Transcript of the podcast:
MARK RIEPE: Back in the '80s and '90s, there was a popular single-panel comic strip called The Far Side by Gary Larson. One cartoon featured a bunch of dinosaurs standing around, looking rebellious and smoking cigarettes. The caption read, "The real reason dinosaurs became extinct."
I’m not going too far out on a scientific limb to say that dinosaurs never smoked. But fire almost certainly played a big part in their demise. And that fire was started by a rock from space.
The rock in question hit Earth about 66 million years ago, in what we now call the Gulf of Mexico, near the Yucatan Peninsula in present day Mexico.1
It carved up miles of ocean floor, vaporized rock and water, and many of the rocks that weren’t vaporized on impact were liquified by the powerful shockwaves of the resulting explosion.
I'm Mark Riepe, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decisions and the cognitive and emotional biases that can cloud our judgment.
If this event had only local consequences, we probably wouldn’t be talking about it, but this explosion ignited everything within 900 miles.
Get out a map and draw a circle with a 900-mile radius around the impact site, and the resulting circle will cover a big chunk of Mexico, along with Texas, Arkansas, Louisiana, Mississippi, Alabama, Florida, and Georgia. Now, what does this all have to do with dinosaurs?
Well, many of these vaporized rocks contained sulfur. And the impact sent that sulfur into the atmosphere, creating a haze of acid that blocked sunlight. And I’m not talking about a day or a week of overcast skies. How about years of nighttime—long enough to cool the planet, and when it rained, it was an acid rain, which would also have killed plants and animals on land and in water. Seventy-five percent of plant and animal species on Earth went extinct. The unwitting victims also included all dinosaur species except for the ones who could fly, who evolved into the birds we have today.
As I mentioned, this happened 66 million years ago, but the risk of these strikes persists. In 1908, a smaller meteor exploded in the skies above Siberia and flattened eighty million trees with energy equal to about 185 Hiroshima bombs. The area was very sparsely populated, and it's unclear if any people died, but forty miles away an eyewitness was thrown from his chair. And in Asia, people could read a newspaper outside at midnight by the light in the sky.3
NASA takes this threat seriously enough to have created the Center for Near Earth Object Studies.4 In November 2019, they launched a rocket as part of their Double Asteroid Redirection Test, or DART, the world's first full-scale mission to test technology that can defend Earth against "potential asteroid or comet hazards."5
The rocket will slam into an asteroid called Dimorphos in early fall of this year. After the crash, scientists will measure the change in Dimorphos' orbit. The goal of this project is to save Earth from a collision with a large asteroid.
The thinking is that the sooner they find an asteroid bound for Earth, the sooner they can do something about it. The rocket comes into play because the farther from Earth they can intercept it, the smaller the nudge needed to alter its path so that it misses Earth.
In other words, the farther away the asteroid, the less force is needed to change its trajectory. If that’s confusing, think about it this way: If there's some huge renegade asteroid that shows up out of the blue and will hit Earth in a few days, is it really possible to change its trajectory? Probably not. When it hits, much of life as we know it would go the way of the dinosaurs.
But if we had intercepted that asteroid 10 years ago, it's plausible that we could nudge it out of the way. If you’re wondering what any of this has to do with retirement planning, here’s the connection. Say you believe that you need a million dollars to retire comfortably. But there are 60 candles on your birthday cake, and you haven't saved a dime.
You’ve got a problem. Retirement is a big, fast asteroid speeding toward you, and the time to react is short. Let's face it, there aren't many legal activities that generate that kind of money in a short amount of time. Your golden years probably won't be as golden as you expected.
Now if that birthday cake has 25 candles on it, you’re in a quite different situation. It’s different because you have the time to make and implement a series of small, doable decisions that will get you to your goal. This is like the asteroid that's so far away, it'll take years to reach Earth, but that’s a blessing because you have time to build your strategy, implement it, and let it work its magic.
I used a million dollars in my example because it’s a nice round number, and I don’t mean to imply that you can’t have a successful retirement without reaching that kind of number. My point is that whatever your number looks like, bigger or smaller, less effort will be required to reach that number if you start early.
One of the reasons people don’t plan is that procrastination and present bias get in our way. I talked about procrastination and present bias in Episode 3 from Season 10 for those who want to learn more.
But the short story is that we fall victim to present bias, which causes us to avoid doing work now—even if it's just putting aside a small sum every month for retirement—because the future benefits seem so small compared to the cost of missing out on something that we could gain by spending that cash now.
For younger investors or parents of younger investors, the good news is that there are retirement vehicles specifically designed to create incentives for you to save. I'm taking about Individual Retirement Accounts, or I-R-A-s, some people call them IRAs.
My guest, Hayden Adams, will offer some guidance on using IRAs to save for the retirement you want.
Hayden is a director of tax and wealth management at the Schwab Center for Financial Research. He's also a certified financial planner and certified public accountant, and he provides analysis and insights on topics like income tax planning, tax-efficient investing, asset allocation, and retirement withdrawal strategies.
Hayden, welcome to the podcast and thanks for joining me today.
HAYDEN ADAMS: Thanks for having me, Mark.
MARK: Hayden, let’s start at the beginning, and for people who might not know all the details, can you explain what an I-R-A, some people call them IRAs, what are they, and why do they exist?
HAYDEN: Yeah, most people know them as Individual Retirement Accounts, but believe it or not, the IRS actually has a completely different name. They call them "Individual Retirement Arrangements," but in the end, it’s the same acronym, IRA, so it’s the same thing, just slightly different name.
The whole idea behind IRAs was, basically, Congress was trying to encourage people to save for retirement. Congress knows that "Hey, yeah, we’ve got Social Security, we’ve got some, you know, medical protections for the population, but in the end, that’s generally not enough money for most people to live a comfortable retirement." So the government generally groups the accounts into two main classes. First, there’s the taxable account. So that’s like your brokerage account or your bank account. The reason they call it a taxable account is because before you can contribute to those accounts, that money becomes taxable, so like your wages get taxed, then whatever is left over after your taxes, you can put into your bank or brokerage account. The next class of accounts is tax-advantaged accounts, and that’s where the IRA falls. And those tax-advantaged accounts are divided into, basically, two subcategories. The first is tax-deferred retirement accounts. That’s like your traditional IRA. So what happens is, in general, you’re given a deduction when you make your contribution, so that reduces your tax bill. And then everything could grow tax-free, and then, finally, when you pull the money out at the very end, that’s when you’ll eventually be taxed as ordinary income.
The other account is Roth accounts, and there’s two Roth accounts. There’s a Roth IRA, and there’s a Roth 401(k), also known as a designated Roth account. With those accounts, you don’t get a deduction up front, so, basically, you have to pay taxes. Just like you would with the taxable account—you pay the taxes first, whatever is left over, then you can contribute to those accounts, the Roth accounts. And then the assets grow tax-free, and then, finally, when you pull out the money, assuming you meet all the rules and requirements, you can pull that money out tax-free when you’re in retirement.
MARK: Hayden, you mentioned Roth accounts and, you know, what we’re calling traditional accounts, or traditional IRA accounts. The standard advice is that younger investors, they should be opening a Roth because their tax rates are low now and those tax rates will probably rise over time. What do you think about that advice? For a younger investor, does it make sense to assume that one’s tax rate is going to be higher as they advance in their careers?
HAYDEN: Generally, yes. Over a person’s career, their earnings tend to go up over time. And that’s kind of logical. I mean, you look at somebody who just graduates from college, and it’s like probably their first job, their wages are going to be lower. As they progress through their career, their income starts to go up and up, hopefully. And then, finally, when they reach their late 50s, maybe early 60s, generally speaking, that’s when somebody reaches their highest income-earning potential. So overall, when it comes to making contributions to retirement accounts, it tends to make a lot of sense for people to focus on a Roth account when their income is lower, because when your income is lower, your tax bracket is going to be lower. As your income increases over time, then it may make more sense later on to use a tax-deferred account.
MARK: The focus of this episode, as we mentioned, is on younger investors, but let’s assume that we’ve got some older listeners out there. Can a Roth still make sense for them, even though they don’t get that upfront tax deduction?
HAYDEN: Yeah, definitely, because when it comes to this whole decision as to which account to contribute to, the hard part is, you know, for some of us, we might be looking 20, 30 years into the future, and you just don’t know what the future holds. So, for some individuals, it can still make sense to contribute to a Roth, even if your income is relatively high, because perhaps your income could be even higher, or perhaps the tax brackets could change, and tax rates could go up in the future. So those two factors, your income and what the future taxes are, can make the decision a little bit more difficult.
Now, it can be sometimes easy, even for people in higher tax brackets who maybe have a bad year. Say, you own a business, your income went down, that happened to a lot of people during COVID, and because of that reduction in income, maybe that’s a good year for you to consider contributing to a Roth because you’re in a slightly lower tax bracket than normal. And then, you know, as your income goes back up again, you switch to a tax-deferred account.
In the end, there are a group of people who it can be a little bit more of a difficult decision for, and that’s kind of that middle tax bracket where you don’t know what the future holds. Are you going to stay where you are versus go up in tax bracket in the future? And we can talk a little bit more about that later on, but there is a strategy that individuals can use if you kind of fall into that middle area.
MARK: How about the younger investor just kind of getting started out? You had mentioned Roth is probably the best place to start, but are there cases where the traditional IRA makes more sense for somebody who is just getting started?
HAYDEN: Yeah, generally speaking, I think it makes sense to contribute to almost any retirement account, just because it’s better to save than to not, but, you know, there are people who, even when they’re in a lower tax bracket, they don’t like the idea of a Roth simply because you don’t get a tax deduction for it. And tax aversion is a very common thing—a lot of people just don’t like the idea of paying any more taxes than they absolutely have to. And the Roth account, unfortunately, doesn’t help with that because you don’t get a tax deduction for it upfront. So for those individuals who are very concerned about maximizing their tax deductions, contributing to a traditional IRA where you do get a tax deduction if you meet the requirements can make a lot of sense, because in the end, what really matters is to save as much as you can as soon as you can.
MARK: Yeah, good advice. I think your point about getting that upfront deduction, I think that’s really appealing. Let’s get into some more of the nuts and bolts here. How much can someone contribute to an IRA in any given tax year?
HAYDEN: So, unfortunately, the traditional IRA has one of the lowest contribution limits of all the tax-advantaged accounts. That limit for the traditional IRA is also the same limit for a Roth account. You can contribute up to $6,000, and if you’re over age 50, you can contribute an additional 1,000.
Now, when it comes to the traditional IRA, just because you can contribute to it doesn’t necessarily mean you’re going to get a deduction for it. So you have to meet several requirements before you can actually receive a deduction for your contributions to a traditional IRA. Now, with a Roth, there is no deduction, so it has a whole set of different rules and income limits, but we’ll focus right now on the traditional IRA rules. So, first of all, if you are not a part of an employer-sponsored plan—so like a 401(k), TSP plan, something like that—there is no limit on whether or not you get a deduction for your contributions to an IRA. Now, if you have a spouse who is covered by an employer-sponsored plan—again, like a 401(k)—there can be potential limits to your deduction for contributions to one of these plans. Now, if neither you nor your spouse is a part of one of these plans, then there are no limits. You can definitely get a deduction for your contributions to an IRA. You don’t have to worry about it if you have no employer plan, but anybody who is a part of an employer plan or has a spouse who is, you should definitely check out those limits and make sure before making contributions to an IRA that you’re able to get a deduction for them.
MARK: Hayden, given that the contribution limits, as you were just describing, you know, $6,000 a year, even with the extra $1,000, if you’re over 50, that’s still a pretty low amount, as you mentioned. So that means one of these accounts is probably not going to be your only investment account. Is that right?
HAYDEN: Yeah, for a lot of people, there’s a plethora of different retirement accounts that you can contribute to. There’s SEPs. There’s 401(k)s. You might work for the government at some point, or for a charity, and they might have a 403(b), so there’s a variety of accounts that you can contribute to.
MARK: Hayden, IRAs have become incredibly popular since they were first introduced. As you mentioned right at the very beginning, Congress was trying to create incentives for people to save more for retirement, and these accounts certainly have done the trick. What you think makes them … why have they been successful? What makes them so special?
HAYDEN: Well, I think the thing that makes the IRA the most unique is that almost anyone can open one of these accounts. Basically, as long as you have some form of earned income, you can contribute to an IRA, and it’s extremely easy to open one of these accounts. For example, it literally takes a few minutes at Schwab to open one of these accounts. In fact, I actually just opened an additional account for myself just recently, and it was crazy, it was like three clicks, and, boom, and I had the account opened.
The other nice thing about them is they’re cheap, if not free. So, for example, at Schwab, it was free to open it, and there’s no administration fees either. Now, there might be fees for some of the investments that I put in there, so like if I have a mutual fund that’s got like fees, then, you know, there might be fees along those lines. But there’s a lot of flexibility when it comes to opening them, how cheap it is, and the investment options, there’s a huge number of them. In fact, probably quite a bit more investment options in an IRA than there are when you’re using something like a 401(k).
MARK: Hayden, many investors are getting exposed to saving for retirement for the first time when they first, kind of when they first get that first real job, and their employer offers them a 401(k) plan. Is it going to be better, ultimately, to save for retirement in a 401(k) or an IRA?
HAYDEN: So, in general, you know, I’d say the best option is the one that you can get the most money into. 401(k) basically wins in this respect, because as we said before, you know, 6,000 is the limit for an IRA, but the normal limit for a 401(k) this year is 20,500. And if you’re over age 50, you can contribute another 6,500 in catch-up contributions, so that’s $27,000 in total, if you’re over age 50. So just right there, the 401(k) wins, simply for amount you can contribute.
Now, in addition, since a 401(k) is generally offered by an employer, a lot of employers offer matching contributions, which is basically free money. So they’ll have rules that say like, you know, the first 5% that you contribute, we’ll match dollar for dollar, or something like that. And it’s, basically, free money that you can get on top of sort of that 20,500, or, you know, that 27,000, if you’re over 50. Of course, not everybody works for somebody who offers a 401(k), and that’s where an IRA steps in, to give options to everybody to have a retirement plan, not just those who work for an employer that offers something like that.
MARK: We already talked about the Roth version of the Individual Retirement Account, but what are some of the other types and flavors of these accounts that are out there, and what sorts of people are eligible to open these kinds of accounts?
HAYDEN: So over the years, Congress has created numerous types of IRAs and different types of retirement accounts, just, again, trying to encourage people to save. Now, we’ve talked about the traditional IRA and gone over kind of the basics of it, but the Roth is basically the exact opposite of the traditional IRA.
Now, they also have SIMPLE IRAs—it’s a good acronym because it’s pretty simple to set up for like a small employer, and it has a slightly bigger contribution limit than a traditional IRA and Roth. So you can contribute in 2022 up to $14,000, and if you’re over age 50, you can contribute an additional $3,000, so that gives you a total of up to $17,000 if you’re over age 50.
Another one is a SEP IRA. Now, this one is very interesting, especially for those who are self-employed. And it’s really interesting if you’re self-employed and maybe you’re the only employee, or you have very few employees, because this one has an incredibly high contribution limit. Basically, you can contribute up to $61,000 in 2022, depending on your income level. There are other limitations, so like if you’re like self-employed, you can’t contribute more than 20% of your income up to $61,000. So that’s a great option to defer as much as possible into one of these accounts. Now, is that available to everyone? No, it’s not going to be available to a lot of people who aren’t self-employed, or don’t own a business, or something like that.
But, I mean, there’s a huge number of options out there, and I encourage everybody to seek out not just the traditional IRA, because it’s the one most people know about, but to talk to a financial planner and figure out what account type is the best for them, because there’s even something like a solo 401(k), where you can make some pretty hefty contributions to it, and it’s pretty affordable to set up. Not quite as cheap and as easy as a traditional IRA, but it might be worth the cost to maximize your contributions.
MARK: Let’s assume that you’ve opened a traditional IRA and life changes, your situation changes, and you decide that a Roth is better for you. Can you convert from one to the other, and what is the decision process that would make that a good idea?
HAYDEN: Oh, you can definitely convert from a traditional IRA to a Roth, but there are a few questions that you need to answer first. And the simplest one is do you even have an account that’s eligible to be converted to a Roth account? Because not all accounts are rollover-eligible, and you will need to check with your plan to see if your account can be rolled over.
The second question you need to ask yourself is, "Where is my tax bracket today compared to what I think my tax bracket is going to be in the future?" It’s that same question we were asking before as to whether or not should I contribute to a Roth versus a tax-deferred account. So, if you think you’re going to be in a higher tax bracket in the future, then it can make a lot of sense to do a Roth conversion.
The third question you have to ask yourself is how are you going to pay the taxes on this Roth conversion? Because when you do this conversion from one account type to the other, taxes end up being due. Generally speaking, you don’t want to pay the taxes from the account that you’re converting. You want to pay the taxes from some other account, like from cash in your bank account, or from your brokerage account, so that you can maximize how much money goes into the Roth.
And then, finally, when do you need this money is the last question you need to ask yourself, because you want to leave that money in the Roth account as long as possible. There are rules about like taking money out after a Roth conversion. It’s called the five-year rule. But, really, you don’t want to leave the money just five years before you take it out. You want to leave it there for 10, 15, 20. You want to give that money as long as possible to grow when you do a Roth conversion.
So those are a few things to think about when you’re thinking about this idea of whether or not you should approach a Roth conversion. And you should ask these questions before you actually do it, because once you do a Roth conversion, you can’t undo it. That’s surprising to a lot of people because in the past, before the Tax Cuts and Jobs Act of 2017, you could do Roth conversions and undo them, but that is no longer the case. Once you do one, you’re stuck with it.
MARK: Yeah, I mean, that entire process, the way you described it, I mean, it’s a great example of why, you know, consulting with a tax advisor or a financial advisor to help walk through all the different scenarios. And as you mentioned, it’s an irrevocable decision, so you want to make sure you get it right, and getting an extra pair of eyes to look at makes a lot of sense.
Especially for the younger listeners who may just be starting to invest, I mean, these accounts are called Individual Retirement Accounts, so, clearly, they were designed for retirement, but is that the only goal for which an IRA account makes sense?
HAYDEN: Not necessarily. I think it’s definitely the primary goal. It’s the main thing that most people will want to think about. But it also could be used as a way for wealth transfer. And what I mean by that is like, so, say, you have children, or grandchildren, or heirs that you want to pass your wealth onto, an IRA can be a very useful tool to transfer a large amount of wealth. Somebody who perhaps wants to give some assets to their children could use that IRA and say, "Look, I don’t need that money, so I’m going to set this aside and let my heirs have it."
The downside with that strategy is that you do have to take required minimum distributions from tax-deferred IRA accounts. So another option for people when it comes to this process is, like you talked about, the Roth conversion. So you could convert those assets from that tax-deferred status to the Roth status. Again, you have to pay those taxes.
Say you’re in your 70s and you think you’re going to live into your 90s, so that’s 20 years right there, and you did a Roth conversion, you could pass that Roth account onto your heirs, and they could basically get tax-free assets. Now, depending on who the individual is who inherits those assets, they will have to distribute them over … generally speaking, it’s a 10-year period if it’s like your children or something like that.
Now, the other thing you can do is you can use those funds for like a first-time home purchase, or adoption, or medical expenses. Now, I generally don’t recommend that people use that as their first source for paying for like a home purchase or something like that, or any of those … like adoptions expenses, because if you’ve got the cash in your bank account, that’s usually the better money to go after, because once you pull the money out of those retirement accounts, you generally can’t put it back in.
MARK: Hayden, earlier we talked about what do you do if you’re eligible for both a traditional IRA and a 401(k) plan, for example. You know, you might potentially have multiple accounts. There are also, as you mentioned, multiple types of IRAs. Let’s say someone is eligible for multiple types of IRAs. How does that person decide which one is right?
HAYDEN: Yeah, that can actually be a pretty complex decision. And, in fact, people underestimate how important that decision is as to which accounts to contribute to. We already talked about how you want to contribute as much as you possibly can. So like sometimes the decision could be pretty clear between like, say, a traditional IRA and a 401(k). You may want to go after the 401(k), specifically, because you can contribute more to it. But where it gets a little bit more difficult is the decision between, "Should I contribute to a tax-deferred account, or should I contribute to that Roth account?" And we were talking about how the younger people, generally, it can be a somewhat simple decision for them because they’re probably at their lowest earning potential of their entire career, and, you know, hopefully, they’re going to see their wages keep going up and up and up and up until, you know, they reach right before retirement where they’re going to be at their peak earning potential. So for the younger individuals, it tends to make sense to use those Roth accounts.
Whereas if you’re a person who is perhaps at your highest earning potential, which, again, tends to be when you’re in your 50s and 60s, that’s where a tax-deferred account can make a lot of sense, because what generally we see happen is that once you’re at your highest earning potential, you’re probably going to see your tax rate drop maybe one or two tax brackets as you move into retirement. Now, that’s assuming all things being equal because, again, you know, Congress can change the tax laws and raise tax rates and all that kind of stuff.
Where it gets a bit more complicated is for people in those middle tax brackets. So I probably fall as a good example here. I’m 45 years old, so I’m, you know, not quite at my highest earning potential, likely. You know, hopefully, over my career, I’ll keep progressing, and my income will keep increasing, but you don’t know for sure. So, for me it could be one of those situations where it’s like am I going to be in a higher tax bracket or not in the future, or am I equal to the tax bracket that I’ll be in when I’m in retirement? For someone like me, it can make a lot of sense to divide your contributions because it’s kind of almost hedging your bets. You’re not sure what the future holds, so contribute to both accounts. And what you can do is split it and say like, "I’m going to contribute to a Roth and to a tax-deferred account and split my contributions between the two because I just don’t know what the future holds."
MARK: All right, Hayden, just a couple of more questions, and I’ll let you go. You mentioned a couple of times, at least, that, you know, really, these are meant to be really broad universal accounts that almost everyone is eligible for. Are there any conditions, though, under which someone would not be eligible to open an IRA account?
HAYDEN: The first and most important rule is that you have to have earned income, but, again, for every rule, there’s an exception to the rule when it comes to the IRS. And so like, say, you have a spouse who doesn’t have earned income because they’re not working. Well, your spouse can even open up a traditional IRA and make contributions. Basically, they’re going to contribute your earnings to the retirement account. So, again, that’s the big flexibility in traditional IRAs, which makes them so popular.
And believe it or not, even kids can contribute to an IRA. So if you have a young child who’s got a part-time job, or something like that, even they can open a retirement account. You know, again, it teaches them how to save at a very young age. And the general rule is to save as much as you can as soon as you can—that gives them even more time to save if you create a situation where your child can open an IRA account. And, in fact, there’s even strategies where, you know, you can look at their earned income, and, you know, you might have them contribute their earned income to the account—that kind of teaches them how to save—and then you could like give them some money as a gift, and say, "Here, use this money to live on, but put that earnings into your retirement account." So that’s a strategy that some people use in order to encourage savings at a younger age.
MARK: All right, Hayden, last question. We’ve talked about you got to, you know, open these accounts, you’ve got to put, you know, cash into these accounts, pick the account type, but at that point, you’ve got to make the decision to decide how to invest that. You don’t want to just leave that money in the entirety of that portfolio in cash, given that for most people, you know, these are long-term investments. We could talk all day about, you know, different invest decisions there. But my question to you is are there any restrictions on what sort of investments that someone can hold in their Individual Retirement Account?
HAYDEN: Oh, there definitely are, and there’s some pretty hefty consequences to breaking these rules. When it comes to prohibited investments, for example, you can’t have life insurance, you can’t have like items like antiques, or any kind of collectibles, you know, like Beanie Babies, something like that in your retirement account. You also can’t have personal real estate, so you can’t go out there and buy a house that you’re using as like a vacation home or something like that. Even if you’re renting it part of the time, you can’t use it.
So there are opportunities for having real estate in an IRA, but you have to be really, really careful about that, it cannot in any way, shape, or form be personal, because if you do anything when it comes to prohibited transactions, you could potentially negate the entire retirement account. And what I mean by that is the IRS would say like, "Hey, on the first day of the year, because you used a prohibited investment, that entire amount is distributed." And, in fact, it can be the entire account can be distributed, and you lose your status as having a tax-deferred retirement account, and you have to recognize all the income in that year. And that’s not just for specific investments; it’s also for specific types of transactions. You can borrow from certain retirement accounts like a 401(k), but you can’t do that with an IRA. You also can’t sell property to your IRA, and, again, like anything that’s with any kind of personal use items, that could basically wipe out your IRA account and force a 100% distribution.
MARK: Hayden is a director of tax and wealth management at the Schwab Center for Financial Research. Hayden, thanks for being here.
HAYDEN: Well, thanks for having me, Mark.
MARK: The way we do these podcasts is that we usually do the interview first and then sometime later we record this last part where we wrap it all up. As I was re-listening to the interview with Hayden, this retirement-saving process started to remind of Scrabble.
At one level, Scrabble’s a simple game. All the players have letters, and each is trying to make words out of those letters building off words that have already been created by other players and are on the board.
Not surprisingly, you need at least a reasonable vocabulary to play Scrabble just like you need to save a reasonable amount of money to prepare for retirement.
But I have an adequate vocabulary, and nevertheless, I’ve managed to win one game of Scrabble with my wife in 29 plus years of marriage. And I’m not convinced her vocabulary is that much better than mine. I think what’s going on is that her tactics are so much better than mine when it comes to exploiting some of the oddities of the Scrabble board.
There are all these places where if your word covers certain squares, you get three times the number of points that you would normally earn for that word.
There are other squares where whatever letter you put on that square, you earn three times as many points for that letter. For example, using a Q earns you a lot of points. Use a Q on a triple-letter square, and you earn huge bonus points. She’s so much better at taking advantage of these opportunities, and it really makes a difference.
This same thinking applies to retirement savings, tax planning, and selecting accounts. Saving money and investing prudently is a big part of successful retirement planning, just like knowing a lot of words helps a lot when playing Scrabble, but you shouldn’t neglect the details that Hayden covered when you're investing.
To invest tax efficiently requires an understanding of different account types and the way different asset sales or distributions are taxed within a taxable brokerage account.
But if gaining that understanding sounds like a lot of work and might be contributing to your procrastination with getting started saving for retirement—well, you're in luck, because IRAs exist.
Hayden gave us a lot of good information on IRAs, which are a great way to start investing for your future in a tax-advantaged way. Provided you meet the eligibility requirements he mentioned, you can start building a retirement portfolio right away.
Yes, some thought and work is required. There are various limitations and exceptions and different types of IRAs. But try to think of it as the effort you must make to launch a rocket that will save the Earth from an asteroid strike. You have to buy fuel. Hire and pay a team to launch. Make sure the computers work and are aiming the rocket in the right direction.
All mundane tasks. But the rocket will nudge that asteroid far, far away so it won't clobber our planet. Do the boring, small stuff now, and you'll stand a better chance of reaping the rewards when you retire.
For more information on how to get started with an IRA, visit Schwab.com/IRA.
And there are also informative articles, videos, and podcasts on saving for retirement on Schwab’s Insights & Education site, which you can check out at Schwab.com/Learn.
And if you’re wondering whether retirement planning is even necessary given the risks that an asteroid might hit earth in your lifetime and we haven’t proved out this rocket-nudging technology yet, don’t worry. NASA says that no known asteroid larger than 140 meters—about the size of a small football stadium, and the kind that could cause a planet-wide catastrophe—has a significant chance to hit Earth in the next 100 years.6
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On the next episode, we'll talk with a Schwab branch manager about what to do if you already have an IRA and you're ready to turn your retirement savings into retirement income.
And if you want more of the kinds of insights we bring you on Financial Decoder about how to improve your financial decisions, you can also follow me on Twitter @MarkRiepe. M-A-R-K-R-I-E-P-E.
For important disclosures, see the show notes and Schwab.com/FinancialDecoder.
1 Wei-Haas, Maya, "Last Day of the Dinosaurs' Reign Captured in Stunning Detail," nationalgeographic.com, published September 9, 2019,
2 Bunch, Ted E. et al, "A Tunguska Sized Airburst Destroyed Tall el-Hammam, a Middle Bronze Age City in the Jordan Valley Near the Dead Sea," nature.com, published September 20, 2021,
3 "The Tunguska Impact – 100 Years later," nasa.gov, published June 30, 2008, https://science.nasa.gov/science-news/science-at-nasa/2008/30jun_tunguska.
4 Center for Near Earth Object Studies (CNEOS), NASA Jet Propulsion Laboratory, California Institute of Technology, "Planetary Defense," accessed June 13, 2022, https://cneos.jpl.nasa.gov/pd/.
5 NASA Blogs, "NASA, SpaceX Launch DART: First Planetary Defense Test Mission, "Double Asteroid Redirection Test (DART) Mission page, nasa.gov, November 24, 2021, https://blogs.nasa.gov/dart/2021/11/24/nasa-spacex-launch-dart-first-planetary-defense-test-mission/.
6 Planetary Defense Coordination Office, nasa.gov, Near-Earth Object Observations Program, Objective section, accessed June 16, 2022, https://www.nasa.gov/specials/pdco/index.html#dart.
7 Picard, Caroline, "20 Scrabble Tricks That Will Help You Win Every Time," goodhousekeeping.com, April 12, 2018, https://www.goodhousekeeping.com/life/entertainment/g19731948/scrabble-tricks/?slide=2
Instinctively, most people know that it's a good idea to save money for the future. But when it comes to saving for retirement, there are complex decisions each person must face—and typically when they are just starting out in the workforce. Is it better to contribute to a 401(k) or a Roth IRA? When can a traditional IRA make sense? How can you convert a traditional account to a Roth account?
In this episode, Mark Riepe speaks with Hayden Adams. Hayden is director of tax and wealth management at the Schwab Center for Financial Research. He's also a CERTIFIED FINANCIAL PLANNER™ professional and certified public accountant, and he provides analysis and insights on topics like income tax planning, tax-efficient investing, asset allocation, and retirement withdrawal strategies.
Hayden and Mark discuss the history of IRAs, the various types of accounts, how to invest once the account is open, and many of the pressing decisions facing younger investors when they are deciding how best to save for their future. Taxes play a key role in many of the decisions, and Hayden walks listeners through the potential pitfalls—and benefits—of each savings-related decision.
Follow Financial Decoder for free on Apple Podcasts or wherever you listen.
Financial Decoder is an original podcast from Charles Schwab. For more on the series, visit Schwab.com/FinancialDecoder.
If you enjoy the show, please leave us a rating or review on Apple Podcasts.
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions.
This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
Investing involves risk including loss of principal.
Roth IRA conversions require a 5-year holding period before earnings can be withdrawn tax free and subsequent conversions will require their own 5-year holding period. In addition, earnings distributions prior to age 59 1/2 are subject to an early withdrawal penalty.
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