Benefit of Roth Versus Traditional

Contributions are made to your retirement savings plan and can be made either pre-tax or after-tax.

This leaves us with the question—should the contributions to your retirement account be pre-tax or after-tax?

Pre-tax, or traditional, means that you don’t pay taxes with every contribution, but you will pay taxes when you withdraw the money.

On the other hand, the after-tax option, or Roth contribution, does not save taxes now but can if taken out tax free assuming the account has been in place for at least five years.

The Roth option is valuable and important to understand. Many in full-time ministry, or those on the lower end of the income spectrum, do not pay much income tax. We all complain about taxes, but you can make a mid to high 5 figure income with 3 children along with a commitment to tithing and be in a very low tax bracket.

One of the strong benefits of contributing to a retirement plan is the tax deductibility of your contribution. If you pay little income tax, that incentive goes away. A number of years ago, a congressman named Roth lead a campaign to create another tax incentive to save—no tax savings now, but no taxes to pay when you take the money out.

Interestingly, we sometimes pay more in taxes during retirement than during our earning years. That makes the Roth option very attractive. When you know that all or part of your Future Funded Ministry income will not be taxed, the incentive to save increases.

For most who pay little income tax, Roth is the way to go. Note that the Roth option is only available for contributions by the participant, not for employer contributions. Please discuss this option more with your tax advisor.

To sum it up:

1. Roth contributions are after-tax contributions, meaning you don't get any reduction in taxes for making the contribution. However, when you go to withdraw the funds in retirement, you won’t pay any taxes on the funds—what you initially contributed or the earnings.

2. Roth makes sense for people in a low tax bracket, pastors, and overseas missionaries.

3. Traditional contributions are pre-tax contributions that do reduce your taxes today. However, the contributions grow tax-deferred, meaning that when you withdraw the funds, you will pay taxes on the amount you receive, both the initial amount and the earnings.

4. Traditional makes sense for people in a high tax bracket.

5. Lastly, you do have the option to divide your contributions between traditional and Roth.

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Will I Have Enough Money to Retire?

Here are 5 factors that may affect your retirement savings

(1) Inflation

• Reduces how much you can buy today, compared to last year

• Historically, inflation averages 3% annually

• Your investments need to keep pace with or outpace inflation

(2) Investment Risk

• Determine how much potential gain you are aiming to achieve with your investments, understanding that also means you may potentially lose a similar amount

• More risk equals more volatility in returns and account values go up and down more

• Diversify your portfolio by allocating money to multiple asset classes so you are not totally exposed if one asset type (such as stocks) drops dramatically

(3) Healthcare and Long-Term Care Expenses

• A number of studies show that the average 65 year-old couple can expect to spend hundreds of thousands of dollars on healthcare in retirement

• The combination of increasing life expectancy and growing medical treatment costs can have a huge negative impact on savings

• Consider obtaining Long Term Care insurance

• The premiums can be significant, but having the coverage in place may help avoid disrupting your overall retirement planning strategy

(4) Taxes

• Employer-sponsored and individual pre-tax accounts offer a variety of ways to receive tax breaks when making your retirement savings contributions

• Pre-tax contributions provide a current reduction in taxable income, and therefore a reduction in the taxes you pay each year as you are adding to your accounts

• Roth contributions are done on an after-tax basis, which does not provide a current year tax advantage, but does allow you to make withdrawals on a tax-free basis in retirement

(5) You

• Set goals for what your financial needs will be in retirement

• Evaluate your personal risk profile and asset allocation strategy

• Take advantage of any employer matching contributions for which you may be eligible

• Roll over assets from former employer plans rather than cashing out those accounts

• Seek out trusted professional guidance or use available self-help tools

Is your staff prepared for the future? Visit Envoy Financial to learn how we can help you equip your staff for their retirement.

Tips on Setting up a Successful Retirement Plan

Do you wonder if you’re taking the right steps towards a successful retirement plan? Here are some tips that can help you make sure you’re on track.

Know your starting point

• What are the balances in your existing 403(b), 401(k), IRA, or savings accounts?

• Do you own other assets which may be convertible to cash in the future?

• What is your current income level?

• Do you currently have or follow a household budget?

• Does your employer offer a retirement plan?

• What are you currently contributing toward retirement?

• Are you taking full advantage of any possible employer match?

• How much experience do you have with investing?

• What is the current asset allocation of your investment portfolio?

Set realistic goals

• How long do you have to save before retirement?

• Do you know how much money you need to save for retirement?

• How much risk are you comfortable taking with your investments?

• Do you expect major future changes to your income or expenses?

• How much can you realistically increase your contributions?

Avoid Pitfalls That May Reduce Savings Today and in the Future

• Set aside and maintain an emergency fund for unexpected expenses.

• Do not wait until late in your earnings years to start saving—start early.

• Once you start saving, continue the habit, even if it is a small amount.

• Avoid withdrawals during earning years, including loans and hardship distributions.

• When you leave an employer, rollover your assets—don’t cash out your account.

You do not have to do this on your own

• Discuss financial goals with your spouse and family.

• Review potential budget changes and opportunities to increase contributions.

• Read and learn to understand your account statements.

• Utilize professional advice from your investment providers when it is available.

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