Intro: Hi, I'm Ed Slott.
And I'm Jeff Levine.
And we are two guys who just love to talk about retirement and taxes.
Look, our mission is simple to educate you, the savers, so that you can make
better decisions because better decisions on the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debate the pros and the cons of a particular
retirement strategy or topic with the.
Helping you keep more of your hard-earned money.
Yeah, but we won't know which side of the debate we're taking until we flip
a coin winner of the coin flip gets to pick which side of the debate they want
to argue, and both of us will have to argue in favor of our respect positions,
whether we agree with them or not.
At the end of each debate, there's going to be one clear winner you, a more
informed saver who can hopefully apply the merits of each side of the debate
to your own personal situation to decide what's best for you and your family.
So here we go.
Welcome to the Great Retirement Debate.
Jeffrey Levine: All right, everyone.
Welcome back to the Great Retirement.
I'm here with Ed Slott.
Ed, good to be with you as always.
Ed Slott: Great to be back with you and a, again, hitting one of my favorite
topics, Roths, but what kind of Roth?
Which is better?
Some people have money.
They say, where should I put it?
My Roth IRA or Roth 401k.
And sometimes you can do both, so we'll see.
Uh, which is better.
So we have to, uh, flip a coin to see which side of the debate.
You will take and then I will take.
All right.
I have my coin here.
Oh, somebody's gotta call it.
We'll call whatever.
Jeffrey Levine: All right.
I'll take tails, Ed.
Ed Slott: Tails, what did you call?
Jeffrey Levine: I called tails.
Ed Slott: All right.
That's what it is.
All right.
What are you taking?
The Roth 401k or the Roth IRA?
Jeffrey Levine: You know, Ed, we're recording this the
Monday after the Super Bowl.
It's a, it's been a long, you know...
Ed Slott: Well it was a commemorative coin!
Jeffrey Levine: Oh, okay.
All right.
The commemorative coin..
Ed Slott: One side, I'll be like, the ref, one side is the Roth 401k and the
other side we'll call tails, the Roth IRA.
Jeffrey Levine: Well, I am going to take, yeah, I'm gonna take the
Roth IRA as the better vehicle here.
Uh, I'm gonna, I'm gonna stick it to you the Monday after the Super Bowl.
Ed Slott: Yeah.
All right.
I like..
So it's a tough call because I like tax free.
All right.
So I'm taking the Roth 401k.
Jeffrey Levine: Yeah, and I'm gonna take the Roth IRA and boy
Ed, I've got a list a mile long.
So out of, out of, out of courtesy on this one, I'll let you make the first argument.
Ed Slott: All right, all right, the Roth 401k.
What's better about it?
All right, uh, I'll ask you, Jeff, how much can you put in a
contribute to a Roth IRA in a year?
Jeffrey Levine: Uh, let's see, $6,500 for this year.
$7,500 if I'm 50 or over by the end of the year.
Ed Slott: Alright, so would 30,000 be higher than that?
Jeffrey Levine: Checks the math.
Carry the one, uh, yes, yes, yes it would.
Ed Slott: All right.
For 2023, those are the limits for the Roth 401k or regular 401k limits,
22,500 with the catch up, 7,500 more.
It's the first time I believe it's ever hit 30,000, uh, that you can put in with
a, Roth 401k, and remember coming up with Secure 2.0, some people might get
extra catch ups going in there, that could really pile on in a Roth 401k.
So there's another advantage.
Higher annual contribution limit.
Uh, Jeff, I'll throw you another question.
Uh, why is it some people can't contribute to a Roth IRA?
Jeffrey Levine: Because they're not aware of the backdoor Roth to get around
Ed Slott: Well, that's that's gonna be where, how you answer me back.
Jeffrey Levine: That's right.
No, because they make too much money.
Of course.
Yes.
Ed Slott: Right.
Yes.
Uh, and there are no limits, income limits on who can contribute to a Roth 401k.
What if you get in trouble?
Uh, Roth 401ks, you know, part of a regular 401k.
Generally, generally an ERISA plan, which means it's got
rock solid creditor protection.
Uh, I don't think so.
You know, that goes by state law when you have IRAs and Roth IRAs
and they may not be as good.
Uh, when I'm talking about creditor protection, it's the gold
standard in an ERISA plan, employee Retirement Income Security Act, uh,
that's the gold standard, both for bankruptcy and other judgements.
You get that in a much stronger creditor protection in a Roth 401k.
Jeffrey Levine: You know, I, I'll, I'll, I'll pick and knit with you there.
Uh, some places you get much stronger creditor protection, but in, in the, as
you said, it's a state by state issue.
In the overwhelming majority of states, your IRA or your Roth IRA
will have roughly an equivalent protection under state law.
That the, uh, now in, in, in fairness in some places, including perhaps our most
populous state, uh, the, the rules are not nearly as favorable at the IRA level,
but in, in most places, most people have about the same protection for their Roth.
Of course, if creditor protection is an issue for you, you
don't want most, you want all.
So I, I will, I will somewhat seed to you there, but I gotta stop you, Ed.
You know, one of the big things, one of the big benefits about, uh, a, a Roth
IRA is it's tax-free nature, right?
And, and, and the ability to invest tax-free for the long run.
Would you agree?
Ed Slott: Yeah.
Jeffrey Levine: Okay.
And so that means that you probably wanna put your best or highest
appreciating, let's call that your, and I don't wanna say your best,
but your, your highest appreciating investments or the things that you
believe over time will go up the most.
Right.
Would you agree with that?
Ed Slott: Yep.
I'm waiting for the setup.
I, I can feel myself getting set up here.
Jeffrey Levine: That's it.
There's a, there's a aha here coming and the aha is, you know, with the plan.
You are stuck in almost all situations.
Very, very, very rarely does the plan give you more flexibility,
be besides, let's say a, a limited lineup of choices that the plan has
chosen for you and with a Roth ira.
Really the, the world is your oyster other than perhaps, uh, you
know, collectibles, life insurance and s corporation securities.
You can own just about anything inside your Roth IRA that you want, which means
you can pick the investments that you believe will go up the most from a much
wider assortment of, of, of choices.
And that's a big deal.
That that's a big deal and that's perhaps the biggest benefit of
the Roth IRA for for most retirees relative to the Roth 401k.
Ed Slott: It's one benefit.
Here's another benefit I talked about, uh, higher contributions.
Uh, when you have your own Roth IRA, are there other people around
that can match your contributions?
Like friends?
Jeffrey Levine: I mean, I guess it depends how nice your friends are, but, uh, no.
In general, you, you, you, you probably would not have matching
contributions for your Roth.
No.
Ed Slott: Which you could have in your Roth 401k and under secure 2.0.
Uh, soon those matching contributions can go to the Roth 401k side, beefing up your
. Roth 401k contributions, uh, that way.
So that's another benefit.
For the Roth 401k.
Jeffrey Levine: Even so far we've focused on the, the big benefit long term of,
of people who are, are using these accounts for, for their intended purpose.
But you know, Ed, as we know, life gets in the way and not everyone who puts
money into a retirement account is lucky enough to be able to wait until retirement
account, a retirement to use it.
And while we're certainly not encouraging folks to raid their retirement accounts,
we do know that for various reasons people need to access money sooner.
If you have a Roth IRA, one of the best things about it for, for young people
in particular who are worried about what if I need the money for whatever, right?
Uh, for, for anything else with Roth IRAs, whatever I put in, in the
form of contributions I can take out immediately without a tax, without
a penalty, and without a reason and without age justification for
any reason, for any purpose, at any time, I can take what I put in, out.
Now if you have a Roth 401K and you've put in money over the years, and
you've been fortunate enough to have some earnings in there, so you've got
kind of a mix now of the money you've put in plus the earnings, et cetera,
are you able to do the same thing?
Ed Slott: No, no, you got me on that.
There're a different, uh, first of all, ordering rules in a Roth 401k,
without getting too technical, it's exactly as you said with a Roth IRA,
your original contributions should be withdrawn anytime any reason.
Tax and penalty free, cause that's the order they come out.
First those, uh, contributions come out, then conversions and you don't
hit the earnings till the last layer as opposed to most distributions.
There are some exceptions from, uh, Roth 401ks and 401ks in general.
You follow what's called a pro rata rule, where each distribution has a
piece of the earnings, so it's not as advantageous if you have to, if
you, you want to get that money out.
Jeffrey Levine: Right.
Cause those earnings are what would be subject to tax and a penalty.
Ed Slott: That's correct.
But another benefit of, uh, Roth 401ks, and by the way, as I said,
I'm a big Roth fan either way, and we're gonna get to that in a minute.
Uh, one of the things you talked about needing the money, uh, with
a Roth 401k, if it's a part of a plan that offers loans, that may
be an option you absolutely don't have with IRAs and Roth IRAs.
Jeffrey Levine: Well, that, that's true, but if I could take my own
money back, I may not need a loan.
So I'll, I will argue on that one.
And you know what, Ed, I, I think one other thing that's really interesting to
note here, i, i, is that the Roth IRA is something that allows you to, uh, to, to
be flexible, to choose where you want to hold it, not only for investment purposes,
but also for estate tax planning.
Ed Slott: That's true.
Jeffrey Levine: For if, if you wanna have multiple accounts, you can set that up.
If you have, uh, certain beneficiaries that you want to keep separate, you can.
So there's a lot more flexibility with the Roth IRA than there is the plan.
At the end of the day, the Plan Roth is still a plan account.
Ed Slott: All right.
Trick question now.
Uh, let's talk about RMDs.
Roth IRAs have no lifetime RMDs.
Jeffrey Levine: Ah, see that's a win for me.
Oh, oh, wait.
Or, or, or is it.
It used to be a win.
In fact, if we had recorded this ad just a few months ago,
that would've been a big pro.
I would've been my, that would've been my, you know, my, my number one argument
for you is that Roth IRAs have no RMDs, but as we know, That is now equal under
the, at least beginning in 2024, Ed, for..
Ed Slott: That would've been your drop the mic.
Jeffrey Levine: That's, that's it.
I, I got one more year where the Roth IRA remains advantageous and that's in 2023.
Roth IRA still have no required minimum distributions, but Plan Roths do.
Imagine being 75, 76 years old this year and having to take money
out of a Roth 401k account, that's growing tax and penalty free before
you actually needed the money.
It would be criminal almost to do that.
Ed Slott: Right.
So that goes away.
That's a good change In secure 2.0, no lifetime.
I, uh, same thing with the Roth.
We're only talking about no lifetime RMDs, the beneficiary issue.
That's another issue.
They still follows the other, the other general rules for beneficiaries.
But here's an interesting thing you know, maybe you can do
both, cause we have this debate.
We like the Roth.
We like the Roth 401k.
Jeffrey Levine: That is, that is the show, Ed.
That's the whole premise of the show.
Ed Slott: Yeah.
Yeah.
All right.
But, uh, can't you do both?
You know, a lot of people don't know this.
If you have the disposable income and you qualify for a Roth IRA contribution
or a backdoor Roth, how you can get money in and you have the money
to load up on a Roth 401k at work.
You can actually do both.
I know some people think you can't, cause it almost sounds too good to be true.
Jeffrey Levine: It is.
It's a great, uh, it's, it's great when you can do it.
Now, it is a little bit limited in the sense that if you have that much
disposable income, your income is probably high enough that you don't qualify to
go directly into the Roth IRA, but for those where it, it, it, it, you know where
you have it, maybe have other savings that you can live off of, you know,
someone who's, uh, who's able to do that.
That it, it is a home run and Ed, you know, more, this is a
case where more is better, right?
Like this, this some is getting more is better.
Ed Slott: The only reason I bring it up, because we're debating, we almost
sounding like, well, do you have to choose between a Roth IRA and a Roth 401k?
You can have both.
If you have the income.
So that's the story.
Uh, we both like Roths, however you can get them in there.
Roth IRA, or Roth 401k, they both grow tax free for the rest of your
life and even beyond, even under the limitations of the Secure Act for
another 10 years for most people.
Jeffrey Levine: On that, Ed, we agree.
And another thing we agree on is that while there are two sides
to every coin, your life and your retirement decisions are too
important to leave up to a coin flip.
And that's why one thing that we continue to agree on, Ed is that if
there is a big decision in your life, You wanna make sure you're talking
that through with a knowledgeable financial advisor or tax professional
so that you can weigh the pros and the cons of different options against your
specific set of goals and circumstances.
Trying to figure out whether a Roth IRA or Roth 401k is right for you.
It's great to have the knowledge that you can get from this podcast, but
you need to talk through big decisions like with a knowledgeable professional.
Ed, there are lots of benefits to both Roth IRAs and Roth 401ks and you
know, maybe we missed something or maybe we've persuaded some listeners.
So we'd love to hear from you if, uh, if you'd like to give Ed and I a
shout and let us know what we missed or what you thought and whether you
think the Roth 401k or the Roth IRA is the better vehicle for you and why?
Reach out to us.
Let us know.
You can hit up Ed on Twitter @TheSlottReport that's
@TheSlottReport or myself @CPAPlanner.
Again, that's @CPAPlanner.
We look forward to hearing from your comments and would love to know what we
should debate in an upcoming episode, Ed?
Ed Slott: Yep.
Plenty more to come on the great retirement debate.
See you next time!
Outro: Jeffrey Levine is Chief Planning Officer for Buckingham Wealth Partners.
This podcast is for informational and educational purposes only, and should
not be construed as specific investment accounting, legal or tax advice.
Certain information mentioned may be based on third party information,
which may become outdated or otherwise superseded without notice.
Third party information is deemed to be reliable, but it's accuracy and
completeness cannot be guaranteed.
The topic discussed in corresponding arguments are those of the speakers
and may not accurately reflect those of Buckingham Wealth partners.