David H. Kinder, RFC®, ChFC, CLU
Financial Entertainers warn against IRS Regulated Retirement Plan Contributions! Ramsey and Orman
Updated: Jan 19
I am copy/pasting the link and article here, but this isn't about Suze (although it could be). This is a wake-up call. If these financial entertainers are changing their tunes... then it means something is changing and it's time for ALL of us to be aware of it! *** https://www.marketwatch.com/story/suze-orman-urges-investors-to-stay-away-from-traditional-401ks-2020-06-17
PDF link: <click here>
Suze Orman: ‘You have to be crazy’ to put your money in this investment
Published: June 18, 2020 at 10:16 a.m. ET
‘Do you really think that tax brackets aren’t going to have to go up five, 10, 15 years from now in order to pay for all the debt that we’re carrying’
‘Please, if you have the ability to do a Roth 401K, 403B, or a TSP, or a Roth IRA, those are the type of retirement accounts that you want to be in. Stay away from the traditional ones.’
That’s personal-finance celebrity Suze Orman offering some advice on the “Pivot” podcast this week about what investors should be doing during the coronavirus pandemic.
With traditional IRAs or 401(k)s, savers get the tax break immediately upon the contribution, allowing their investments to grow tax-free, and then have to pay the taxes upon withdrawal. But there are better ways to save for retirement, considering the current climate, Orman explained.
“With a Roth, you pay taxes today, and in the long run, when you take it out, it’s tax-free,” she said. “Why? Do you really think that tax brackets aren’t going to have to go up five, 10, 15 years from now in order to pay for all the debt that we’re carrying? Of course they’re going to have to.” Bottom line: Take advantage of “the lowest tax brackets” we’re likely to see for a long time. As for where to put the cash, Orman said she sees a sideways stock market for a while, with investors essentially forced to partake, in light of the alternatives.
“Are they going to put it in a 10-year Treasury at 0.76%? The possibility of negative interest rates?” she said. “You have to be crazy, if you ask me, to be in bonds at this point in time.”
For most people, her suggestion is just to stick with the Vanguard Total Stock Market ETF VTI, 0.92% . Don’t even consider individual stocks, she said, unless you’re super rich.
The broad market has been holding up nicely this week, though the Dow Jones Industrial Average DJIA, 0.95% was down slightly Wednesday, giving back gains from earlier in the session. ***
EDIT: This article is far more recent:
Dave Ramsey Warns There's a Big Downside to Investing in a Traditional IRA or 401(k)
Story by Christy Bieber • Jan 8, 2023
If you are investing money for retirement, chances are good that you're putting it into a traditional 401(k) or into a traditional IRA.
These accounts have some big advantages. Both offer upfront tax breaks so you get to deduct the amount you contribute to them in the year that you make the contribution. If you are investing in a 401(k), there's also a good chance your employer will match your contribution, while if you're investing in an IRA, you get your choice of brokerage firms and have access to a wide selection of investments.
While these benefits make traditional retirement plans attractive, finance expert Dave Ramsey has pointed out that there's also an important downside to these types of investment accounts that you should consider.
Traditional IRAs and 401(k)s come with a catch
According to Dave Ramsey, the big downside of traditional retirement plans comes when you are actually a senior and you begin relying on the money from these accounts.
"You'll have to pay taxes on the money you take out of your traditional IRA in retirement," Ramsey explained.
See, while you enjoy an upfront tax break in the year you contribute and tax-free growth, withdrawals are not tax free. You're taxed on the money you take out at your ordinary income tax rate in your later years. This means that you have to give the IRS a cut of your fixed income.
Instead of committing your future self to paying these taxes, Ramsey recommends an alternative retirement investing account.
"We recommend investing with a Roth IRA instead," the Ramsey Solutions blog reads. "Roth IRAs are funded with taxed income. You won't be able to deduct Roth contributions off your taxes now, but who cares? You'll be too busy enjoying tax-free growth and withdrawals in retirement later. Future you will thank you!"
Should you listen to Ramsey?
Ramsey is right to point out that the taxes you'll have to pay in retirement are a big downside when you invest in a 401(k) or IRA.
Not only will the distributions you take be subject to taxation, but the money you withdraw is also going to be counted when determining if your income is high enough that you're taxed on Social Security benefits. Distributions from a Roth don't count in this calculation, though, so you're more likely to be able to enjoy tax-free Social Security checks if you opt for a Roth.
However, the tradeoff is that you do get that upfront tax deduction. And since you can claim the deduction when you invest, it makes it easier to find the money to contribute because each dollar you put into your 401(k) or IRA doesn't reduce your take-home income by as much as an investment in a Roth would.
Ultimately, you'll want to think carefully about when it makes sense for you to claim your tax break. If you are struggling to contribute to retirement accounts now, you may not want to make it harder on yourself by deferring your tax savings until later. Likewise, if you think your tax bracket will be lower in retirement than it is now, it doesn't make sense to wait to claim your savings.
But, if you have plenty of money now and aren't sure you will as a senior -- or if you think your tax rate will be higher later on -- then getting a Roth IRA might be best. You do, however, always want to invest enough in your 401(k) to earn your employer match before moving on to contributing the rest to your Roth, if that's the right account for you.
Now, Dave and Suze have their recommendations... and I have mine. For my position on Roth accounts, you may find this link interesting reading: