Tom Warns of Potential Ticking Timebombs
Transcript:
Katie Nealis:
So looking at the difference between a 401k and a Roth, what Why would you say that you prefer the Roth now versus a 401k?
Tom Vaughan:
Well, 401k actually has two, two different versions. One is a traditional 401k, which is what most people are familiar with. So traditional 401k, you know, grows tax deferred, you get a write off when you put the money in, and then you when you take, you know, the money out, you pay taxes on it. And basically, what I have seen is that that can be a tax time bomb. And this is what I’ve learned in my practices, I’ve got all these clients in their 60s 70s 80s and beyond, actually, that have these very large tax deferred 401k. And now, once they get past 72, they’re being forced to take money out. And you can end up with a situation where you end up with four or $500,000 worth of taxable income coming out of your accounts. And it is literally it’s just a giant tax time bomb.
Whereas a Roth, and there’s two different versions, there’s a Roth 401k, your company has to offer that, or there’s a Roth IRA. And in both of those cases, when you put the money and you do not get a write off, and so that’s the disadvantage, but it does grow tax free thereafter. And so again, if you look at your entire life, I would give up the write off that year for the tax free growth for the rest of my life. And I’ve done I’ve done the numbers on that, and I really believe that that’s a huge issue. I also believe taxes are probably going to be higher later on in my life. You know, because tax rates are fairly low right now, you know, those types of things. So that’s the difference between kind of a traditional 401k and say, a Roth 401k.
So I’d definitely be looking at that Roth 401k if it’s available!