Ask your employer to consider a Roth 401K

Many people are familiar with the concept of a Roth IRA. For those that are not I will give a quick summary of the difference between Conventional and Roth IRAs and why I believe that a Roth is ALWAYS better for new contributions. Both offer significant tax advantages but one provides more advantages today while the other provides more advantages tomorrow. Given they are retirement investing vehicles clearly we should think more about the impact when we are 65 then when we are 30, 40, etc. Here is the basics of each…

• Conventional IRA - You put money in up to a set maximum per year. You then deduct your contributions from your income for that tax year. So if you owe taxes on 50,000 dollars for a tax year, contribute 10,000 to your conventional IRA you will then pay taxes only on 40,000. However, the tax is not avoided only differed until the time of withdrawal. When you then withdraw this money in retirement you pay taxes on 100% of the money you withdraw as 100% earned income. Oh and should social security survive till your retirement since a Conventional IRAs distributions are considered “income” it will effect what portion of your Social Security is taxed.

• Roth IRA - With a Roth we change the time of the tax advantage to the future vs. the present. So this year you owe taxes on 50,000 dollars and put 10,000 into your Roth IRA and you still pay taxes on the full 50K. However you will now never pay tax on that 10K you contributed or the interest earned on it EVER AGAIN. So if you are 30 in that year you will earn interest for 30 years or more tax free and you will NEVER pay a thin dime of tax on the earned interest. Also when you do withdraw the money it is already your money, it will never be considered “income”, you won’t pay any tax EVER.

Now some advisers point out that if you will have lower tax bracket in retirement and believe in “fuzzy math” that a conventional can win out. However, we should live in the world of practice vs. theory. What I have seen actually happen is that be it Roth or conventional people always contribute the same amount. What this means is while you will pay taxes on a Roth contribution today you will end up with the same amount of money at age 60, 65 or whenever you start to take the money out. In other words your tomorrow will be better with a Roth.

Now what many people do not even know is that a 401K which an employer provides can also now be set up with a Roth Option. With a 401K your employer takes a percentage of your check and deposits it for you. While 401’s have some restrictions that IRAs don’t they work quite similar in how they defer or eliminate taxes. The beauty is when you quit working you can roll your 401K into an equivalent IRA and that means if you have a Roth 401k you can roll to a Roth IRA and have money you can take as needed, keep inside the account as long as you like and never pay taxes on it or ever have it count as income.

Again though while the option of a Roth IRA is well known today most people are not aware of a Roth 401K so ask your employer to check into the option for you. To me they are better for all workers but for the youngest workers the advantages are even bigger. There is a good chance that your employer may not even be aware that they can offer a Roth 401k and as we said all the time in the Army “the squeaky wheel gets the grease”.

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Teaching kids to invest and think smart about money

I know a lot of adults that are doing what they can to teach kids about investing and saving money. The most common way is the good old fashioned piggy bank.  There is something to be said especially with younger children to putting some change in a piggy bank.  It is a good start but it is also quite limited.  With the good old pig you always can open him up and raid the savings and the savings lack any type of leverage.  You earn no interest and little Johnny’s or little Dorothy’s pennies end up worth less ever day, unless they are solid copper that is.

My view is it is important to have kids open their first bank account as soon as they are old enough to grasp the concept.  A Roth IRA with some monthly contributions should be set up by age 12 and money should be discussed from a positive outlook.  Don’t teach your children things like, “money is the root of all evil” as that is not the proverb anyway.

People that do well with money come from homes that discuss and value money.  Now of course you must teach ethics, family values and over all life lessons as well.  Your kids shouldn’t worry about money or believe it is the end all be all.  Yet they should understand it and its power, both good and bad and you should teach them the Building Wealth Philosophy as early as possible.

One of my favorite books for parents helping kids learn to invest is Rich Dad Poor Dad for Teens The Secrets About Money–That You Don’t Learn in School!  To me this book is an absolute must read.

One way or another make sure you are making things like money, avoiding toxic debt, savings and investing positive topics of discussion with your kids.  I am not saying your kiddos first words should be leverage and interest over mamma and dada but you get the point.

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Advice from the broke is useless

I know this seems so obvious, never take advice on money, investing and business from the broke. The problem is it is not always easy to recognize the “broke”, when I refer to people that are broke I am not saying they live in a “poor house”, make very little money and eat mealy porridge. I simply mean they are broke as in more money goes out that comes in.

Broke people live next door to you, they live in neighborhoods that are both two steps down and two steps up from yours. Broke people are everywhere, most of the people in America are broke by my definition. They are the people in huge 50K dollar SUVs that they justify as being needed “to cart the kids around in”. Jeez, how big are these kids? They have beautiful homes, nice furniture and perhaps even lawn care service. Many have vacation homes or time shares or other true luxuries. How can I call these people broke?

Easy they are broke, they have very little to no surplus cash flow, they save next to nothing other then what perhaps goes automatically into a 401K (Thank God for that at least). They have TVs on credit, cars on credit, pools on credit, some have charged the very paint on their walls and the sofa they sit on. Cut off their income for 30 days and most would loose every thing they have. They are broke because they have no “wealth” only things, stuff and the appearance of wealth.

Such people are always big talkers. They tell you “now is the time to buy” or that “that business deal seems risky” and other wonderful nuggets of advice. They tell you how great that new SUV is, how wonderful owning a plasma TV is and they always have investment advice for you.

My advice is, don’t take their advice. If you follow the advice given by most people it will lead you down the same path they are on. In other words take advice from your uncle who has that beautiful house, nice cars and kids in top schools and you may just get their yourself. Yet you will probably do it “his way” (the normal way) and be in debt up to your eyeballs and working into extended retirement years just to pay the interest on all of it.

So where do you go for advice? To the successful, to the millionaires next door. Look for the guy that pays cash for everything, the woman that has a 6 figure job and a 150,000 dollar house and a sensible car along with a nice savings account, a good team of advisers and a very fat and growing Roth IRA. These people are not “broke” they could go with out work 6 months to a year with just a bit of sacrifice if they had to.

How do you find them? There are many of us, just talk to people and you will know right away.

• The broke talk about how expensive gas is and the wealthy talk about how efficient their cars are.
• The broke think rich people are “over paid” and “thieves” and the wealthy think the rich are “generous” and “admirable”
• The broke shop for “deals” on consumer goods, the wealthy look for “deals” on real estate and investments
• The broke think cars are status symbols and the wealthy think cars are a “necessary expense”
• The broke talk about “saving money” by spending it, the wealth talk about budgeting and investing the savings

Just realize it is not income that separates the broke from the wealthy. In my town I can show you people with a household income of 100K or more that are “broke” and I can show you some with a household income of say 70K that are very “wealthy”.

Just remember this and consider it when anyone advises you how to spend your money, what to buy, how to invest and on what is important or what is safe vs risky. Now I am not saying that no broke person ever gives any decent advice. Sure many times they do, just don’t let the broke counter your instincts or justify what you know to be a mistake for short term gratification.

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