Can This Be True About a ROTH vs a Traditional IRA?

In episode #5 Hari and Phil break down the surprising similarities of a ROTH IRA and a Traditional IRA.

If you ever want to stump your accountant. This will do it. Sit back and listen as your hosts use simple math to show you that a ROTH and IRA aren't that different and what market conditions plus tax rates you'd need to have one outperform the other.

Go To https://www.philbodine.com/401K to learn more about the concepts mentioned in today's episode.

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This material is for informational purposes only. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Transcript

[Unknown6]: 0:02

hey guys and welcome to another episode of the wealth and overdrive podcast this

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he gos and welcome to another episode of b wealth and overdrawing podcast this is

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is your host harry luca and phil bodine how are you doing today phil

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your host harry luca and phil bodine how are you doing today go great as usual i woke up this morning i have a pulse on this side of the grass it's going to be a good day

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man i'm come to keep that motivation for me every single morning as well well

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well it could be thirty

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it could be thirty degrees where you're at right

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oh no no that's defin no we're we're bright and sunny today

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sunshine and texas right that's what it's california is all about

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that's why that's why i moved here i want

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well i

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to pay more in state income taxes

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i did i

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i didn't really mean to bring up the topic of taxes so i know sometimes

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didn't really mean to bring up the topic of taxes cause i know sometimes that can put in a bit of a fluster a downward spiral but

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it it is a very sore subject with me carry

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but

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once it actually plays really really well or has a huge part to play into the

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it actually plays really really well or has a huge part to play into the conversation we're going to have today now for those watching on the screen you

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conversation we're gonna have today now for those watching on the screen you will

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will see there is kind of a presentation that goes through this but if all you're

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see there is kind of a presentation that goes through this all the doing listening

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doing is listening through the podcast first of all we appreciate you very much

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to the podcast first of all we appreciate you very much for tuning in and hanging

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for tuning in and hanging out with us today you can either head over to the

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out with us today you can either head over to the youtube channel it will be

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youtube channel it will be recorded and host over there so you can always watch it

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recorded on host over there you can always watch it with the presentation if not

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with the presentation if not this presentation has been given around the country

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this presentation has been given around the country it's a very few selected

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to very few select audiences and phil has a very good way of explaining his way

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audiences and phil has a very good way of explaining his way through that so you

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through that so you can still get through this presentation even if you can't see

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can still get through this presentation even if you can't see the slide right now

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the slide right now today what we are going to be going over is probably a very i

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today what we are going to be going over is probably a very i'm say top three top

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say top three top five question you get in the office wouldn't you say

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five question you get in the office with yeah many people are always asking me the common question to roth or not to roth would be a good title for this

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that that is the question right

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yeah should i deposit money in an ira or should i do a wrath and what's the difference between the two i i i get most often

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what's the difference between the two im i and

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and just so people know we will be answering that question after the slide but

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just so people know we will be answering that question after the slide but what's

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what's most valuable about this today and i think this is a very powerful side in

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most valuable about this today and i think this is a very powerful side in the fact that when this is given at any presentation no matter where you are in your

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the fact that when this is even at any presentation no matter where you are in your life financially as long as you have a rough understanding of an ira or a

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life financially as long as you have a rough understanding of an ira or a rough

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rock irra i think when this is completed people are always kind of left with their

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ira i think when this is completed people are always kind of left with their mouth

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mouth hanging on the table you say so

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hanging on the table wouldn't you say so ville can always be an opener

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yeah they don't know what to believe and when they don't know what to believe they they don't do anything so it it just

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so it it just

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this type

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this type of equation

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of information needs to be discussed in front of a qualified advisor

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yes

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yes

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um what is going to be shown here pretty much could stump any one of your

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what is going to be shown here pretty much could stumpp any one of your financial

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financial professionals or people that you seek advice from

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professionals or people that you seek advice from

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but

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but at the same time bill has been his word for thirty three years all these

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at the same time phil has been us for over thirty three years all these slides in

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slides and communication does go through compliance and so this is very accurate

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communication does go through compliance and so this is very accurate in how this

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in how this is presented and phil we'll go through a couple of disclaimers of why

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is presented and phil we'll go through a couple of disclaimers of why these

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these numbers make sense and how they will make sense so on that note phra or

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numbers make sense and how they will make sense so on that note phil i want to hand this over to you what is the biggest difference between an ira or should we

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should we say what are the differences i

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say what are the differences with the ira and a rough ira

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thanks har and again every everyone's different and different circumstances apply to different people but essentially what an ira is anything that you deposit monies into on a pre tax basis in other words you're going to defer the tax versus pay the tax now and defer to another time so ira you're depositing moneys into on a pre tax basis or something like your four hundred one thousand versus a wth i need to back up on that first one needs to understand the differences between a wth array and an ira which is an individual retirement account in an i r a these particular accounts you deposit monies into with pretax monies the monies grow tax deferred not tax free and then when you withdraw the monies from these accounts they are taxed as ordinary income versus a wrath after tax money goes in they grow tax free and then you can withdraw monies from the account tax free so big differences between the two and the mechanisms as to how they work does that make sense

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it does

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so let me go through real quick and let's use an example and as harry alluded to earlier in the podcast if you want to stump your accountant and most advisors just walk him through this exercise so hopefully you'll get a chance to see the slide and walk through our numbers first let's assume the pretax ira we're going to deposit thirty thousand dollars into this account just make a one time deposit of thirty thousand dollars and we're going to assume that that account's going to grow by seven point two percent for ten years now why did i choose seven point two percent well the rule of sevent two if you divide the rate of interest divided into the number of years that will tell you when your account will double in value so if you took some two divide it by ten i said that wrong harry what is that

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oh slide's been wrong all these years

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slide has been wrong all these years now yeah it's been wrong all these years yeah it is right no i had to the ma i'm like what the crap no the reason i chose um seven point two percent is by applying the rule of seventy two you just take uh the rule of seventy two means you divide that number into the amount of interest that you're going to earn on a given account and it'll tell you how many years it takes for your account to double so in this case we put in thirty thousand dollars at seven point two percent interest for ten years our money would double from thirty thousand to sixty thousand that's a tax deferred deferred value of sixty thousand and let's just assume that your annual interest income again is seven point two percent interest which your income off of that sixty thousand would be roughly four thousand three hundred and twenty dollars and by the way we don't get to keep all that the taxman is first in line we call the taxman the good hands people they they they need to be paid so as that money comes out of the account let's just assume that this person is in a thirty three percent income tax bracket so if we would draw four thousand three hundred and twenty from the account we would owe a tax of one thousand four hundred twenty five dollars and sixty cents which our net income would equal two thousand eight hundred and ninety four dollars and forty cents still with me harry

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absolutely man

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okay so the other side of the coin would be the wrath and in the wth array again we would we really be able to deposit a full thirty thousand dollars into the account and compare apples to apples no we we can't we would have to pay tax on the money first that money would then we would have net to invest twenty thousand one hundred so assuming the same tax rate of thirty three percent just like on the previous side we can't deposit thirty thousand into the wrath because we'd have to pay tax on that first and so we'd have net to invest twenty thousand one hundred versus thirty thousand on the side and the question i always pose to

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well

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our audience is this which do you think will have more net spendable income question mark the thirty thousand dollars that we were able to go all in into

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yeah

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the ira or the rod array of twenty thousand one hundred and there's really only two reasons people invest money it's taken me over thirty years to figure this out the only two reasons that people invest money is to spend it now or to spend spend it in the future well how did these two accounts spend let's calculate that assuming for ten years the tax rate remains the same and both accounts are invested in the same investment and we have a withdrawal rate of seven point two percent which do you think which side do you think will have more net spendable income the ira side or the wrath i a side harry what is your assumption

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well

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well i mean i think many tend to lean on the ire side particularly because it the

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i mean i think many tend to lean on the r ira side purely because the higher

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higher number just

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number just makes you feel that's where it's gonna end up

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right there's more money compounding there's more money deferred and we're just essentially just deferring the enjoyment of the money to some other point in time and we're going to do that for ten years but let's look at the wrath we put in the thirty thousand we we we paid the tax first we had net to invest twenty thousand one hundred we

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why

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invested that in the same investment as we did the ira and we got seven point two percent interest for ten years which as we all know the rule seventy two means our deposit of twenty thousand one hundred will double for forty to forty thousand two hundred over ten year period that's a tax free value of forty thousand two hundred over ten years which sps better assuming the same withdrawal rate and both of these worlds have the same tax the same investment the same amount of interest the same withdrawal rate everything is remains the same lo and behold the answer is the same there is no difference it's the same two thousand eight hundred and ninety four dollars and forty cents does that surprise you

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yes

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why does that surprise you you would think and most people think i would have more money more nut spendable income in the ira than the wrath but however if both sides remain the same same tax same amount of interest being earned in both accounts and the same withdrawal rate we have the same amount of net spendable income how in the world cannot be

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more to the point how has not this not been shown or educated in any other area

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has not this not been shown or educated in any other area

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i'd imagine for many listening to this this is probably the first time

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i imagine many listening this is probably the first time

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you've seen this and i imagine is quite a few questions i know phil one of the you've seen this and i imagine is quite a few questions i know phil one of the

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you've seen this i imagine it's quite a few questions i know phil one of the biggest questions you'd probably get is what about

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biggest questions you'd probably get is well what about biggest questions you'd probably get is well what about the

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the actual tax rate is

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actual tax rate itself what

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yeah so

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would happen if it went up or down on what affects that

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exactly i mean we we live in an ever changing world i mean that is one of the guarantees and life well there are multiple guarantees in life one is death the other is taxes we that's one thing that's that's sure to go up if you wanna invest in something that's sure to go up invest in taxes because we all believe that taxes are going to go up in the future in this scenario if taxes were to go up and didn't remain the same you obviously you would lose on the ira side you would have less net spendable income and thus that's why most people today especially while taxes are on sale today it probably makes the most sense to pay tax now and deposit the monies into a never tax account meaning the wrath ira because in the event i deferred the tax and tax rates were to go up in the future obviously i would lose on the left hand side of the screen i would lose in the ira because i chose to defer the tax and pay the tax later just kick kick that can down the road in that event absolutely i i would lose every time if however conversely if tax rates today were eighty percent and i could pull it out at a lower tax rate i could win on the ira side versus the wth ira side when it comes to net net amount of income that would be spent however i don't know too many people you know a lot of people say i'm gonna retire in a lower tax rate all that means to me if you really believe the myth that you're going to retire in a lower tax rate you just didn't plan for retirement um

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what do you mean by that phil

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well you plan to be poor or you're dependent upon someone else for income i don't think anybody plans to for failure

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right

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i want i've been doing this a lot of years harry i've not yet met anyone that i've worked with over the years that actually retired in a lower tax bracket i've reti i've worked with people that retire the same tax bracket but not

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mhm

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a lower tax bracket so obviously we don't want to plan for failure and we don't want to retire to uh in a lower tax bracket that's that's just planning for failure

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so do many pe have you ever had people challenge you when they see this slide that it

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so you ever had you when they see this slide that it just can't be true

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just can't be true that there's no way that's possible

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they actually get their calculators out and they they'd look at the math and feel your your mouth is right you know i i would have thought the other way around but again assuming both sides everything remains the same tax rates remain the same the uh interest remains the same withdrawal rates remain the same there is no difference

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and i think of the same some people have said well why only thirty thousand and i think of the same some people have said well why only thirty thousand

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and i think the same that some people have said well w thirty thousand dollars it

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dollars it doesn't matter if it's two hundred fifty five hundred or million dollars it doesn't matter if it's two hundred fifty five hundred or million

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doesn't matter if it's hundred fifty five hundred or million dollars the map is

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dollars the math is the math and the outcomes the outcome isn't that right dollars the math is the math and the outcomes the outcome isn't that right

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the man and the out come correct correct

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yeah

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so regardless of what all the financial entertainers are telling you on tv tv shows radio shows uh be be careful uh be careful what you listen to be careful what you employ when it comes to your own personal financial situation when you bring up a

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and you bring up a good point you know we we've been touch us a couple of times

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we've even touched this a couple of times you know when it comes to these

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you know when it comes to these financial entertainers that's the people you see

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financial entertainers as the people you see on tv pushing certain products or

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on tv pushing certain products or things on those lines and influence as we see on

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things on those lines and influence as we see on social media is one of these or

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you know social media is one of these or why would someone push one or promote one

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why would someone push one or promote one over another do you feel

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over another do you feel

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um sometimes out of fear i mean

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again

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a lot of people i harry let me ask you do you believe tax rates are going up going down or staying the same over the future

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i'd have to say they're going up

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they like i said one thing if you want to invest in one thing that sure that's go sure to go up its taxes so but at the same time um my best advice is to be in front of a knowledgeable advisor who can help you explore your overall short term in long term uh retirement objectives so this is just one example of how people can be let astray by you know hey you're going to retire lower tax record so they shovel all their money into the ira side when i believe you should diversify your tax obligation and you know that's another podcast is you know our tax control quadrant we don't want to shovel all our monies yes it's important to diversify our assets but tax diversification is important as well so we'd want to at least employ maybe an ira and wth deploy assets into both tax strategies

[Unknown6]: 20:39

absolutely and i think like you say it's uh everyone's different there's no right

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absolutely say it's uh everyone's different there's no right or wrong way everyone

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or wrong way everyone's scenario is is definitely independent to their own so

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scenarios is different independent to their own so we're definitely not on this

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we're definitely not on this podcast to give any advice just basically shine a big

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podcast to give any advice just basically shine a big spotlight on what is out

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spotlight on what is out there the myths and the lies that are being marketed to

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there the myths and the lies are being marked to everyday people and some of the

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everyday people and some of the things we've been coming up with now i think we're

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things we've been coming up with now i think we're going to get a lot of great

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going to get a lot of great feedback maybe some angry feedback primarily about

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feedback maybe some andre feedback primarily about this stuff just can't be true

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this stuff either just can't be true we do definitely run into people that are

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we do definitely run into people that are very go headed because they've just been

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very bone headed because they've just been embedded with this false information

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embedded with this false information for so long in the fact that you know

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for so long in the fact that you know traditional financial planning and advice

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traditional financial planning and advice you know has been failing in the past a

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you know has been failing in the past a really good resource or something to kind

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really good resource or something to kind of help people coach along and how we

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of help people coach along and how we like to think about things over here is you

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like to think about things over here is you can download one of our free guides

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can download one of our free guides that i think we created five six years ago the

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that i think we created out five six years ago the four one paper shef yes

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four hundred one k bro she film you can just head over to phil boden com ford s four hundred one thousand as a

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he was head over to phil bodine dot com for slash four o one k as a free download

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free download and i still pdf or just shop in your email it's about five or six

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and i saw pdf or a shop in your email it's about five or six pages you just read

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pages you can just read through that and even that alone will break through some

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through that and even that alone will break through some of these concepts and

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of these concepts and some of the ways that we think a little bit differently or

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some of the ways that we think a little bit differently or the proven concepts of

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the proven concepts what we believe in

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what we believe in

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on

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on the myths and the lies that have been put out there

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the myths and the lies that have been put out there phil what are some other maybe

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what are some of the maybe core questions that you receive on this concept we wrap

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core questions that you receive on this concept before we wrap it up today

[Unknown5]: 22:04

it up today well i mo everyone's different i mean

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okay

[Unknown5]: 22:22

i we people i believe just need better information to make better informed decisions going forward um and again do you want to deposit monies into something that's always taxed or do you want to deposit your monies into something that's never taxed well if if i were to have my choice i would want all my monies to be deposited deposited into something that's never taxed however if we could show a strategy for people that have deposited monies or shoveled all their monies into pretax accounts if we could show them how to withdraw those monies and wash the tax or avoid the tax through other strategies that could be a huge benefit for them

[Unknown6]: 23:31

and you

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so it's not one is better than the other it's different strategies for different people in different circumstances

[Unknown6]: 23:41

yep and what's best for

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for them

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them well

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well bill i think again i think we've definitely raised a couple of eyebrows

[Unknown6]: 23:43

phil i think again i think we've definitely raised a couple of eyebrows dropped a couple of draws on jaws on the table with this one again if you want some more

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dropped a couple of drawers on jaws on the table with this one again if you want

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information on this by all means you can pop over to the four hundred one thousand

[Unknown5]: 23:50

some more information on this by all means you can pop over the four hundred one

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brochure we just mentioned but at the same time you can also head over to phil

[Unknown5]: 23:54

thousand brochure we just mentioned for the same time you can also head over to

[Unknown6]: 23:57

bodine com ford resources on there you will also find a great

[Unknown5]: 23:57

build god com resources on there you will also find a great

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library of videos and content and great information that will also help guide you

[Unknown5]: 24:04

library of videos and content great information that will also help guide you in

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in the right direction on some of the concepts that we we fully stand behind at

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the right direction on some of the concepts that we could stand behind at the same

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the same time

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time

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if this podcast has provided great value that you know people in your life your

[Unknown5]: 24:15

if this podcast is providing great value that you know people in your life your

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family that would receive

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family that would receive the benefits from seeing this stuff then by all means

[Unknown6]: 24:22

benefits from seeing this stuff then by all means please forward comment below

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things forward comment below give us a share by all means write a review on the

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give us a share by all means write a review on the matter where you're watching

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matter where you're watching this on itunes youtube no matter what it is we much

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this on itunes youtube no matter what it is we much appreciate it and the praise

[Unknown5]: 24:33

appreciate it and the phs goes a long way and we really like the feedback feel

[Unknown6]: 24:35

goes a long way we really like the feedback feel anything else to wrap it up

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anything else to now

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hi

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again love to wrapp it up with life is good eternity is better prepare for both

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and on that though we'll see the next podcast

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and on that there we'll see the next podcast and i made so you're gonna laugh