Strategic Retirement Planning: What’s the Best Account for You?

Andrew Busa:
IRAs, 401(k)s, health savings accounts. How do you get a handle on all of these vehicles that are available to you to help save for your short, medium and long-term financial goals? Listen to this podcast to find out how.

Andrew Busa:
Hello, this is Andrew Busa and I’m a financial planner here at Adviser Investments. We’re here with another The Adviser You Can Talk To Podcast. Today, I’m joined by Rick Winters. He’s a CERRTIFIED FINANCIAL PLANNER™ and a vice president here at Adviser Investments.

Rick Winters:
Hey, Andrew.

Andrew Busa:
Good to have you back. So, today our main focus is discussing the importance of reviewing your contributions to your retirement accounts. And really just think of today’s podcast as a friendly reminder, and also to emphasize why it’s so important to make sure that you’re really reviewing those contributions each and every year.

Rick Winters:
Yeah, you need to do that because those annual limits are rising on your retirement plan contributions and you may need to adjust accordingly.

Andrew Busa:
Right. They change these every year. And when I say they, I’m talking about the IRS. Right?

Rick Winters:
That’s right.

Andrew Busa:
They calculate based on inflation what the maximum allowable contributions to your retirement accounts are. And here we’re talking about your 401(k)s, your IRAs, health savings accounts, SEPs. All of those accounts are adjusted every year with how much you’re able to put in those accounts from a tax advantage standpoint.

Rick Winters:
That’s right.

Andrew Busa:
So, we find that the beginning of the year is always a great time to check on. This is just sort of a financial wellness check. And we also have a great resource that can help with that, right?

Rick Winters:
That’s right, Andrew. Key financial data worksheet. It’s going to be the, as I like to classify it, the greatest cheat sheet ever.

Andrew Busa:
It’s a great resource.

Rick Winters:
Great resource, has everything that you’re going to be looking for based on limits, income limits, and how you can actually go about including information on Medicare, tax rates, otherwise.

Andrew Busa:
Very true.

Rick Winters:
So, if you haven’t taken a look at it, it’s going to be attached in the notes of this podcast.

Andrew Busa:
Rick, I know you do a lot of this kind of work with clients, making them aware of these annual contribution limits, right?

Rick Winters:
That’s right. I do. It keeps me busy during the day. So, we’re making sure our clients are receiving the full benefit of tax advantage savings, which is extremely important. Just constantly trying to balance between tax savings now versus tax savings later and helping people figure out what they can save bouncing between investors, available cashflow and the limits that are allowed through the government and the IRS.

Andrew Busa:
Right. And that balancing act is definitely an important conversation that we have with a lot of our clients. And I think, in our last podcast together, Rick, we mostly focused on the benefits of Roth IRAs. Just talk a little bit about how today’s podcast is different.

Rick Winters:
I’m going to plug that even more.

Andrew Busa:
Okay.

Rick Winters:
So, that was a really good podcast.

Andrew Busa:
That was.

Rick Winters:
We actually had a lot of helpful information in there and we did get some really helpful feedback from a lot of listeners.

Andrew Busa:
Yep.

Rick Winters:
That’s episode 34. Please go back and look. Actually, just recently, completed an updated special report about Roth conversions.

Andrew Busa:
Yes, super helpful.

Rick Winters:
Which just got titled Converting to a Roth IRA. Don’t miss it. It’ll be in description of this podcast. But to go a little bit further, now back to the task at hand. This podcast is definitely different from the last one. That was on Roth conversions, this one’s about savings. Just trying to make sure that we know how to take full advantage of the investment options that are available to us, how to make sure that each person knows which ones are specifically available to them.

Andrew Busa:
Sure.

Rick Winters:
And over the long term, just make sure we have a cornerstone strategy in place for IRAs, Roth IRAs, and so that you can focus on building your overall secure financial future.

Andrew Busa:
That’s well said. I think today’s podcast is a little bit more broad in scope, like you said. We’re going to be touching on just overall savings strategies and why it’s so important to make sure that you’re choosing the correct retirement vehicle for you and your financial plan.

Rick Winters:
That’s exactly right.

Andrew Busa:
So, in today’s podcast, we hope you take away a few things. First, which retirement accounts to consider depending on your financial situation and how to decide which accounts to fund. We’re going to be talking about the power of tax friendly vehicles and why it’s important just to consider investing in tax friendly vehicles. And also why it’s important to make sure that you’ve reviewed your maximum allowable contribution limits on an annual basis. And this applies to everybody with earned income, right?

Rick Winters:
That’s right. Earned income. That’s your salary, your commissions, your bonuses. It’s not your investment income or your passive income. To cut it down to the basics, if you’re out there mowing the lawn every week, getting your $10 income and you report that on your tax return, you can make…

Andrew Busa:
That’s earned income.

Rick Winters:
… a contribution to your IRA or your Roth.

Andrew Busa:
Rick, any other thoughts before we dive into the good stuff?

Rick Winters:
Yes, I do.

Andrew Busa:
Okay.

Rick Winters:
It’s about planning ahead. Timing. The beginning of the year is the best time. Actually, I’ll even go a little further back. The last month of the year prior is the best time to do your planning…

Andrew Busa:
Great point.

Rick Winters:
… for making your contributions to these plans. Why? Because, well, first and foremost, you may be thinking about your company-sponsored plan and you need every paycheck to make those contributions. If you don’t start making those adjustments into January, well, you probably missed maybe first paycheck or second paycheck.

Andrew Busa:
That’s a good point.

Rick Winters:
The other ones to keep in mind that for those, happy birthday, you may be turning 50 this year. Guess what? You get to make an additional contribution.

Andrew Busa:
You’ve graduated.

Rick Winters:
You’ve graduated. The number is up. You get to put more in, assuming you have the means to do it. The other thing is you got to remember deadlines. We got, first and foremost, December 31st is for those annual contributions that you’re making to your company sponsor point. We’re talking 401(k)s, 403(b)s, and the like. April 15 is to make sure you don’t miss the cutoff for the year prior if you hadn’t made your IRA or your Roth contributions. And October 15 for late filing, which would actually have an impact on self-employed individuals who have plans where you have the ability to wait until that late date to make that contribution.

Andrew Busa:
So, that’s great. Let’s dive in here and let’s get into, first, just defining some of these accounts that we’ve mentioned, talking about the tax implications. As a listener, when thinking about what kind of retirement account would be most appropriate for your financial situation, it’s important to first understand the tax implications of all of these accounts. Rick, break it down for the listeners here. Start with the traditional versus Roth IRA.

Rick Winters:
Definitely, yeah. Just to make sure everybody knows what we’re talking about. When you have a Roth IRA, it’s not just a cool name, the meaning behind it is, it’s named after a senator who came up with the law, but that doesn’t tell you what it’s all about. So, it’s after tax contribution. Tax-free growth and tax-free distribution.

Andrew Busa:
Right.

Rick Winters:
You can get the access to this through an IRA, Roth IRA, or through your 401(k), which actually allows you to save a significant amount of additional money. But this is all known as tax-free vehicles, tax-free savings. So, you get it in there after tax, it grows tax-free, distributes tax-free. [crosstalk 00:06:59].

Andrew Busa:
So, once the money is in there, it’s never taxed again, like we talked about in our last episode.

Rick Winters:
Yes, exactly. So, then the IRA, that’s different. That’s don’t pay taxes now, grows tax-deferred, taxable when I distribute. That would be something that you’d find through your normal 401(k) at work, SEP IRAs, simple IRAs and even annuities, but that’s referred to as a tax-deferred vehicle. You will eventually have to take distributions from that and pay taxes on that.

Andrew Busa:
Right. Just at a basic level of Roth versus IRA, a lot of this comes down to that marginal tax rate that you’re in. Whatever bracket you’re in at that moment is going to determine kind of what bang for the buck you’re getting from each of these accounts. If you’re in a very high tax bracket now and you contribute to your regular IRA, you’re going to get a bigger bang for the buck there.

Rick Winters:
That’s right. Yep.

Andrew Busa:
Versus once you’re in retirement, you might be better off withdrawing from the Roth because it’s not going to be taxed if you’re in a higher tax bracket then.

Rick Winters:
And we’ll touch on that again. It’s always about when am I paying less tax?

Andrew Busa:
Right.

Rick Winters:
Okay. If I tell you it’s always this little… My quick phrase is if I’m going to pay less tax now than I am later, Roth IRA. Easy.

Andrew Busa:
Yep.

Rick Winters:
If I’m going to pay more tax now than I am later, traditional IRA.

Andrew Busa:
Right. So, talk to also this idea of the mega backdoor Roth.

Rick Winters:
This one might not be a common discussion out there. So, let’s spend a little time on this one. To give justice to where you all your opportunities exist is that through your company sponsored plan, most of us know our annual deferral limits. What can I take from my paycheck and put into a pretax or Roth savings in my 401(k)? Well, that’s a very specific limit.

Andrew Busa:
Right.

Rick Winters:
Beyond that, your company could also put in matching or profit sharing, but there’s actually a significantly higher limit that gets upwards into the $50,000 to $60,000 range on the plan itself, which, if your plan sponsor allows you to make after tax contributions, not Roth contributions.

Andrew Busa:
These aren’t Roth.

Rick Winters:
These are after-tax contributions. You’re taking money that otherwise would have gone to your checking account, but now you’re directing it into the 401(k). And why this is called the big mega backdoor Roth contributions is because once you get it in there, as long as your plan allows it, you can actually convert those dollars to Roth.

Andrew Busa:
Right.

Rick Winters:
Okay?

Andrew Busa:
That’s interesting. Again, just to clarify that, these aren’t Roth contributions. These are after tax into your 401(k), then you’re converting it to Roth.

Rick Winters:
You’ll never be taxed on that again ever because… So, if you do nothing more than just make your after-tax contribution, well, the after-tax contributions in there. When you retire and move it over, you can roll that over into a Roth IRA. But all the growth that had gone on from those after-tax contributions are still deferred. However, if the plan allows you to do that in-plan conversion, you can then grow your, well, in this case maybe additional $10,000, $15, $20, $30, depending upon where you’re falling within that limit. Let’s not forget, you have to have this money to make it go in there.

Andrew Busa:
Right.

Rick Winters:
Not assuming everybody has an extra 30 grand sitting around just to make an after-tax contribution, but don’t miss it. So, we did spend some extra time on it.

Andrew Busa:
I think it’s important because this is something that it doesn’t get as much press and probably a little bit more complex. So, if you are considering this, talk to us about it. Talk to your CPA, financial adviser. We’re happy to help.

Rick Winters:
Don’t go it alone.

Andrew Busa:
Right.

Rick Winters:
But I do know, there’s one of the things we were going to talk about here, HSAs. That’s your thunder.

Andrew Busa:
That’s right. Health savings accounts. These are sort of tax anomalies in a way because it’s tax-free all around. When you contribute to the account, it’s tax deductible. The money in there is growing tax-free and withdrawals are also tax-free, as long as they’re used for qualified medical expenses. Incredible tax deal. It’s the only tax-free deal in town that I know of.

Rick Winters:
And there is an episode out there completely devoted to it. Unfortunately, I don’t remember the exact episode number. We’ll plug that into the description notes.

Andrew Busa:
Sure, we will. And that was a good one too, I think.

Rick Winters:
Yes.

Andrew Busa:
All right, well, that’s a really good overview of just the basic tax implications of the traditional IRA, the Roth IRA, health savings account. What about just the regular old taxable brokerage account? How does that fit into this?

Rick Winters:
Still important here. So, when I describe it to people who may not have had any after-tax savings is you’ve got your savings account, you’ve got your checking account. Checking account is for like a month and a half worth of bills.

Andrew Busa:
Right.

Rick Winters:
The savings account, assuming you’re… I refer to it as your high-yield savings account because I’m not going to tolerate someone paying me pittance on my extra money. I’m talking pennies on the dollar when I can go out and get at least maybe four or five times that in a brokerage account.

Andrew Busa:
Sure.

Rick Winters:
But I better be getting high-yield savings on my extra dollars I put aside for an emergency. Beyond that, that’s brokerage savings. Brokerage would be giving me access to saving in stocks, bonds. In our case, mutual funds and ETFs as well, mainly. And this all comes in as capital gains, interest and dividends. So, while we’ve been talking about all these other things in providing us with deferred growth or tax-free growth in this case, well, each year we’re going to have a tax liability associated with it. But it’s extremely important.

Andrew Busa:
It is, whereas before we’re talking about IRAs that are mainly designed for retirement savings. That’s money you’re probably not going to touch for 25, 30 plus years or more. The taxable account probably is going to be more designed for money that you’re looking to use in the next three, five, seven years, probably those midterm goals. It’s a way to allow you to save for those kinds of things.

Rick Winters:
Yeah, if you needed to.

Andrew Busa:
Right.

Rick Winters:
So, if I need to go and put a down payment on a house, I’d be really excited about, one, having had put some cash aside so I could do that. But also maybe I need to dip into my brokerage account because your 401(k) and your IRA and your Roth IRA are the last place you really want to go for that.

Andrew Busa:
Right. Oh, by the way, the taxable account does have a place in retirement planning as well.

Rick Winters:
Very much so.

Andrew Busa:
Right. Just because it’s not tax advantaged doesn’t mean it can’t play into your retirement withdrawal strategy.

Rick Winters:
You have these big IRAs that you eventually saved into because you listened to this podcast and took full advantage of all that company matched your own contributions. Well, every time you turn around and want to do something special, the last thing you want to do is have Rick Winters over here who’s helping oversee your account tell you that you have to pay an extra $5,000 in taxes for that vacation.

Andrew Busa:
Yeah, you love to do that.

Rick Winters:
Yeah, that’s not fun. The brokerage account is where you’re going to want to go for that discretionary extra spending.

Andrew Busa:
Absolutely. And I think, just to sum this up, what it comes down to, again, is time horizon. The IRAs, you want to leave that growing tax-deferred as long as you possibly can. There are exceptions to pull money out for those accounts, for like a first-time home purchase or something like this, but if you can avoid it, I would recommend it just because you want to take advantage of tax-free growth for as long as you possibly can. Saving for retirement, it’s hard enough. Don’t make it harder than it needs to be.

Rick Winters:
Yeah. Yeah. I’m with you.

Andrew Busa:
So, let’s get into the importance of consistent contributions. Now that we understand our basic ABCs of what these accounts are. We started off this podcast by saying why it’s important to make sure that you’re making these contributions consistently. Talk a little bit about why.

Rick Winters:
Yeah. So, one thing you can never make up for is the benefit of compound, interest in growth.

Andrew Busa:
Eighth wonder of the world.

Rick Winters:
Eighth wonder…

Andrew Busa:
Maybe someone said it.

Rick Winters:
Exactly. Maybe.

Andrew Busa:
Maybe I said it.

Rick Winters:
I’ll take that.

Andrew Busa:
Yeah.

Rick Winters:
Yeah. We better put that in the notes.

Andrew Busa:
Yeah.

Rick Winters:
So, the concept here is pretty straightforward. If you can start saving when you’re 20 years old and do $2,000 a year, you’re better off than someone who’s 35 years old trying to put $5,000 away. Why? Because you’ve had all that extra time to have that smaller contribution grow and compound on itself that the person who’s trying to throw extra money in later can’t make up for. So, the ability to save early, save consistently and progressively, if you can, depending on your timeframes, it makes all the difference in the world.

Andrew Busa:
Absolutely. Let’s say you never review the annual limits, right? That might not hurt you after one or two years, but all of a sudden you might turn around after five years and realize that the limits have risen by $5,000, say, and you’ve gone five years without increasing your contributions. That’s serious growth to miss out on over time, right?

Rick Winters:
Especially if you had the means to do it.

Andrew Busa:
Exactly.

Rick Winters:
You might’ve saved yourself something in taxes or taxes in the future.

Andrew Busa:
So, let’s get into a little bit of more planning analysis talk, right? When you’re helping clients choose between all these different retirement vehicles, how do you help them think through that? Because I think this is, in one way, it’s sort of a basic financial decision, but in other ways it’s not.

Rick Winters:
Yeah. So, if we’re going to try to put a hierarchy to this, I think that’s kind of where my mind is going with that question, is first and foremost, if I go and contribute to my 401(k) plan, well, I may be getting a tax advantage, but the biggest thing I’m getting is probably free money from my company.

Andrew Busa:
Right.

Rick Winters:
So, if I can put a dollar in and get 100 cents on the dollar, that’s an immediate return that I would be missing out on. So, I’ve got to take advantage of that first and foremost.

Andrew Busa:
Sure.

Rick Winters:
Next, you mentioned that the true benefits of a health savings account. Well, that triple tax savings, one, is if you do need it for medical costs. Well, you don’t pay taxes upfront when you make the contribution and you don’t pay taxes when you take it out. That’s about as good as it gets when it comes to tax treatment. But if you actually don’t use it for health benefits over age 65, you can treat it similar to your IRA and just pay taxes on the gains or just pay taxes on the distribution, but you had all that tax-deferred growth.

Rick Winters:
Then we move over to IRAs and Roth. Why? Because, well, they may be restricted based on your contributions you have to your company sponsored plan, your income limits. You may be making too much, but if you still have access, definitely. That’s one place you’re going to want to focus your attention. And then brokerage. We just don’t want this money sitting around in a money market making less than 1%.

Andrew Busa:
Sure.

Rick Winters:
If you know that there’s an opportunity to potentially be making two or three or five or 10 or more.

Andrew Busa:
Right. And I’ve got another one for end of year planning. You know, we talked about the beginning of the year. And you mentioned it a little bit about it at the beginning of the podcast, but for 401(k)s, if you’re getting towards the end of the year and you’re seeing, hey, I’ve got a little bit of extra cash flow here. I can stuff maybe a little bit more into my 401(k) plan. Let’s say you’re just taking advantage of the company match, which is great, you mentioned that you definitely want to go ahead and do that. But you might say, “Hey, I can get a little bit more into this plan before the end of the year, but you have to let your HR know about that.”

Rick Winters:
Just don’t let life happen.

Andrew Busa:
Right.

Rick Winters:
You know, just take a half a second to think, or ideally you get the call somebody that’s working with you and, say, simply your adviser, me, us, your accountant. Somebody that you rely on to help you make some better, well, one, tax decisions and, two, your investment decisions.

Andrew Busa:
Right.

Rick Winters:
Yep.

Andrew Busa:
I wonder, too, if you can talk a little bit about these decisions for small business owners out there because I know they’re juggling a lot. Planning for retirement is just one more thing that they have to think about. What general advice do you have for them?

Rick Winters:
Yeah. Small business owners are in a unique spot. Small business doesn’t mean you’re making money, but if you are in a profitable situation where your business has been successful and maybe this has kind of happened overnight, or you find yourself in a position where you’re able to save, the resources that are available, they are way more flexible than they were 20 years ago.

Andrew Busa:
Yeah.

Rick Winters:
You have access to a solo 401(k), a simple or a SEP, just to make sure that you’re not missing out on that tax-deferred savings.

Andrew Busa:
Right.

Rick Winters:
And now you can even use those same exact plans, well, in this case, a solo 401(k), to make Roth contributions. And that’s, again, pretty powerful because not only can you make your Roth, but you can also make your profit sharing contributions to yourself. So, you get the benefit of both.

Andrew Busa:
Right. So, there’s really more options available than ever for the small business owner out there, which is really exciting, but also kind of overwhelming.

Rick Winters:
Yeah.

Andrew Busa:
So, I think the key there, talk to your financial planner, your financial adviser to see what’s right for you because it’s going to depend on how your business is structured, how many employees you have, what kind of income you’re making.

Rick Winters:
You just open up a whole…

Andrew Busa:
Whole can of worms. [crosstalk 00:19:16]. Maybe that’s another podcast.

Rick Winters:
Yeah, that’s a whole thing in itself. [crosstalk 00:19:18]. I was going to say. So, the key is if you are self-employed, make sure you’re thinking about it and you’re asking the question. And hopefully you’re actually being prodded to think about it from the people you’re working with.

Andrew Busa:
Right. Well, Rick, this has been a really great conversation. I’m glad that we had a chance to do this. A little bit of a sequel to our first Roth IRA podcast.

Rick Winters:
I wonder if they’ll let us do anymore.

Andrew Busa:
They might shut us down. I don’t know. So, I know this has been on the minds of a lot of people out there. So, thanks for joining me. Any other thoughts before we leave the listeners?

Rick Winters:
I actually do. I would like to just remind everybody that, first and foremost, you have to have a plan. That means understanding the timing of when you need to consider your options for starting to save or how you’re going to save. So, don’t miss out on thinking ahead. Then I would also say consider what resources you have available to you, the money that’s coming out of your paycheck hitting your savings account. Is that the only place it can go and earn, in this case, nothing? No, you have other options. You’re going to want to consider how you can use your accounts for tax savings and long-term growth. Yes, absolutely. Plan ahead, get yourself organized, work with your professionals. Come to us. We have a lot of… I can talk endlessly. You know that. Yeah, I think it’s just do it.

Andrew Busa:
Well said. So, this has been Andrew Busa and Rick Winters from Adviser Investments thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. Really the subscriptions are helpful for us and it helps us get good feedback and understand what kind of episodes that you want to listen to. Please feel free to do that. You can check us out at www.adviserinvestments.com/podcasts. Your feedback really is always welcome. If you have any questions or topics that you’d like us to explore, please email us at info@adviserinvestments.com.  Thanks for listening.