Organizing Your Retirement Options

November 22, 2006

Changing Retirement Landscape
If you have not been a devoted subscriber you may need to go back and listen to my last Podcast “Retirement in Crisis” to better appreciate how important retirement savings are to your future. The government recognizes that most individuals have been asleep at the wheel when it comes to saving for their retirement, and they are also unaware that Social Security is only a few decades from a funding disaster (don’t worry I am not going to go there on today’s show). As a result of this SILENT BUT DEADLY BUILDING DISASTER the government has made several changes that provide tremendous opportunities for you to save for your future retirement and financial independence.

What retirement option should you use and in which order should they be funded?
To answer such a question we must understand all the different retirement options

Traditional 401k: $15,000 annual contribution limit ($20,000 for those over 50). Contributions are tax deductible and earnings are not taxed until you start to take withdrawals. However, withdrawals are taxed at ordinary income tax rates instead of the lower capital gain and dividend rates.

ROTH 401k: ROTH 401ks became available at the beginning of 2006, but most employers did not change their existing plans to add the new option because they were not permanent, but that changed this past August with the signing of the Pension Protection Act of 2006. I am prediciting that with the new legislation that ROTH 401ks will become much more common.
Same contribution limits as normal 401k ($15,000 for 2006 & individuals over 50 can invest $20,000). The contributions are just like normal ROTH IRAs and are not deductible, but the earnings are never taxed. Unlike, ROTH IRAs there are no income limitations.

ROTH IRA: You can contribute $4,000/year ($5,000 for those over 50). The contributions are not deductible, but the investment earnings are never taxed. You can no longer contribute to a ROTH IRA once your income exceeds the following limits: Married Filing Jointly ($150,000-$160,000) Single ($95,000-$110,000).

Traditional IRA: $4,000/year contribution limit ($5,000 for those over 50). Fully deductible if you do not have an employer provided plan. Your earnings grow tax derred until you start to take withdrawals. However, just like traditional 401ks, traditional IRAs are taxed at ordinary tax rates.

So now that we know our options where do you invest your money and in what order???

My advice is to load up on the ROTH options. I can not stand to pay taxes anymore than anyone else, but there is a good chance that your taxes are going to be higher when you retire based upon research done on what the requirements will be for our US Government in the future.

I know that the conventional wisdom has always been you will be in a lower tax bracket in retirement than you will be at your peak earning years. However there are some issues facing our great country.

** Tax Revenues have not kept pace with future government obligations (Social Security, Medicare….)
** Congress has not fixed Social Security. Instead of investing the money to grow the funds were used to fund other general governement programs. When the IOUs come due money will have to come from somewhere. That will probably be higher income taxes.
** According to the US Government Accountability Office; Our Government will either need to cut spending by 60% or double federal taxes to balance the federal budget in 2040. Unfortunately, the Government is great at promising programs, but bad at ending programs. Therefore, I would count on higher taxes.

Items to Consider:
**If you are a high income earner and your company does not offer a ROTH 401k, start making some noise. This is very important since the ROTH IRAs have income limits.

**If you have maxed out your 401k and income limits do not allow you to use the ROTH IRA consider contributing to a nondeductible Traditional IRA. Part of the new legislation allows you to convert a traditional IRA (nondeductible IRA) into a ROTH IRA in 2010, and the only tax implications would be to pay taxes on the earnings. This conversion also does not have any income limitations.

Holiday Shopping:

With Thanksgiving and Christmas specials there will be large crowds and long lines. A good way to beat the system is to keep the sale circulars from one store and use it at a competitors. This allows you to get the great “Door Buster” special and avoid the lines and the mad dash during the peak period.

A Shamless Plea for Money…..

In October we made a mistake with our feed and it went down for a few days. To fix our error we hired an outstanding consultant to do an ASAP fix. His invoice just arrived and it is close to $1,000. I love doing the show, and accordingly have invested a large sum of money in equipment and time. However, this is one time that I am asking for help. If you love the show please visit our website and help us pay for this consultant’s time by clicking on the “Support Money-Guy.com” icon.

Happy Thanksgiving!




Most Recent Episodes

Financial Planning 101 (By Age) 2023 Edition

Throughout every decade, there are different areas of your financial life that come in and out of focus. In this episode, we'll discuss what you need to focus on by age, pitfalls to watch out for, and how to know you're doing it right. In this episode, you'll learn:...

Is the 2023 Housing Crash Around the Corner?

Housing prices skyrocketed after the pandemic to all-time highs, and mortgage rates have more than doubled since 2020. Homes are harder to purchase for more Americans, which means it’s more important than ever to make sure you are ready to buy before purchasing. In...

Watch This Before Rebalancing Your Investment Portfolio!

85% of Americans don’t rebalance their 401(k). Are they making a huge mistake? In this episode, we’ll discuss the “why” behind rebalancing, how to do it, and the data on whether or not rebalancing can increase your return. In this episode, you’ll learn: What...

Don’t Make This HUGE 401(k) Mistake!

Americans are making a HUGE mistake in their 401(k) that could cost them thousands by retirement. We’ll talk about why this is happening and how you can avoid making the same mistake in this Q&A episode! For more information on how to make the most out of every...

Alex Hormozi’s Top Money Advice! (Financial Advisors React)

In this episode, we react to Alex Hormozi's financial advice. Enjoy the Show? Sign up for the Financial Order of Operation (FOO) Online Course! Sign up for our Know Your Number Course! Check out our Net Worth Tool! Get FREE downloads full of financial advice from...

Everything You Need to Know About Finances in Your 20s

In this episode, we discuss everything you need to know about finances in your twenties. In this episode, you’ll learn: The top financial advice for your twenties How to start building wealth and the steps you should take Enjoy the Show? Sign up for the Financial...

The Most Valuable Asset in Building Wealth!

This episode will show you how to maximize the most valuable resource you have - starting right at this moment. What is it, you may ask? It’s TIME. If you give your money time to grow, you’ll be amazed at how much your dollars can become - it’s incredible! How wild is...

Financial Hacks and Habits of the Top 1% (By Age)

Who wouldn’t want to have a high enough income and net worth to be considered part of the top 1%? In this episode, we’ll tell you exactly how much you need to be considered part of the top 1% and the habits and hacks those in the top 1% used to get there.   In this...