Okay, next up we have a question from Austin. He says, "I've heard for younger investors under 25, total taxes, Roth is more favorable, and above 30 percent, traditional is more favorable. Do tax percentage rules change based on age, and if so, how?"
Tax percentage rules do not change based on age. What makes the most sense for you, however, does change based on age. Now, we just see people all the time saying, "Hey, I don't care even if you're a 22-year-old, you make a million bucks a year, you're in the top tax bracket, and you live in a high-tax state, even then you ought to do Roth." Ah, I understand the academia behind that and the thought of long-term tax regrowth. But I also understand the value of present-day tax savings. And if I can give you a dollar and in return you're going to give me a 30 percent immediate rate of return, that's how you can think about the tax savings. It's really, really difficult to walk away from that benefit. However, we have seen later in life, we have clients that have very large 401(k)s and they've got very large taxable brokerage accounts. And they're still saving in their 401(k) and they're thinking, "You know what? I'm not going to run out of money. And what I really need to be thinking about is how I'm going to legacy plan for the next generation. How am I going to save money for future generations and pass this on to my children?" So we have seen folks who are even in high-income situations switch back to Roth in their twilight years of their career as a means, a mechanism for legacy planning. So I don't think it's so much age-dependent on the tax rate percentage. I think it's more dependent on what are your goals. Is your goal early retirement? Is your goal normal retirement? Is your goal legacy planning? And the answer to those questions, once you kind of have a picture of the finish line, will allow you to better dictate what the path right now should be. But if you are a young person and you do fall in less than that 25% marginal bracket when you combine your federal rate with your state rate, I think that Roth is a no-brainer, almost because you got to do it because it's going to be so, so, so valuable for you over the long term.
Well, I think this is one of those, it's easy for us to have hard and fast rules. But this is such a customized answer, Bo, on where tax rates fall. The we are and we have our own assumption, and I just hit the mic. We have our own assumption. I want to make sure I tell you why we believe it, but also what you need to be thinking about. Age does have a huge impact, you know. And the fact that I do like younger people since you have so many years of time, you know, so much time for compounding growth, that's why people like to see that money in the Roth because you're maximizing the tax-free growth opportunity. However, you have to ask yourself, will tax rates be higher or lower in the future? We're just thinking and we're going off what the past has been, that older
people in retirement typically pay less taxes. There are multiple things that go into this. First of all, once you remove earned income from your income, your taxes, your income overall goes down because the biggest contributor to your taxable income is your earned income. The second thing is governments typically write into the tax laws big breaks for older people. Why? Because older people vote. So we all know our elected officials love to kind of prime the pump of making themselves look really good to that important group of people. So those two things go into it. So that's why we say if your earned income is going to disappear, plus you're going to be in this now favored group to the government that is setting up tax rates, pay attention to that because your taxes could be lower in retirement. So why pay it at these higher rates now while you're working when it could be lower in the future? And then the third thing you have to think about is where will you be and now? If you're somebody who will, down the road, you know you're planning on retiring at 70 years of age, you're never going to have the ability to do a Roth conversion because you have earned income then. Maybe you don't have the same flexibility as somebody who is going to retire at 55 and they're going to have all the way from 55 to 75 to where they can convert IRA money into Roth money at lower tax rates. Pay attention to that. These are the scenarios that go into this. Awesome. This is one of those situations where we give you general guidance because it's helpful for you to learn. But when you get sophisticated enough to where you have multiple things going on, multiple scenarios, multiple variables, this is when you should take it to the next level and hire a financial advisor. But for most young people in their 20s, yeah, if you're not in that tippity top because realize tax rates are so high now, I have to look through all my crazy sheets here. I mean, even for single filers to get beyond 24%, you have to be making over $182,000, $364,000 for a married couple. You can quickly see that a lot of young people are going to be doing Roth just because you're not going to get into those high tax rates. If you are, God bless you, you're going to graduate to the next level even faster.
