3 Things 5-25-26

 Thing One

Why the Roth Makes More Sense Than Ever

We get the question from time to time about whether a Traditional IRA or a Roth IRA is better. And over the years, we’ve tried to explain that the real question isn’t which account is “better.” The real question is: how do you structure your retirement assets to pay the lowest possible tax rate across your lifetime — and potentially your kids’ lifetime too? That’s an entirely different conversation.

Most people approach retirement planning like an investment problem. They focus on rates of return, contribution amounts, and market performance. But increasingly, retirement planning has become a tax management problem. Because when you compare Roth and Traditional accounts side by side, the biggest variable isn’t your investment return. It isn’t your savings rate. It isn’t even the market itself.

It’s your future tax rate.

And that’s where the Roth starts making a lot more sense today than it did 10 or 20 years ago. One of the biggest reasons is the national debt. The United States is now over $36 trillion in debt, and that number continues to rise at an unsustainable pace. As interest rates have moved higher, the cost to service that debt has exploded as well. In fact, interest payments alone are now rivaling — and in some years exceeding — major government spending categories like national defense.

That matters because governments only have a limited number of ways to deal with debt problems at this scale. They can raise taxes, inflate the currency, or use some combination of both. Neither outcome is particularly attractive for retirees who are heavily dependent on pre-tax retirement accounts.

If most of your retirement savings are sitting inside Traditional IRAs or 401(k)s, there’s an uncomfortable reality many people ignore: you don’t fully own all of that money yet. You own your portion of it.

The government owns the rest — they just haven’t decided what percentage they’re taking yet. And that percentage may look very different 10, 20, or 30 years from now than it does today.

Think about a retiree with $2 million inside a Traditional IRA. Most people mentally treat that as a $2 million asset. But it really isn’t. It’s a future taxable liability attached to an investment account. Every dollar withdrawn in retirement will eventually pass through the tax system, and if future tax rates rise meaningfully, retirees with large pre-tax balances could end up paying far more than they expected. The Roth changes that equation.

With a Roth account, you pay taxes on the seed instead of the harvest. Once the money is inside the account, future growth belongs entirely to you. There’s no future partnership with the IRS on the gains. And in an inflationary environment, Roth dollars become even more attractive because withdrawals remain tax-free even if nominal account balances rise dramatically over time.

That doesn’t mean Traditional accounts are bad. Far from it.

For many high earners, Traditional contributions still make a tremendous amount of sense. Reducing taxable income during peak earning years can be incredibly valuable. In many cases, the tax deduction today is too beneficial to ignore. But the mistake is treating retirement planning like an all-or-nothing decision. The real goal is tax diversification.

Having money spread across taxable accounts, tax-deferred accounts, and tax-free Roth accounts creates flexibility later in life when tax laws change, income fluctuates, or required minimum distributions begin. Flexibility matters because none of us know what future tax policy will look like.

Thing Two  

Gone Too Soon

Here some highlights (or maybe lowlights) from various researchers of inherited wealth:

............

A longitudinal study discussed by financial researcher Russell James found that roughly 42% of heirs saw their net worth fall back to — or below — pre-inheritance levels within about one year of receiving wealth.

Research from Ohio State University found similar patterns. About 35% of inheritors experienced no increase in wealth, or actually became worse off financially after receiving an inheritance. The average participant spent roughly half of what they inherited, and nearly 1 in 5 people who inherited more than $100,000 spent or lost it entirely.

Research published through Oxford University Press found that heirs depleted roughly half of inherited wealth within seven years.

And one of the most cited statistics in estate planning comes from The Williams Group, which estimates that approximately 70% of wealthy families lose their wealth by the second generation, and 90% by the third.

...........

That’s pretty sobering. Many parents spend 30 or 40 years sacrificing, saving, investing, and building wealth for the next generation. And yet much of that wealth disappears in a fraction of the time it took to create.

But here’s the important part: Most of the time, it’s not because the kids are irresponsible. It’s not bad investments. It’s not lifestyle inflation. It’s not even bad advisors. It’s that many families spend decades building wealth and almost no time preparing the next generation to receive it.

When asked for his thoughts on why the inherited wealth diasppears so quickly, one CPA with a large on-line following said, "...Because wealth transfers in documents. Wisdom only transfers in conversations. A trust can transfer assets. A will can distribute money.

But neither can teach judgment, stewardship, patience, discipline, gratitude, or responsibility. Those things have to be modeled. Discussed. Repeated over years..."

The families who preserve wealth across generations aren’t necessarily the families with the highest returns. They’re the families with the strongest communication. The ones having conversations around the dinner table about values, generosity, investing, mistakes, taxes, work ethic, and purpose long before wealth is ever transferred. If those conversations aren’t happening yet, start today. Because the greatest inheritance you leave your children may not be the money itself. It may be preparing them to handle it wisely. 

Thing Three

Just A Thought  

"What's the point of life if we don't let living change us?" - Julian Fellowes