Tax-Deferred vs. Roth Contributions: Weighing the Benefits

Seth should prioritize Roth contributions to maximize tax-free growth despite the complexities of tax-deferred accounts.

### Understanding Roth vs. Tax-Deferred Accounts: Weighing the Benefits
* 🤔 Seth questions whether contributing to a tax-deferred account is advantageous if his tax bracket is **below 25%**, suggesting a preference for **Roth contributions** to **avoid taxes in retirement**.
* 📊 The general rule states that individuals in lower tax brackets (below 25%) should consider **Roth contributions**, while those above 30% may benefit more from **pre-tax contributions**.
* 💰 The speaker emphasizes their preference for Roth accounts due to their **tax-free nature**, especially when individuals anticipate **lower tax rates upon retirement**.
* 🏦 It's noted that much of the money in tax-deferred accounts often comes from employer contributions, such as matches or profit-sharing, which can be seen as **"other people's money."**
* 📝 The speaker acknowledges that while Roth contributions are recommended, there are **complexities in implementing new legislation** regarding employer contributions to Roth accounts.
* 💡 Tax-deferred accounts may have their drawbacks, but they still serve a purpose, particularly when **leveraging employer contributions to enhance wealth-building**.
* 🔍 The discussion highlights the importance of **understanding the differences between account types** and making informed decisions based on **individual financial goals and situations**.
* 🚧 Ultimately, while Roth accounts are favored, there is room for tax-deferred accounts in a comprehensive financial strategy, particularly when considering **free money from employers**.

[Music] All right, Seth's question is up next. He says, Howdy, theoretically, is there any advantage to filling a tax-deferred bucket if my tax bracket does not justify it? It seems prudent to load up everything in WTH and avoid all taxes come retirement. What do you think? We get this question a lot. A lot of people tell us, Hey, I hear your rule of thumbs, and I know that you say that the dividing line between doing pre-tax and Roth depends on my tax rate. If I'm in the tax situation where I add my marginal federal rate, my marginal state rate, and it's below 25%, I should probably do Roth contributions. And if I add my marginal federal, my marginal state, and it's above 30%, I should look at pre-tax. Well, I'm in the situation where I'm below 25%, and I'm probably going to stay in 25%, and I'm probably not going to move out of that. Should I just do Roth 401k and Roth IRA and HSA and build up the tax-free bucket?

Is there something I'm missing out on? There's something I'm not thinking of when it's raw, tax-free compared to tax-deferred. Yes, Seth, I've said this many times. My favorite of the, if you're naming your favorite children, the Roth is my favorite because it's tax-free, is ideal. We only recommend outside of that when you really get in those high tax rates and you're hoping that there's an arbitrage situation where you're paying highest tax rates right now, but you think when you retire your income's going to drop substantially and you're going to be able to pay at a lower tax rate. But what you're getting to and what Bo is alluding to is that there's another way you get money in these tax-deferred accounts, and it's typically other people's money, meaning your employer, OPMS, this money to you as a match. Now look, I know that, or profit sharing. I know that there's legislation that passed recently that will allow even this money to be Roth.

but tell me in the comments section. I'd be surprised if anybody is actually getting employer money into the Roth yet, and they're getting additional stuff put on their W2 because these are some of the first years you can do it. And I'm telling you, I bet there's not many out there because this is like most of the stuff that's written into some of these new legislations. They sound great, but they're so complex to implement that it takes years for the market to actually get caught up to where you see this actually being a decision point for you. So, I got to think, Seth, most of your tax-deferred money is not going to be your choice. It's just going to be other people's money that gets put in that for you, for your benefit, and you get to maximize that free money and really turn it into your wealth-building process. So, if all the rules of thumb suggest, Hey, continue doing Roth, continue doing Roth, it's not like Seth should forgo the tax-free opportunity in order.

to build tax-deferred. No, that probably doesn't make sense now. There probably is another line of thinking when you think about like Roth versus after-tax, depending on your goals and how you approach that. But specifically for this question, pre-tax versus Roth, I don't think it's crazy. Yeah, tax-deferred has the most issues probably out of the three different account types, you know, tax-free, which is Roth, the after-tax or your brokerage accounts, and then tax-deferred. You feel sad that that tax-deferred sits in third place, but it has a purpose. Like I said, in other people's free money is definitely still a powerful resource in your wealth-building journey. I love it. We're getting some people. My Roth is 401K match is not. No Roth 401K match yet. Um, yeah, so it sounds like not seen a yes. I mean, I don't, this is, this won't be in that part, but it's just like a few years ago. This was a comment that came up a few years ago. The legislation came out.

that your employer could pay back student loan debt tax-free. Um, if they did it, so I immediately researched the way the math works. It's like if you pay someone $5,000 a year, if you pay someone $50,000 a year, they could elect to defer $5,000 of their comp to go pay student loans. So, they're only taxed on 45. It was a great benefit. It was like a huge thing. I looked at, I got both our CPA involved, and you know, and it just got to the point where they're like, Yeah, this thing is so cumbersome. There's not a mechanism to make this. So, I'm sure there's probably some big Fortune 500 company that has a whole department that has figured out, but for most small businesses, these things sound great in the brochure, but the implementation is just almost impossible. I mean, think about the fact of even like Roth and the 10-year rules or IRAs in general. The 10-year inheritance rule. It took them

years to come up with clarification, so some of these things are much easier said than to do. mhm.

Should We Go 100% Roth to Avoid Taxes in the Future?

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The Money Guy Show

Seth questions the benefit of filling a tax-deferred bucket if his tax bracket is below 25%.

The common advice is to do Roth contributions in lower tax brackets and consider pre-tax in higher ones.

However, tax-deferred accounts can also offer benefits through employer matches and profit sharing, with recent legislation allowing these contributions to be Roth as well.

The Complexity of Employer Contributions to Roth Accounts

Employer contributions to Roth accounts are still rare, as the new legislation's implementation is complex and takes time.

Most tax-deferred money will come from other people's contributions, which can be a valuable resource for wealth-building.

The discussion around pre-tax versus Roth contributions is nuanced, and tax-deferred accounts, while often seen as less favorable, still serve a purpose in the wealth-building journey.

Challenges of Tax-Free Student Loan Repayment by Employers

Employers could potentially pay back student loan debt tax-free by allowing employees to defer a portion of their compensation.

However, the implementation of this benefit is cumbersome and challenging for small businesses.

The complexity of similar financial mechanisms, like Roth IRAs and inheritance rules, further complicates the process.

Clarification on certain issues takes years, making them difficult to address.

Some proposed changes are easier to suggest than to execute.

The complexity of these matters can hinder progress and implementation.