Podcast Episode - Suze School: A Different Way To Think About Your Future

401k, Podcast, Retirement, Roth

January 14, 2024

On this episode, Suze teaches a lesson on a different way to think about your retirement accounts.  What are the pros and cons of a 401k, versus an investment account?  Get out your Suze notebooks, and make sure you know which is best for you.

Listen to Podcast Episode:

Podcast Transcript:

January 14th, 2024. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen. Today is Suze School. But you know what else today is today is the day that four of my friends from grammar school are coming for the very first time in just a few hours this morning to the island. Leslie Lynn, Laurie Brown Nader, Benjamin Nitka and Marsha Nitka Truitt. Oh my God. I'm so excited. I can't even stand it. Do you all have friends from when you were at grammar school?

They all say to me, how did this happen to you? Like, really Suze? You weren't that smart anyway, I can't wait to see them.

I also can't wait to do today's podcast because it's going to be a little bit of a different one or a different way that I want you to think about your retirement accounts. So you should absolutely get out your little Suze notebooks for this one.

You know, when it comes to planning for your retirement, most of you think that the only way you can save for retirement is in a retirement account and usually you think, oh, my God, I need to do it in a 401k if you work for a profit corporation or a 403 B, if you work for a nonprofit or a TSP, a thrift savings plan, if you work for the government or the armed forces, or if you don't have a retirement account at work for whatever reason, or you don't work for an employer, then you think, oh, the only way I can do it is with a Roth IRA or a traditional IRA.

But you can only put so much money per year this year. It's 7000 or 8000, if you are 50 or older, you can only put so much money in there. And many of you tend to think that there is absolutely no other way for you to save for retirement.

But do you know that the majority of people out there that accumulate massive amounts of wealth, they have their money, not just in a retirement account if they even have it in a retirement account, but they invest in a regular investment account at usually a brokerage firm. And that is how they accumulate massive amounts of money as well for me personally.

Yes, I have some money in an IRA and some that I converted to a Roth IRA a long time ago and I used to have a pension plan where I would put money into this knowing that when I got older, which I am now, I could take it out, but I would be taxed on it as ordinary income.

I started to think, Suze Orman, why would you do that? You are far better off not putting money away and taking a tax write off right now, like in a pension plan and simply taking that money and investing it in an investment account.

So I want you to understand my way of thinking and why you might decide that an investment account may be where truthfully the majority of your retirement money goes versus a traditional 401k 403b or a TSP after the point of the match.

Now, with that said, there is just one caveat to this as you already know and you have known forever. Now, there is no better investment or retirement account that you can have than a Roth IRA backdoor, Roth. If you can do one or a Roth 401k 403b or TSP, if you can invest that way, that should be your number one priority for this podcast here.

I'm talking about pre-tax traditional 401Ks or 403bs or TSPs especially after the point of the match, right? And a match for those of you who don't know is where you put a dollar into your retirement account and your company matches it and puts maybe 50 cents or so for every dollar you put in up to usually 6% of your base pay.

So I just wanna tell you why I think this way and for you to write down the eight greats, I call them the eight great reasons why in a 401k that is pre taxed after the point of the match. And when I say 401k, I'm referring to all the others as well. OK. Just so you know why investing in a 401k after the point of the match may not be as great as a regular investment account. If you have the discipline to every single month, put money away.

So are you ready for this one a different way for you to think about your future?

I want you on a piece of paper to write down two columns right now. Get out your paper and do this and I want you on to the left side to write pre-tax 401k.

On the right side, I want you to write an investment account. Have you done that? Good.

The very first difference between the 401k pre-tax and an investment account is that it's true in a 401k, that's pre-tax. You do get a taxable income write off in the investment account since you're doing it with after tax money, there is no write off whatsoever. That's a kind of an advantage for many of you. Maybe in your heads for the 401k.

The second reason, however, is that within a 401k, you have limited investment options. Usually you have mutual funds that you can invest in possibly your employer's stock. But that's usually it. And it is possible that that account may also come with high fees. Just depends on your company in an investment account. You can invest in absolutely anything you want and in most cases do it absolutely With no fees whatsoever.

You could invest in treasuries, you could invest in certificates of deposits, you could invest in individual stocks, mutual funds, you could do option strategy, you could do anything that you wanted.

So that is number two, therefore, an investment account wins there.

Number three, it is true that when you invest in a 401k, your money is tax deferred. So you get a tax write off for it. When you invest while it's in there, you do not pay any taxes on it no matter whether you sell, buy whatever it is tax deferred until you go to take it out. However, in an investment account, the truth of the matter is when you make investments, let's just say you buy individual stocks, you buy an exchange traded fund or index funds, maybe the same funds that you would have invested in within your 401k while the money is in those, you don't pay any taxes on it. So in its own way, it's tax deferred.

There are many of you out there that have purchased and maybe you do it monthly, whatever the Standard and Poor's 500 index fund and, or the Vanguard Total Stock Market Fund, whatever it may be or the ETFs, you don't buy it and sell it and trade it while the money is in there.

Essentially, it is tax deferred because you don't pay taxes on it unless you sell it. And again, the majority of you buy something and truthfully you hardly ever sell it. Now, while it is true that if you are getting dividends on your exchange traded funds and, or stocks, you will pay taxes on that, but that might not be that much money.

So that is a difference there in this case, advantage to the 401k, but just by a little bit, number four in your 401k, if you invest in things and they go all the way down, maybe something has happened and you don't want to be invested in it anymore and you have lost money on it when you go to sell because remember, you don't lose or make money till you actually sell.

You need to understand in a 401k or really any retirement account for that matter, there are no tax write offs for losses. What so ever in an investment account, if you buy something and you have a loss in it, you can sell it and take that off your taxable income up to $3000 per year or if you have something in your investment account that you've made a lot of money on and maybe you want to offset those gains with losses. You can do so in an investment account.

So really, that's an advantage for an investment account.

Five. When you have money in a 401k, there is a penalty to withdraw that money in most cases before the age of 59.5. And it's usually a 10% federal tax penalty and whatever the penalty will be for the state that you live in as well.

So the pre-tax retirement accounts also come with a lot of restrictions on them in an investment account. It is your money.

You can take it out whenever you want, you can access it, you can do anything you want with it, no limitations whatsoever.

So the investment account wins in this scenario, number six, the money that you have in a 401k.

When you go to take it out, you will pay ordinary income tax on it and you may not think that you will be in a high income tax bracket at retirement.

I think given the extraordinary debt that the United States is carrying, we are coming to the crossroads of having to do something about it and whether that is reducing the budget, which we should absolutely be reducing. But I don't think that is going to take care of the problem. One of the only solutions really will be to raise income tax brackets. I have said this forever. I will continue to say it. So, don't count on being in a lower income tax bracket when you retire in an investment account, when you do go to take money out. And if it's been in there for over one year and whatever it is that you're selling, that you may have a gain in where you've made money, you will be taxed as capital gains tax on that.

That can be a very, very big difference. So again, the investment account wins here as well.

Number seven, if you die and it's not an, if it's a win any money that is in your 401k plans, when it goes to your beneficiaries and they go to take it out, they will be taxed on it as ordinary income as well. And while you might not be in as high of an income tax bracket, maybe your children will be in a higher income tax bracket because why now they're working? Maybe they've been very successful. So, what kind of burden are you passing down to them? Where number one, they won't get what they see in the account? And number two, how many podcasts have I done on the new inheritance laws when you get a pre-tax retirement account that has to be wiped clean within 10 years?

I mean, it is a mess as to how you figure out all of that with an investment account. There are no rules like that.

When you die, you leave it to your beneficiaries, hopefully through a revocable living trust everybody. So there are no probate fees. However, they will all get a step up in cost basis as to whatever is in that account at that time.

So if you happen to invest, let's just say $50,000 in an investment account and now it has grown to be worth a million dollars. Let's just say that's true.

You die. Your beneficiaries get it. Their cost basis on that now is $1 million. If they turn around and they sell it, they don't pay one penny of income tax. Going back for a second to the 401k. You invest $50,000 it's now worth $1 million.

You die, your beneficiaries get it. They will have to pay ordinary income tax on that million dollars. They may have 10 years to withdraw it, but that would be $100,000 a year. Approximately. They're going to pay ordinary income tax and have to pay it on a lot of money. Hands down the investment account wins over a 401k plan. In this scenario,

8. Two things here, I'm gonna combine two into one.

There are required minimum distributions on a pre-tax 401k, which means once you turn the age of 73 currently, you are required to take out specific sums of money from your retirement accounts even if you do not need them this year. I have to make my first withdrawal from my retirement accounts that I did have, even though I don't need that income and that income will go and be ordinary income tax to me. And that brings up everything for me. It will add to Medicare B premiums, social security taxes, all of that when you have a Roth retirement account, just so, you know, there are no required minimum distributions. So you don't have to worry about that in an investment account. You do not have to take out required minimum distributions also with number eight because I'm combining these two together.

If you leave your place of employment, what do you do with the money that is in your 401k?

You can either just have to leave it there or you have to do an Ira rollover with it. There are things you have to do with it in an investment account.

If you leave your place of employment, it has nothing to do with the money that is in your account.

So these are eight great comparisons for you to just think about when it comes to traditional 401k money after the point of the match. And by the way, for those of you who maybe were keeping score as to which one had the most advantages. It was six wins for the investment account, one win for the 401k and one where they both tied.

Now, who should not be doing this strategy. Well, obviously, for those of you who are investing in Roth retirement accounts just keep doing that after you've maxed out, you might want to do an investment account.

But if you're somebody that only can save money because they withdraw money directly from your paycheck before you ever see it, otherwise you spend it and you are not disciplined to invest and save money on your own. Forget about this. Or if investing on your own confuses you and you just want to invest in the few mutual funds maybe, or the mutual funds because maybe there's a lot of them that your employer offers. All right, you can do that.

However, for those of you who are disciplined, who really are investing up to the point of the match in your 401 Ks or even after your Roth IRAs, it's something that you just might want to think about.

I will always tell you that you should always invest up to the point of the match in any retirement account bar none.

I will always tell you to choose a Roth retirement account at work versus a traditional retirement account at work. And if you choose a Roth 401k, you are absolutely to invest up to the max in that, get as much money in that as you can before you do an investment account. However, if for whatever reason, you are not doing a Roth retirement account and you keep choosing to do a pre-tax 401k. If you continue to put money in after the point of the match, you really need to listen to this podcast over and over again.

Did I just make your entire head swim? Very possibly.

These are the things that I want you to just start to think about.

It's these little changes that you can make to how you are doing things that can make an entire world of difference to your true bottom line when you get older.

All right. So until Thursday, when it is another ask KT and Suze, anything, my God, my friends are going to arrive in just a few hours here. Oh, I'm so excited. Anyway, until next Thursday, there's really only one thing that I want you to remember when it comes to your money and it is this people first take care of yourselves. People. You yourself need to be first people first, then money, then things now you stay safe and you stay unstoppable.

Suze Orman Blog and Podcast Episodes

Suze Recommends

Suze Orman Blog and Podcast Episodes

Family & Estate Planning

A Quick Task to Ease Your Mind

Read Now

Suze Orman Blog and Podcast Episodes

Podcast Episode - Ask KT & Suze Anything: Should We Buy or Rent When We Retire?

Read Now

Suze Orman Blog and Podcast Episodes


Your Ultimate Savings Opportunity Starts Now

Read Now