argued for the advantages of Traditional accounts, particularly for those in higher tax brackets. "For many Americans, taking the deduction today at their highest marginal rate makes a lot of sense," he said. In retirement, the effective tax rate on withdrawals is often lower than the marginal tax rate faced while working. This is because retirees typically first benefit from the standard deduction, followed by lower income tax brackets. He also debunked the misconception that future retirees will inevitably face significantly higher taxes due to national debt. While acknowledging the $34 trillion debt, he pointed out other untapped revenue sources, such as university endowments and capital gains, as potential targets for future tax increases, meaning retirees might not be the hardest hit.
While Sean leaned towards Traditional accounts, he also discussed the strategic importance of Roth accounts. "Traditional and Roth accounts are not mutually exclusive," he said. One effective strategy involves maximizing 401(k) contributions for tax deductions today while also contributing to a Roth IRA for tax-free growth. For those who can't deduct Traditional IRA contributions due to income limitations, contributing to a Roth IRA offers a workaround, providing tax-free growth and withdrawals in retirement.
Sean introduced "Dynamic Duo Planning," which blends both approaches. This involves maximizing 401(k) contributions to take advantage of tax deductions while also contributing to a Roth IRA. He also discussed the option of Roth conversions during retirement. Between retirement and the age of 75, when required minimum distributions start, your income might appear artificially low, allowing you to convert funds from a Traditional 401(k) to a Roth IRA at a lower effective tax rate. "You might be taxed at a high rate when you contribute, but during retirement, you can convert at a lower rate, printing money off the government," Sean noted.
The conversation also covered alternative investment advice, like avoiding retirement accounts to invest in real estate or one’s business. Sean cautioned against this overly concentrated approach. "If you're already undiversified in one area of your balance sheet, it doesn't make sense to be equally undiversified in another," he advised. He emphasized the benefits of diversification and criticized the higher fees associated with alternative investments like annuities and real estate.
In conclusion, Sean encouraged listeners not to fear traditional retirement account contributions. For most Americans, these accounts offer significant tax advantages both now and in the future. Even if you face higher taxes in retirement, it's a good problem to have, reflecting considerable financial success. Shannon wrapped up by stressing the importance of being clear on your retirement goals and cash flow. She urged listeners to tailor their strategies accordingly, saying, "To win the game, you have to learn the rulebook."
Whether you're a small business owner, an employee, or just starting your financial journey, carefully weighing your options, diversifying your investments, and strategically planning for a financially secure retirement are key takeaways from this enlightening episode. For more in-depth insights, check out the full episode with Sean and Shannon.
Sean Mullaney is a financial planner and writes The FI Tax Guy blog focused on the intersection of tax and financial independence. In 2022 he authored the book Solo 401(k): The Solopreneur’s Retirement Account.
X (formerly Twitter): https://twitter.com/SeanMoneyandTax
LinkedIn: https://www.linkedin.com/in/seanwmullaney/
YouTube: https://www.youtube.com/@SeanMullaneyVideos
Website: https://fitaxguy.com/
What you'll hear in this episode:
04:40 Federal debt may not heavily burden retirees.
06:46 Retirement accounts lightly taxed despite tax increases.
10:24 Optimize retirement strategy with Roth conversions timing.
14:08 Clarity on retirement goals overrides generic advice.
19:52 Diversify income and investment channels equally.
20:20 We're in the best era for investors.
If you like this episode, check out:
Boosting Business with Better Client Care
Acquire Cheaper and Better Customers (Financial Priority Formula Part 3)
Want to learn more so you can earn more?
Get $50 off your HR audit with People Principles by using code SHANNON50 here.
Visit keepwhatyouearn.com to dive deeper on our episodes
Visit keepwhatyouearncfo.com to work with Shannon and her team
Watch this episode and more here: https://www.youtube.com/channel/UCMlIuZsrllp1Uc_MlhriLvQ
Connect with Shannon on IG: https://www.instagram.com/shannonkweinstein/
The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
