Jason Parker interviews David Waldrop, CFP about the Roth 401k.

As a Certified Financial Planner and President of Bridgeview Capital Advisors, Inc., David is responsible for advising clients in the areas of retirement plans and portfolio management. Specializing in financial planning and consulting, David brings together all aspects of his clients’ finances while incorporating their goals and objectives, both personal and financial.

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Below is the full transcript:


Announcer: Welcome back, America, to Sound Retirement Radio where we bring you concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for in transition through retirement. Now, here is your host, Jason Parker.

Jason: America, welcome back to another round of Sound Retirement Radio. I’m so glad that you’re joining us this morning. For our listeners right here in the Seattle area, if you’re driving down the street this morning, I want to remind you that you can listen to all of these programs online. Everything’s archived and transcribed for you at SoundRetirementRadio.com. You’re listening to Episode 073.

We’re going to be talking about taxes and some ideas for having a tax-free retirement today. This is going to be a great show. As you know, we’re always trying to bring experts on from around the country who we believe can add real, significant, meaningful value to our listeners’ lives, to your financial lives.

I have a guest that we’ll be bringing on today. As many of you know, I like to get the morning started right with a verse to renew our minds. Today, for this next couple of weeks, we’re doing this series where I’m bringing in some of my personal favorites, some of the verses that have really significantly impacted my life. This one’s Matthew 7:7. It says, “Ask and it will be given to you. Seek and you will find. Knock and the door will be opened to you.” Gosh, it’s just awesome.

I’m reminded, as I read that, because one of the things I’ve learned, and I don’t want to get off too much of attention here but, this idea of “Seek and you will find”, you will find exactly what it is you’re looking for. If you’re looking for skepticism and cynicism and disbelief and reasons to be discontent, man, I’m telling you, you are going to find that every time. You want to look for reasons to be unhappy with your spouse or disappointed with your kids, you’re going to find it. If you flip that around and you say, “No, I’m going to look for reasons to be great for them. I’m going to look for appreciation. I’m going to look for abundance. I’m going to look for all of the good things that are happening in my life.” You’ll find that, too.

One of the things I struggled with this verse for so long is I thought to myself, why don’t they specify that, because it’s just says “seek and you will find?” You’re going to find whatever you’re looking for, but then, earlier, couple versions earlier, Matthew 6:33, it says, “But seek first His kingdom and His righteousness and all these things will be given to you, as well.” That was the wipe-all moments. It’s like, “Oh, yeah. First, seek His kingdom and righteousness.” Anyways, it’s my big takeaway for this morning.

The other thing I wanted to do is share with you, my daughter came up to me recently and she said, “Hey, dad. Will you make me a sandwich?” Of course, my response was, “Abra cadabra! You’re a sandwich.” Oh, yes. The jokes, the jokes. I know how much our listeners love our jokes.

Today, as we get started, we’re going to be sharing ideas about a tax-free retirement, tax-free planning for you. I want to introduce our guest. I have David Waldrop on the phone. He’s a certified financial planner and president of Bridgeview Capital Advisors in El Dorado Hills, California. He’s the president of an independent registered investment advisory firm. David, welcome to Sound Retirement Radio.

David: Thank you for having me.

Jason: David, I’m excited to have you on here because I know, if there’s one thing that really gets a lot of our listeners, most people say they don’t mind paying their fair share in taxes but most of them don’t want to pay more than their fair share in taxes. You have an article on your blog that was called “Roth 401(k) Plans: 5 Things You Need to Know” and I want to get into that article on more specifics because I really think it adds a lot of value to people’s lives as they’re doing planning for retirement, but first, can we just talk for a minute about taxes and tax-free in general and why you think that that maybe a good solution for some people?

David: Absolutely. I think one of the key things to recognize is that having a tax-free retirement option is still relatively new, with the introduction of 401(k) plans. I believe the late 70’s, it took a good 20 years before the advent of a tax-free retirement plan and that is most commonly as a Roth IRA. Many of us refer to Roth IRA, fewer has actually opened up accounts and started funding them, but the Roth IRA was introduced in the late 90’s and that was until about 2006. That was really the only way you could tax the money away into a tax-free retirement plan.

Jason: Yeah, so tax-free is … If you ask somebody, “Hey, do you want to have taxable income, tax-deficient income or tax-free income?” Most people I’ve found like the sound of tax-free. It does require a little bit of paying, but before we get too much into the knots and bolts of Roth 401(k) plan, how those work and why they work, I want to bring our listeners attention to the US debt in our country right now. There’s a website you can all visit called the USDebtClock.org. If you pull this up, you’ll notice that the national debt our country has right now is $18.7 trillion, $18.7 trillion.

To put that in perspective, if we rewind the clock just 15 years, so we go back to the year 2000 and you look at what the national debt was back in the year 2000, I’m going to pull this up for you. Our national debt 15 years ago was $5.6 trillion. That’s incredible.

Here’s the question I want you to think about is, we get into this discussion on Roth conversions, in the world where we have 10,000 baby boomers retiring every single day, putting more of a strain on things like social security and medicare and we are currently running a budget deficit, meaning we’re spending more money than we’re taking in and the national debt continuous to grow, what are the possibilities, what’s the probability that taxes are going to go down in the future when we currently have some of the lowest marginal income tax rates in our nation’s history? How many of our listeners driving down the road right now this morning or on their morning jog listening to the podcast believe that taxes are going to go down in the future?

If you use that as your frame of reference as we start talking about tax planning, tax efficient cash flow, keep that in mind. David, what are your thoughts? When you look out there and you see this national debt that’s almost $19 trillion, is that sustainable in your opinion?

David: It’s staggering. It’s almost impossible to comprehend those numbers. One of the key characteristics that I value in retirement plans is how your plans are taxed. You’re really having two options: tax-free or tax deferred. It can be very difficult to predict what the future tax rates will be. It is absolutely a prudent measure to assume the tax rates will be higher. We can never really accurately predict the future but as you said, it’s always numbers that it would be absolutely prudent to assume that whatever our tax rates are now, they’re going to be higher many years down the road in the future.

Jason: Some things got to give. I think, most people agree some things got to give. If I look back historically, I’m just pulling this information from a website here online when we look at the historical top marginal income tax rates. Back in 1918, the top marginal rate was 73%. In 1936, the top marginal rate was 79%. In 1945, the top rate was 91%. Then, if we look today, the top rate is 39.6%. We have some of the lowest top income tax rates in our country and yet we’re spending more than we’ve ever spent.

It sure looks to me like if you are getting ready for retirement, you need to be thinking about not just the cash flow that you’re going to be having but how that cash flows going to be taxed to you. I want to talk about this Roths but the other side of that equation is just the traditional 401(k). Tell our listeners a little bit about the traditional 401(k) and what are some of the things they should be thinking about there, David.

David: Absolutely. The most common type of contribution that is made to a 401(k) plan is from free tax dollars. Within a 401(k) plan, you’re going to have different sources of funds. You’re going to have funds that come from what you contribute. You’re going to have matching contributions, hopefully, from your employer. Then, and even bigger bonus on top of that is if your employer provides [inaudible 00:09:06] profit sharing contributions.

If we focus on the idea that a majority of what people typically [inaudible 00:09:16] away for retirement is that it is from pre-tax dollars. While you are getting a reduction in your taxes now by reducing your taxable income, making these contributions to your 401(k), those money is history [inaudible 00:09:34] will go. With the combination of not only your contributions but your employer’s contributions, it’s realistic to think that you’re going to accumulate some pretty sizable sums that you’re going to be drawing on in retirement.

Where a lot of people are taken by surprise is when they turn 70 1/2 … I wrote a separate article about this, how the IRS is absolutely thrilled when you turned 70. They are ready to throw a big party for you. They get to finally start collecting tax on all that deferred money that’s in your 401(k) plan.

What a lot of clients are finding out is that, in their retirement years, they’re needing to take income and they’re very surprised by how much the taxation on those withdraws can deplete their retirement savings. The tax [inaudible 00:10:30] is huge when all of your retirement funds are in what’s considered a tax deferred 401(k) plan or other tax-defer retirement plan.

Jason: Tax deferred, we often refer to that money as tax hostile because most of the people that we serve seem to think the taxes have nowhere to go but up. Now, that may not be the case for everybody so I think it’s really important that we emphasize that planning as an individual scenario.

There are probably times when it doesn’t make sense to consider the Roth IRA or the Roth 401(k) but let’s get into the Roth and why some of the new ones is there, some of the things that really make that a powerful vehicle, David. Go ahead and share with our listeners why you’re a proponent in many instances of a Roth and what’s some of the advantages and disadvantages there are specifically with the Roth 401(k).

David: With 401(k), it’s really been a game changer that there’s now a tax-free option within a 401(k). When we talk about tax-free, we’re talking about Roth IRAs and then we’re also talking about the advent of Roth 401(k)’s. I think it’s important to note that your Roth IRAs start there. If you’re looking at a tax-free option, you want to diversify, you want to make sure that not all of your retirement funds are in what’s referred to as the tax deferred bucket or just waiting for the IRS to tax whatever moneys you take out.

This is not what I see happening a lot. You get a client that’s maybe heard about a Roth IRA. They know they should do something but they don’t take advantage of it and they procrastinate. The next thing you know, 5 years goes by. During those 5 years, their income is rising and they think, “Okay. You know what? Now, I’m ready to get serious. I wanna start putting my money into a Roth IRA.” They start looking at the numbers and they are surprised to find that, “Guess what? You’re no longer illegible to contribute to a Roth IRA because your income is over a certain threshold.”

One of the main things to recognize is that, if you don’t take advantage of it, you might miss that opportunity. If you got an opportunity to put tons in a Roth IRA, you need to do it while you can because there maybe a time when you’re excluded from being able to contribute. With the advent of a Roth 401(k), that’s now made it even more compelling because with a Roth IRA, you’re limited based on the IRS contribution limits each year. Those amounts are much smaller than the limits that are available within a 401(k) plan.

You’re looking at being able to contribute upwards of $18,000 a year in a tax-free Roth 401(k) each year regardless of your income. You can’t be excluded from contributing to a Roth 401(k) in the same way that you are potentially excluded from making contributions to a Roth IRA.

Jason: One of the areas, as your talking, in a couple of things you said that really captured my attention, first of all, to diversify. When we’re talking about taxes, it probably makes sense to maybe have some tax deferred money and some tax-free money so that, like you said, not all of your eggs are in one basket. I really like that. The other thing I think about though is, especially for people that are self-employed that own their own business and that they have the ability. A lot of them, they’re thinking in terms of their simple IRA or their [SAP 00:14:18] IRA where they contribute money, tax deferred.

I know a lot of small business people shy away from the 401(k) option because of administrative responsibilities. How hard is it for somebody that has a small company to set up a 401(k) so that they can … Often times, those people to have the higher cash flow, the people that are producing goods and services in our country. How can they do this in a way that they can take advantage of those Roth 401(k)’s and still make the contributions?

David: Something very interesting has happened over the last several years as more players have entered the retirement plan market place and cost are coming down. There are costs that are associated with 401(k) plans. Understandably, many small business owners tend to shy away from setting up these plans because while there maybe certain tax benefits for them doing it, not only as a cost factor but the cost that are involved in administering the plan and keeping records for the plan and staying compliant with the plan, it can be overwhelming for some.

Depending on whether or not you’re self-employed and you’re a one-person business or whether you’re a smaller company, the good news is it costs to have income and down to handle his plans but the bad news is it’s there a lot more red tape. If you are not within a company retirement plan and you’re a business owner, you’ve got employees, you really are limited to the 401(k) space.

If you are one-person company [inaudible 00:16:13] $1,099 income, however it maybe structured, as long as you don’t have employees, there are solo 401(k) options where you would be able to set up a 401(k) plan for yourself and your business. The cost are significantly lower, the record keeping requirements are significantly reduced because there aren’t other employees involved and there are custodians that are out there, they finally got on board and said, “You know what? We are going to make this Roth option available within some of these solo 401(k)’s or sometimes are called uni-case or even individual 401(k)’s.”

Jason: All right. Folks, if you’re just tuning in, if you’re driving down the road this morning, you’re listening to Episode 073 of Sound Retirement Radio. I got David Waldrop on the program with us today. He’s a certified financial planner with Bridgeview Capital Advisors down in El Dorado Hills, California.

Now, some of you maybe listening and you maybe thinking, “You know, Jason, is a financial advisor. Why is he bringing on financial advisors from all over the country?” Let me tell you something. We are better together when we work collectively together than we are independent from one another, and I am always looking to learn. I am always looking to get better and I want to surround myself with some of the top advisors in the country.

When I can bring somebody like David on to the program who has written a great piece about Roth 401(k)’s and we can share ideas, somebody once said that, “Team together, everyone achieves more.” Remember, Sound Retirement Radio is about making your life better, listeners, making your life better. For me to do that, what I have to do is I need to be able to find the best of the best people around the country that are adding real value to people’s lives and I need to bring them on to the program to share their wisdom with you. I hope you value that as much as I enjoy the opportunity.

Again, you’re listening to Episode 073. David, you write a blog on a regular basis. This, what we’re talking about today is an article that you had written on your blog. Will you share with our listeners how, if they want to start following you, if they want to get more information on the work you’re doing, how they can find you online?

David: Absolutely. My blog is The Astute Advisor. The address is TheAstuteAdvisor.com. If you go to my website, there are really articles on there for everyone, wherever you are in your financial journey. Whether you’re just starting out or even well into retirement, we can do something for you there. You can contact me if you’d like. There are areas on my website to be able to connect with me.

If you do go to the site, there’s also an e-book today I have available which is the Five Finance Basics that Everyone Must Know. If you are looking to just get a sense of, “These are topics that I need to get my arms around and some basic fundamentals,” there’s something there for you as well.

Jason: Awesome. Number three on this article that you wrote, you said you don’t want to get too much into the weeds in terms of funding sources for 401(k) but there’s some little nuggets of wisdom in there that are really important. Will you take a minute and talk about that, those items?

David: Absolutely. One of those cases where you start feeling back a [inaudible 00:19:38]. Let’s say, you get your 401(k)’s statement and you see, “Gosh. My balance in my account is $50,000. I’ve got my 401(k) plan.” We talk a little bit about it earlier but the reality is that $50,000 is made up from a few different sources. The finance source is going to be what you contribute out of your own salary.

Just to step back a little bit, when we talk about 401(k), when you ensure that, we use that as a general term to describe our retirement plan but really what 401(k) means is 401(k) is a section of the IRS code that allows employees to contribute their own money to a company’s retirement plan. When you have 401(k), most people are going to encounter several sources of funds within that 401(k) balance.

[inaudible 00:20:36] is going to be what you contribute. If you have a very generous profit sharing plan and your company is making generous contributions, you’re going to have a sizable balance that is what’s called profit sharing. There’s also the employer matching if their doing something whether maybe or not, matching 50 cents on a dollar of what you contribute or dollar for dollar of what you contribute, there’s going to be a source in there.

Some misconception about Roth 401(k) plans and someone might think, “Well, gosh, I’m electing to contribute to a Roth 401(k) plan. I want to put after tax dollars in my own money so that in the future, I can withdraw and pay my taxes on my withdraw.” They might think that that applies to all of the funds that are in the 401(k) when in fact, it only really applies to the money that you’ve put in. There’s going to be other sources of funds in your 401(k) that are going to remain tax deferred and are going to be taxable upon withdraw in retirement.

Jason: That’s a really important nugget that people … I don’t think a lot of people even realizes the case. Thank you for pointing that out. The next thing I want to do is draw your attentions to the required minimum distribution rules. Now, you touched on this a minute ago. A lot of people don’t realize that with their 401(k), their IRA, their TSP, their 403(b), this money is tax deferred. When they turn 70 1/2, they have to start taking required minimum distributions. You pointed out something really important here on Item Number 4. Talk to our listeners about RMDs and the Roth.

David: Yes, absolutely. We are finding that there are some misconceptions out there. There’s some misconception going back to income limitation about whether or not someone is eligible to contribute to a Roth IRA or are they eligible to contribute to a Roth 401(k). Just a review, with the Roth IRA, there are income limitations. There are no limitations on income to participate in the Roth 401(k).

The other misconception that we see has to do with required minimum distributions. That goes back to the idea that most retirement plans are comprised of pre-tax and tax deferred funds that upon withdraw, after age 70 1/2, they are fully taxable as income. Because Roth IRAs are exempt from these required minimum distributions, some folks have mistaken that that applies to their Roth 401(k) balances.

That isn’t the case. If you want to avoid the required minimum distribution rules that pertain to 401(k) plans, one of the ways that you want to do that is roll over your Roth 401(k) balance into a Roth IRA. Once it’s in the Roth IRA, then it’s going to be exempt from the required minimum distribution rules.

Jason: Folks, this is Jason Parker, and I’ve had David Waldrop on the program with me today. You’re listening to Episode 073 on Sound Retirement Radio. Really important rule nugget there, I can’t emphasize enough, David has a blog they write. That’s TheAstuteAdvisor.com. I want to encourage to go there. There’s some more items in this program that we can’t cover today but David, thank you for being a guest on Sound Retirement Radio with us.

David: Thank you for having me on.

Announcer: Information and opinions expressed here are believed to be accurate and complete. For general information only and should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program.

Parker Financial, its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims-paying ability of the company. Investing involves risk.

Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Avenue Northwest, Silverdale, Washington. For additional information, call 1-800-514-5046, or visit us online at SoundRetirementPlanning.com.