Recently I have gone all-in on Roth retirement accounts due to the tax-free growth and tax-free withdraws. The latter is what intrigues me and virtually all financial advisors the most, which is the ability to live virtually tax-free in retirement. This should be all Millennial investors retirement goal, and not just because it is mine but because it is the prudent thing to do financially.
I opened this blog post by saying I have recently gone “all-in” on Roth retirement accounts and what I mean by that is currently I am only investing in a Roth. Hence my claim “all-in”. My employer offers a Roth 401(k) and I invest 15% on my income here. Previously I was splitting the difference and investing 5% in my traditional 401(k) and then 5% into the Roth 401(k). But in 2017 I decided to put it all into the Roth 401(k). My employer match goes into the traditional though, but that is fine and the only option.
I also max out a Roth IRA by contributing the limit, which is $5,500 per year. I also do this for my wife who is self-employed and has no retirement plan. After my company match, these Roth IRA accounts are the sole focus on our retirement investing. Then are amazingly flexible and offer tax-free growth and withdraws. You can even withdraw your contributions at any time, but not your earnings, penalty and tax free. I don’t treat my accounts this way, but in reality they are like pseudo- emergency savings accounts. A Roth IRA is a great investment vehicle for someone who wants to retire early, e.g. prior to age 59.5, because you can withdraw your contributions and begin retiring early on this.
Will Roth IRA Withdrawals Be Taxed in the Future?
But the big question is will a Roth IRA or Roth 401(k) one day be taxed by the government? The main reason I invest in Roth accounts is because I would rather pay the tax on my money now versus 25 plus years from now when it’s all but certain our taxes will be higher. If you look at tax rates historically, we are currently living in one of the lowest rates in the last century. On top of that, by the end of fiscal year 2017 the gross U.S. federal government debt is estimated to be $20.1 trillion. Let me repeat that…by the end of 2017 the U.S. federal government debt is projected to be $20.1 trillion!
Those numbers strongly lead you to believe that the government will be virtually forced to tax Roth retirement accounts, right? In my opinion the answer is a resounding no. Could the government do it though? Yes. But will they? No. The amount of backlash towards this decision would be devastating. Many respected financial minds agree with me, like Michael Kitches.
Fortunately, the reality is that while repealing tax-free Roth treatment is legally possible for Congress to do, it is politically unlikely. Not just because it would be immensely unpopular with active senior voters, but also because eliminating Roth treatment actually scores very poorly in Federal revenue projections, due to the 10-year budgeting process that is typically used to analyze major tax law changes.
U.S. Taxes Will Increase Substantially
What do I think congress will do instead? Well the fact that the U.S. government is expected to be 20.1 trillion dollars in debt by the end of 2017 should tell everyone that taxes will one day increase substantially. Donald Trump and the current administration are in the process of lowering the tax rates on individuals and businesses. This is all well and good short-term, paying less taxes, but big-picture it just doesn’t seem sustainable with the amount of debt our government is in.
If all goes well with my finances and retirement planning, I hope to retire approximately around the year 2040. I find it hard to believe that my tax bracket in 20-plus years is going to be lower than it is right now with this amount of debt on government is in. Just think about it…eventually congress is going to have to pass a bill to increase tax rates on all of us. And if you have all your retirement money tied up in traditional IRA and 401(k) plans, your retirement nest egg is going to take a huge hit. How bad could it get? What if your income was to be taxed at 35% or 45% on withdraws? What would that do to your retirement lifestyle?
Roth IRA’s and Roth 401(k)’s Are for Millennial Investors
I really want to stress to all Millennial investors that Roth IRA’s and Roth 401(k)’s (if available) are the right retirement vehicle for you now and long term. Going after Roth accounts and taxing these is not where the money is. Increasing tax rates on all of American’s, especially the affluent, is where the government will make up ground on their huge deficit. Millennial’s should be safe and sound by investing in Roth IRA and Roth 401(k) accounts for their retirement.