Is Investing in a Roth a Bad Idea?

We came across an article recently that would get anyone’s attention when they’re trying to save for retirement. The headline said this person lost $400k in a Roth 401(k) and warned others about the risk as well. While this headline could very easily be characterized as clickbait, we wanted to explore it a little further and see how much truth was in these numbers.

Join us today to hear Ryan breakdown what the author of this article is saying but also talk more broadly about the Roth. As this article points out, nine out of 10 Americans say they feel like investing in a Roth is a good idea so let’s talk about how we determine what’s best for our clients.

Here's some of what we’ll discuss in this episode:

• Ryan’s favorite show growing up and which Olympic sport would he have the best chance at winning a medal.
• An example of someone in their mid-50s who might benefit from a traditional 401k versus someone who might benefit more from a Roth.
• Why we start with income planning to determine how much we need and what taxes might look like in retirement.
• What are the best ways to financially help a child with their new grandchild?
• Should you park your money in cash if you know a lot of life changes are coming up?

Full Transcript:

Ryan: We know tax rates are going up in a couple of years when the tax cuts and jobs act sunset, but even though tax rates do rise, it doesn't necessarily mean that your tax bracket will be higher in retirement.

Announcer: When it comes to financial planning. You need to cut through the jargon so that you can understand how to achieve your own retirement success. This is Candid Conversations: Retirement Talk with Ryan Cravitz of Cravitz Financial and Insurance Solutions.

Ben: Well, hello and welcome in to Candid Conversations: Retirement Talk with Ryan Cravitz, and we have a good show for you today, Ryan, we're going to kind of bounce around a little bit. I got some getting to know you questions. I want to throw your way, but I want to dive into an article as well that we came across from Yahoo about why a Roth might actually be a bad idea. It kind of goes against everything we hear and talk about a lot, but I want to dive into that with you. It's probably a little bit of clickbait, but we'll go through that and then get a few questions answered that have come into your office here recently. So should be a good show overall. How you doing?

Ryan: Doing pretty good. How about you, Ben?

Ben: I'm doing well. I know we have to be really kind of smart about what we read and what we pay attention to on the internet because there's a lot of clickbait out there and I think this article that we're going to get into in a little bit probably kind of falls under that category, wouldn't you say?

Ryan: Yeah, I would definitely say it's some clickbait. I mean there's some truth to it and we'll dive into it.

Ben: Okay, very good. Well, if you have questions for us, again, you can go to cravitzfinancial.com, a lot of resources there for you as well. You can get podcasts, video, plus some other tools that Ryan has for you, but if you want to call, you can do that at 714-462-9155. All right, we'll start off something that's not financial related to get into the show. I have a little fun to kick off this episode of the podcast. We've got a couple questions for you. We'll call them getting to know you questions away from work here, Ryan. First off, what was your favorite TV show as a kid?

Ryan: Wow, favorite TV show as a kid. Well, I'm going to assume that cartoons count.

Ben: Yeah, absolutely.

Ryan: Okay, good, because that's about all I watched when I was a little kid and I would go with Scooby-Doo because of course that was a very intellectual cartoon. They had some very difficult mysteries to figure out, or at least it seemed like that when you're a kid. So I would say that. And then as I got a little bit older, probably one of the shows that I liked a lot, and it probably wasn't the show as much, but it was just what we did as a family.

So Dukes of Hazard was on, I believe, at eight o'clock every Friday night. And every Friday evening, my mom, my dad, my sister, we all used to go down to this pizza place and a lot of the neighborhood went there as well. There weren't a lot of places really to go, but we would go there and then we'd have to get home in time just to watch Dukes of Hazard. And I'll never forget, my sister and I would spend the night in what we called the magic bed, which is just a pullout bed, but my parents had a pretty big size master and that was always a fun event, so I would have to go with that one, after Scooby-Doo.

Ben: That's pretty funny. Times were much simpler then, weren't they?

Ryan: They were.

Ben: I think back to that, there was Thursday night was the big TV night growing up, Ryan. That was when all the big shows came out, and Friday obviously we're a lot with the kid and Saturday morning, but I don't know that that kind of programming exists anymore. I think it's out there, but I don't know that anybody follows that schedule when watching TV. It's just, hey, want to watch a show? Let me just pull it up and turn it on and not worry about when it actually does air for sure. So it's a good choice. Okay, mine was probably Saved by the Bell. I'm surprised maybe that didn't hit close to home for you with it being kind of a California show a little bit, but always loved that show growing up.

Ryan: That was definitely one of my sister's favorites, I know that. She was always watching that.

Ben: I'll still watch it today if it pops up from time to time. All right, one more question for you then before you jump into our article today. What Olympic sport do you think if you had to compete, if you got a chance to compete, do you think you'd have the best chance of winning a medal?

Ryan: I wouldn't have a chance of winning any of them, but I mean if I had any chance whatsoever, I mean, I guess I would've to go with any of the sports that I've played in the past, which would be baseball, although I haven't played for years, water polo, swimming, and now probably beach volleyball. At least now I play recently, but I'm not quite young enough or tall enough or fast enough or good enough. But nevertheless, those would be the ones I think I'd have the best shot at.

Ben: Those are good ones. The beach volleyball is always a fun sport to watch in the Olympics, although it hadn't been around very long. It's always a lot of energy, super competitive and just a fun sport to watch.

Ryan: Absolutely. Yeah, looking forward to the next Olympics to watch it.

Ben: Yeah, not much longer until that comes around again. All right, Ryan, well let's jump into this article. I mentioned it a little bit, teased it to start the show. We're going to put it in the show notes. It's from Yahoo Finance. The headline will grab you. It says, I lost 400,000 of my retirement savings in a Roth 401K. If you're not careful, you could too. So Ryan, obviously clickbait is what you think right away, but there are, as you've mentioned, there may be some things that have some legitimacy to them in the article. So I thought the first interesting thing was, and as we talk about Roth before on the show, and I know you probably spent a lot of time speaking to your clients about Roth, but then this article, it said there was a survey that found that 92% of Americans think they should be investing in a Roth IRA. I actually thought that was a little bit high. Did you think there's that many people that know about and invest in Roths?

Ryan: I did not think it was that high either. I know I definitely agree with you. That's a high number, and I was surprised by that. In this article too, we talk about clickbait and there is so much of that that is on the internet, and when I first read that headline, I lost 400,000 of my retirement savings in a Roth 401K, and the first thing that I'm thinking is that, well, a Roth 401K isn't an investment in and of itself, right? It's just the account. It caused me to want to dive into read that article, but it's really about the taxes and whether you should actually contribute to a Roth or if you should contribute to a pre-tax account. So the difference between let's say a Roth 401K and a pre-tax 401K, just as an example.

The thing here is that, and I talk about this all the time, that there is no right answer for everyone. So when we look at this type of article, there is a grain of truth to this and for some people I would say that it definitely makes sense for you not to contribute to a Roth IRA, and then for other people it makes a ton of sense to contribute to a Roth IRA. The thing is Ben, it is really something that needs to be decided on a case by case basis. I'll give you a real good example. Let's say somebody's in their mid 50s and they haven't done a great job of saving for retirement really in general. And now maybe they're making a good income and at this point it may make a ton of sense for them to contribute to a pre-tax 401K and get that tax deduction now being in that high tax bracket and allow that money to grow tax deferred.

And then in retirement, it's likely if they don't do a real good job of saving over the years that they'll be in a lower tax bracket and it can make a lot of sense just to go ahead and contribute to that pre-tax 401K now. But in the reverse situation, let's say that you've been a very diligent saver all throughout your working years. You're maxing out your 401K perhaps and you've accumulated a real nice hefty sum inside of your 401K. It might make a lot of sense to now start considering contributing to a Roth IRA or a Roth 401K. What you really need to identify is, and I always say that it starts with the income plan. You've got to look, okay, here's when I'm going to retire, this is how much I'm looking to live on. And then based on that, we got to run the projections to see what does the tax situation look like.

Now, there are some things that are unknown. We aren't going to know for sure what tax rates are going to be. We know tax rates are going up in a couple of years when the tax cuts and jobs act sunset, but even though tax rates do rise, it doesn't necessarily mean that your tax bracket will be higher in retirement. So the bottom line is it's on a case by case basis because again, if you've done a really good job of saving over the years in pre-tax retirement accounts, you've got the RMDs, the required minimum distributions you're going to have to worry about. That's the minimum amount that you're going to have to start taking out once you reach a certain age. For many people it's going to be 73 or it could be 75 depending on the year you were born. And then you have to also think about how does the taxation on your social security work, because other income can cause social security to become taxable, or if you withdrew it from a Roth IRA, would not cause that social security to become taxable, as an example.

Also for Medicare, there's IRMAA surcharges. So based upon your taxable income, you may have to pay more for Medicare, like for part B as an example. So there's a lot of different things that need to be considered. So the key message I think is important to think about here is that if you're reading these different articles on the internet, you have to take it with a grain of salt because everyone's situation is different and you have to make decisions that make sense within the context of your specific financial plan, your retirement plan, look at the income plan and look at the projections, and then you can better identify what is likely the best move to make.

Ben: Yeah, there's a lot to think about here. It is interesting perspective on things, right? I mean, you weigh the arguments for the Roth and why somebody might not, but it's just interesting to think about taxes ahead of time. But to me it still seems like it's a little bit exaggerated. It almost feels like somebody just got completely wrecked by investing in a Roth when that really wasn't the case. I mean, maybe we could have had more income, but it all still have to invest properly. There's a lot of factors that go into that overall, but ultimately the taxes is the big thing you were really thinking through here, right?

Ryan: Yeah, and that's really what they were getting at here in this article. And in the same way that we make decisions on whether we're going to contribute to a pre-tax or a Roth 401K, we also make similar types of decisions when we're deciding whether to do a Roth conversion because we're looking at where are we within the tax brackets. And a lot of times when we've talked about Roth conversions quite a bit, for many it can make sense to do a Roth conversion, maybe after retirement, maybe you retired at 65, but before you have to take out your RMD, which might be at 73 and 75, and being strategic about how much you're converting within those tax brackets. Again, it's case by case. Everyone's financial situation's different. Some people have $10,000 saved for retirement, and some people have 5 million saved for retirement. It's all across the board. Some are married, some have different desires as far as their spending needs in retirement. So there's just a lot of different things that you need to consider. So when you read these types of things, again, take it with a grain of salt.

Ben: All right, very good. Well, that's an interesting article. Again, we're going to throw it in the show notes and you can go ahead and read through that for yourself and follow up with Ryan with any questions. You can go to cravitzfinancial.com. Or just call 714- 462-9155. All right, Ryan, let's go into a couple of questions that have come into your office recently that I thought would be good to bring on the show and answer here. Let's start with this one. So my mom is 85 and because of her dementia, I have power of attorney for her. She has substantial investments, but I have no idea what to do with them. How are you supposed to invest for an 85-year-old?

Ryan: Yeah, so that's a good question and it's going to depend, right? So she's 85 right now. She has substantial investments, but what does that mean exactly? How much is that? And then what are the income needs? So here's the thing, if this is money that's likely going to need to be spent within the next few years, five years, something like that, we need to invest one way, much more conservative perhaps, maybe have cash just in the bank as well, just readily available to handle these types of expenses. On the flip side, if this is real substantial money, so much so that she's got money even beyond what she could even spend during her lifetime, then it could make sense to invest that money more for perhaps the next generation, for the daughter, if really the money is earmarked for that person. So it really comes down to what is the purpose of this money and when is this money likely going to be spent and how much? Those are really kind of the starting points to figure out what's going to make sense as far as how that money should be invested.

Ben: Good question. And one that again, if you have something that comes up like that, it's always best to sit down with a financial professional like Ryan, who's been doing this for over 20 years. You can find them online at cravitzfinancial.com. All right, here's another situation, Ryan. I'm 70 and my daughter's 41. So I was a bit surprised to find out that I'll be a grandmother in a few months. I assume that ship had already sailed. My question is, what could I be doing to help them financially? Should I start a college fund for the baby or take out a life insurance policy on her when she's born, or what else would you suggest?

Ryan: Well, I think both of those are really good options. I mean, certainly a college fund is a nice thing to do. Also, a life insurance policy can be another great way of gifting money to a beneficiary. One nice thing about the life insurance option is, this is something that I did not too long ago with one client is there's at least one company, I think more, but at least one company now that has the ability that when my client eventually passes away, instead of her grandchild receiving that money in a lump sum, she had it set up so that the grandchild will receive that money over the course of 30 years. And so each year the grandchild would get a check for $5,000 and that would be a way just to remember her grandmother at least for the course of that next 30 years when she got that check every single year. So there's different ways you can do it, but that's one that I kind of liked and certainly resonated with my client.

Ben: Yeah, that's very good. All right, here's a couple more. Let's go with this one. How much is a reasonable amount to spend on travel in retirement? My wife wants to do a couple of big trips each year, but if we do that, we'd end up spending even more money in retirement than we do now while we saw paychecks. So that can't work, can it?

Ryan: Well, Ben, this is my old favorite answer. It depends, right? And the reason that I say that is because in designing a retirement income plan, I believe you have to start with figuring out what are your needs first, how much do you need in order to live on a monthly basis? So we're talking for food, housing, all the basic living expenses, and then we got to design in there the wants, the extra things that we're going to want to in order to have the retirement lifestyle that we really want to have.

So I'll give you an example. I was recently working with a couple. We identified the needs, we put that in there. And then also for the first 10 years of their retirement, they wanted to go on an annual trip and it was going to be a pretty nice sum of money, but they wanted to go on a real nice vacation every single year. And so we identified that, we isolated that, and then we took a look at the overall plan to make sure that based on the current projections and everything else that they would be okay. And so that's the thing, start with the needs and then if there is the ability to get those wants, absolutely do it, because as we all know, we can't take it with us.

Ben: It's true. We cannot take it with us. All right, let's go with one more here for you, Ryan. I have a lot of major life changes occurring in the next six months that I think will affect how I should be invested. Should I just park my money in cash until life settles down and I know what my future looks like? That's probably a good one. I'm sure you might get this one a lot with the volatility of the market, just is it better to stay in cash?

Ryan: This is a tough one, but I would say the best way that I could answer this is because I don't know what's going on in life right now and when that may change. I mean, I know they did say maybe within six months, something like that. But are we talking about money that's in a retirement account and you're under 59 and a half and really, I mean, that money's still going to be long-term money and really don't need that? Or are we talking about money that might be invested outside of a retirement account? And then how much are you going to need and when?

And if you know, for instance, you're going to need a lump sum of money, a large lump sum of money soon like within maybe six months, then it can make a lot of sense to say, okay, let me get this money out of the market and go ahead and put this money over here in cash. Because I'm going to need this money very, very soon. Because at that point, you just can't take the risk of a big market pullback. But if this is longer term money, that's a different situation.

Ben: Yeah, I know that's the easy answer, Ryan, but it's the truthful one, right? Everybody's situation's going to be different. There's a lot more details that need to be figured out and determined before you can actually give a thorough answer. So again, if you ever have questions, it's best to sit down and go through all your situation and really look at all the options. And you can always start by giving Ryan a call, 714-462-9155 or online at cravitzfinancial.com. All right, Ryan, good show. We kind of bounced around to a lot of different topics. Ultimately though, if anybody has questions about the Roth and whether or not it's the best investment tool for them to help save for retirement, always encourage you to follow up. But some good insight, Ryan, and again, we'll throw that in the show notes for anybody that wants to read it. We appreciate your time, Ryan, as always, we'll do it again soon.

Ryan: Sounds good.