I decided to write about my investing experience after a number of holiday gatherings with stock market conversations. The following is not an investment strategy, it is my personal investment experience, and 100% true.
While still working, my company offered its employees a, self-managed, Individual Retirement Account (IRA), known as a Traditional 401k. The contributions are taxed when deposited, and the profits are taxed at withdrawal. A few years later, we were offered a Pre-tax 401k, which meant we did not pay tax on the contribution, or any profit, until we withdrew it years later in retirement. We were told; use your money now, more money to invest, pay tax later, your tax bracket will be smaller at retirement. That was a lie. Then, years later we were offered yet another IRA version, a Roth 401k. This meant we paid tax on our contribution, but never on any profit. Not much was known about this, since nobody had contributed or withdrawn from it yet. We were just getting used to the pre-tax version, where I stayed until retirement.
Because I had visions of a comfortable retirement, I looked for an investor that shared my investment vision. Since I could not find one, I did my own investing. I watched the market daily, and put my money into mutual funds that were steadily climbing and paying sizeable profits. When that fund leveled off, I moved my money into another fund on its way up. This is called “chasing the market.” By the time I retired, with no company match, my balance was over eight times my original contribution. I was making so much money, I retired early, years before Social Security kicked in. I started spending money like it was candy. I bought property, built a barn, bought a tractor, and started building my retirement home. It wasn’t until a year later, when I did my taxes, that I found out I made the biggest mistake of my life. All my pre-tax savings (401k), was not savings at all. Since no tax was paid, it is called income, and all my contributions and profits are taxable. That year, I had to write a check to the IRS for over seventy thousand dollars. The following year; along with paying tax on my normal living expense withdrawals, I also had to pay tax on the $70,000.00 I took out the year before. If I would have invested into a Roth IRA, that $70,000.00 would still be in my account. There would be no tax due, that first year, or any other year in the future. My money would be considered savings, not show up anywhere, and never, never, be taxable.
Think about this. Why do we have an IRA? We put money away, while working, to live on when we retire. So why do we; while working, making money, and can afford it, put off paying tax, until we are out of work, with no income, and need to take money out of our 401k to do it?
Remember when Obama offered super low interest rates. I applied and was turned down because I made too much money. I argued that I did not have a job, I was unemployed and had no income. I was living strictly off my savings. They told me since I didn’t pay tax on my contribution, it is considered income, not savings. Adding to this; medical supply companies, prescription drug companies, and even the IRS, give discounts to low income retirees. With just Social Security, and no pension, I depend on my 401k to live on. However, when adding my 401k withdrawal, I am considered a high earner, and ineligible for any discounts. To make it worse, for every dollar I take out, I need to take out an additional 26.25% for taxes. If I had a Roth, there would be no tax, state or federal.
This last two years has brought about record high prices on everything, forcing me to take out more money than ever from my 401k, which will never be replaced. During the Obama and Trump era, the market went up, and although my balance went down with every withdrawal, the growing stock market put a good portion of it back. But now, since Biden took office, the market has dropped severely. Our balance is falling, even with no withdrawals. Have you checked your 401k lately? Keep in mind, that balance you are looking at is not the real balance. More than 25% of it belongs to the IRS, making it smaller than what you are seeing.
Occasionally, I would meet with a financial advisor to see if anything had changed. As soon as they start asking me questions, I stop them. I let them know, I’m not here for a job interview. I’m here to find out about their investing path, and I only have one question. Never mind all the degrees and plaques on the wall, my question is; what rate of return his clients are making. Believe me he knows. If those earnings are high, he will be proud of that fact and talk about it willingly. Check him out; does he sit up proudly? Does he look you in the eye? Check out his clothes, the shoes are a giveaway. Do you want to give your life savings to somebody that cannot manage his own money first? Do not be afraid to ask questions, and don’t be afraid to walk out.
Many people, still working, believe their taxes at retirement will be less, not true, look at the IRS tax charts. Chances are, your federal tax will still be 22%, or higher. Be serious with yourself. You saved your whole life to enjoy your retirement, the golden years. Where does it say you have to downsize, stop going out, and spend less? It’s just the opposite. I have several retired friends, and our lifestyles have not changed one bit. We now have more time to travel and enjoy our hobbies.
My investing history advocates a Roth 401k, rather than a pre-tax 401k. But, when I suggest it, I still get arguments that investing more money up front is better because it will generate a larger ending balance at retirement. What these people don’t realize is; more than 25% of that larger ending balance belongs to the IRS. And, after paying those taxes, they will end up with a smaller ending balance than the Roth investor, along with missing out on many retirement benefits. Meanwhile, the Roth investor can use all his money and never pay tax again, while enjoying all the retiree benefits.
To the Roth non-believers, do not be fooled by the larger ending balance. Do the math.
— Wally Maslowsky