For far too many people, by the time they start having serious discussions about retirement, they are already behind.  They haven’t saved properly, or there is no solid plan forward, or they just haven’t executed the plan they have in place.  And getting behind (because you know, time waits for no one) causes people to try to “make up for lost time” and they become more susceptible to “get rich schemes”.  Well, if get rich schemes worked, everyone would be rich! That is why the last two articles have focused on the two most popular retirement planning vehicles of our time, 401ks and IRAs.  Both have their advantages and disadvantages, but here we explore and contrast the two major options that may be available to you and try to help you determine which one is best of you.  We are going to compare traditional 401ks and IRAs with Roth 401ks and Roth IRAs.

The traditional 401ks and IRAs allow a person to pay into their retirement without paying taxes on the money they contributed into the plan.  Sometimes, these types of contributions are called, “before-tax” dollars or “pre-tax” funds.  Not being liable for the taxes on the contributions reduces the amount of taxable income to the person pays less in taxes for a given year.   This translates to less taken out of your employment checks and more spending money in your pocket.  These contributions are invested in an account gaining interest (hopefully for years) and can grow to a substantial amount of money!  Meanwhile, thousands are saved in taxes during the contribution years.  But there is a catch, and it’s a big catch.  When the money is withdrawn from the account, it is taxable.  All the money is taxable, the contributions and growth!  So, those years of contributing without paying taxes are made up on the back end; at retirement.

Roth 401ks and Roth IRAs allow a person to pay into their retirement, without any immediate tax breaks.  These contributions are commonly referred to as “after-tax” dollars or “post-tax” monies because the taxes have already paid on their contributions being put into the plans.  And just as before, the money is invested and over years, it can grow to be a sizeable nest egg to be used at retirement.  But here is a nice advantage; when the money is withdrawn for the account, there are no taxes due!  Because the account was funded with Roth, or “after-tax” dollars, the contributions and the growth are tax exempt at retirement.

So which option is better?  Traditional plans? Or Roth plans?  Well, ask yourself the following:  Would you rather pay taxes ONLY on the contributions to the retirement plan, or would you rather pay taxes on the contributions AND the growth?  That’s a silly question! Everybody wants to pay as little in taxes as possible.  Who wants to pay more!  Besides, nobody knows what the tax rates will be in the future and I don’t want to have to worry about it when I am retiring.  That is when I’m going to need the money I saved.  And remember, after years of consistent investing, the majority of the money in a retirement plan will be growth from the investments, not contributions.  So why would I want to taxes on all that growth if I don’t have to?  These points make Roth plans so popular and my personal preference!  But, for some, the advantage of larger “take-home” checks is too good to pass up!

Retirement plans with Roth options look better for long-term investing, but traditional options are not bad and should not be ignored if Roths are not a viable option.  The important thing is to do something!  Start early, it’s never too early.  I tell my younger co-workers they should have started thinking about retirement their first day on the job.  Why?  Well, because according to an article the Business Insider [1], most Americans spend more time planning vacations than retirement.  And separately, true wealth, the kind of wealth espoused in the Bible, takes many years to build.  And most going into retirement, have worked hard enough to have a nice nest egg for their years after leaving the workforce, but if it is not properly planned, there will be a lack the funds to enjoy the golden years as they are envisioned.  Hard work and poor planning don’t translate to riches; in the game of life, you don’t get an “A” for effort.  So take some time now to plan your retirement strategy so you can maximize the opportunities God has given you.  Isn’t that what a good steward would do?  God Bless.

[1] Americans Spend More Time Planning Vacations Than Retirement

Libby Kane – https://www.businessinsider.com/americans-plan-vacations-over-retirement-2014-6