Avoid These Common IRA Mistakes for Better Retirement Savings, Ep. 257

In this week's engaging episode of the Capitalist Investor, hosts Derek, Tony, and along with guest Dave Abate, delved into some crucial financial planning subjects. Here are the top five hot topics discussed:

1. Common IRA Mistakes
Derek kicked off the discussion by underscoring common mistakes people make with their IRAs. A major point was the confusion between Roth and traditional IRAs, and how selecting the appropriate one can significantly impact your tax situation and future financial stability.

2. Roth vs. Traditional IRA Decision
Tony and Dave explored the dilemma many face: Roth vs. traditional IRA. They provided insights into when each account type might be more beneficial. For instance, while Roth IRAs offer tax-free growth and withdrawals, traditional IRAs may be more advantageous during peak earning years due to immediate tax deductions.

3. The Importance of Saving Early and Consistently
Tony passionately emphasized the need to avoid procrastination when it comes to savings. Whether it's a Roth or traditional IRA, the essential point is to start saving as soon as possible. Not saving or delaying the decision can lead to more significant financial issues down the line, outweighing concerns over choosing the "perfect" type of account initially.

4. Tax Diversification in Retirement
Derek highlighted the benefits of having diversified tax buckets—non-qualified, qualified, and tax-free accounts. This diversification allows for greater flexibility in managing and withdrawing funds in retirement, which can be invaluable during unexpected financial needs or large one-time expenditures.

5. Holistic Financial Planning
Lastly, Tony and Dave discussed the critical approach of making financial decisions holistically. Instead of handling accounts in isolation, understanding how each one interacts within the broader financial picture can lead to more strategic investment choices. This might involve using IRAs for stocks if a 401(k) offers poor equity options or balancing growth-heavy portfolios with other types of investments.

This episode touched upon many nuanced aspects of financial planning, and the expert insights offered by Tony, Dave, and Derek could serve as valuable guidance for anyone looking to optimize their retirement savings strategy. Whether you're just starting your financial journey or re-evaluating your current strategies, these discussions could provide the clarity you need to make informed decisions. 
For more detailed advice and personal consulting, always remember to reach out to a qualified financial professional. And if you have any questions or ideas for future episodes, you can contact the team at info@swpconnect.com. 
Stay tuned and keep investing wisely!

Transcript

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Hello, and welcome to this week's episode of the Capitalist Investor. As always, you have me, diamond hands D, and we got the crew back again today, Tony the tiger. And back by popular demand, Dave Abate. Great to be here. We're happy that it's all on this side of the table, Dave. It's all on this side. I can feel it. Okay. You can feel it. That was very convincing. I'm convinced. All right, well, this week, we got a little more planning, corner topics. So we'll talk about some common IRA mistakes, because, as we talked about a little bit last time, if you go out there and you're searching out information on the Internet, there's a lot that you could be missing, especially when it comes to how you save your money and kind of the tax situation around it. So, you know, common Ira mistakes that we see out there. Well, you know what? I'll even take it just a little bit higher. It's like common tax deferred. You want to have a tax deferred account. That would be the most ideal thing you want to have. So whether it's a Roth or traditional is where you kind of start. It's funny, Tony, because I feel like certain words just are buzzwords that people just gravitate towards. And we'll use, like, the Roth Ira, the Roth 401K. But sometimes, like, that's not the right answer for you. Right. And believe me, there are a lot of pros to roths and the tax advantages that they do bring. But depending on your total situation, your income level, the tax benefit you would get from using a tax deferred vehicle in lieu of a Roth. Like, it might not make sense to use, you know, a Roth vehicle during your highest earning years. Yeah. If you have one choice. Yeah, I like the question of, you know, or, like, I love the Roth. I've been investing, and I'm like, why? I don't want to pay taxes. Right. But, you know, like, you do get a tax deduction for that contribution right now. And there's probably a good. I. There's a probably a good chance that you'll be in a lower tax bracket when you retire than when you're working. I'm gonna. I'll make that assumption. That's not always true, but I kind of see it, because I actually met with somebody the other day, and they were telling me how upset they were that they didn't contribute more to the Roth, because now they have a million, you know, million dollar traditional IRA. They're like, I owe taxes on every single dollar and I'm like, I get it, right? And they're like, yeah, and then they're going to force me to take it out when I'm 73. Like, yeah, I understand that, too, but I'm like, how much money do you need to retire? You know, like, what does your retirement look like? I need, you know, I need six grand a month. Okay, it sounds like$72,000 net. Okay, let's take Social Security out of the equation. Let's call that, you know, 32 grand. Now you need $40,000 more. So what is that like? Okay, you have your tradition. You have to take off 50 grand to live your life, right? You have a million dollar IRA. When. When RMD start, you have to take out 3.65% year one. If you take out 50 grand, you just took out 5%. Problem solved. You know, like. Like, people, like, I. But I owe, like, yeah, but you got the deduction in. In your highest years. And, you know, I just did the math for you taking 50 grand out in Social Security, you're gonna be in probably the ten or 12% bracket. Like. Like, they're the. Again, we talked about this on the last episode. The, you know, the information you sometimes capture off of the media sites like Google or even Yahoo. Finance or whatever those might be, like, hey, roths are better. I get it. I really do. A nice blend is nice. But you have to understand where you are today and where you are projected to be when you retire. Yes, there's pros and cons for both sides, and there's some hidden things that a lot of people don't know about. Like, hey, it's possible, right, to get that tax deduction in the traditional IRA or four hundred one k. And then once you hit. If you play with the rules, you hit age 71 two, you can actually make, like, charitable, qualified. Charitable distributions from that Ira and completely escape taxation. Yeah. And, you know, that's definitely, like, there's little, like, tax moves that we can do. But the biggest thing, though, is the Roth versus traditional. When you're saving into your 401K, actually, it's almost like splitting hairs. Like, you know, like, you're splitting hairs on the amount of money that you need to be saving. Because the next thing I want to talk about is, don't procrastinate. Just start saving, whether it's in a roth or traditional. Like, if you're not saving because you're waiting, like, I don't know which one to do. I'm like, just do one. Just pick a direction, and then you can reevaluate a week, a month, a year later and then you can change it. But it was, but if you don't do it, if you procrastinate, that's the biggest problem. That's the biggest problem I see. Or not saving enough sometimes. That is another common mistake. So first of all, you know, recap one and two, you know, or first one, roth versus traditional could be splitting hairs, right, in the grand scheme of things. But number two is very important. You gotta save 1st, first and foremost, and save as much as you can forward. And I would say the longer that I do this and the more plans that I do and present, it's really good to have money in all three tax buckets so non qualified, qualified and tax free. That is a big advantage once you get there, once you get to retirement, to have money in each one of those buckets, because spending isn't a smooth thing. Sometimes things pop up. You know, sometimes people want in retirement, they want to pay, you know, a big chunk or the whole thing when they buy a car. So having the flexibility to have money in all three of those tax, tax buckets is an important thing. So, yeah, just saving is always going to be a good idea. That's one you don't have to Google. If you, if you start saving that, that's really the, the first battle that you have to win. Yep. Another common mistake. Won't spend too much time on it, but like, just know that if you're married, if you're married and you're married finally jointly, you can contribute for a spouse whether they're working or not working. You know, just another, you know, if you look at your finances as a household, that's just another, another way to save more money. So just always remember that you can save into your iras if you're filing jointly as a married couple. And then the other, the other fourth one is that sometimes, and I've done this in the past, where I've looked at somebody's, you know, their tools. They had a, they had a traditional IRA and I looked at the options in their four hundred one k. And they had like target funds, right. Or just very kind of, I'll call them crappy mutual funds, after I did an analysis of everything. And that is where if, again, if we can not look at the individual accounts and how they're performing, but if we can take a look at how everything is playing together on an aggregate level, maybe I can say, man, your equity, the equities that I can invest in, in your 401K stink. They've always underperformed. They're not very good. We can actually do a lot better job in your IRA with all the equities. And then I can sit there and argue and say, like, I don't know if I can pick better bonds than what you have available because bonds are bonds and they're not the growth engine inside of your savings. Right. The stocks, the equity exposure is. So I've done it before where I'm like, hey, let's make your 401k, let's keep all the bonds in there. And then in your IRA we put the equity exposure, or maybe just have a slight equity exposure in the 401K, find some kind of balance. I've done that before because there's a possibility that your investment options in your 401K are just so bad. Yeah, and I think you're hitting on it again, Tony. The importance of making decisions holistically instead of just in a vacuum, like understanding all the moving parts and the pieces on the chessboard, so that when you do, you know, make a, make a decision in one of the buckets, it coordinates and plays well with the other pieces and moving parts. That's so important. Yep. So diversification, you know, diversification tools to your 401K, again, get exposure to the things that you can't capture in your 401K, in your other investment accounts, whether that's maybe an individual stock or commodities like, hey, you like gold, but I can't buy it in my 401K. Okay, use your IRA for that bitcoin right now that we can do ETF, but your 401K won't allow it. Things like that. And even as simple as, like the one I've been seeing lately is in the 401K plans. Like, a lot of people just have straight s and P 500 index exposure. And as we all know, that thing's heavily tilted towards the growth side of things in the equity world, which is some people would argue has gotten very overheated. So now how can we lean against that overexposure to growth to get you more of a balanced situation? Exactly. Absolutely. Couldn't have said it better myself, taking all my good points. That's why he's here, man, trying to take your job. And yeah, he just delivers. They took their jobs. All right, well, anything else to add in here, fellas? No? All right, well, thanks, everyone, for listening this week. If you guys have any questions or comments or show ideas, hit us up@infolpconnect.com. and we'll talk to you next week. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.