The Procrastination Problem
by SGL Financial
Our 2 Cents – Episode #109
The Procrastination Problem
We are back with another new episode of Our 2 Cents! Today we are discussing the rate increase for Social Security that might be coming your way, the dangers of procrastinating on your retirement planning and answering a question from one of our loyal listeners. Click above to listen in now!
- Social Security Raise Ahead in 2023 :
- Current assumptions show a huge jump in 2023 due to inflation.
- Just how much of an impact could that make for retirees?
- What else should you be aware of with a Social Security raise like this?
- The Procrastination Problem:
- Reasons procrastination might be stalling your retirement planning.
- Have you been “hitting the snooze button” on important planning decisions?
- How to overcome procrastination challenges.
- The importance of thinking longer-term and not only the immediate consequences.
- Listener Question:
- “You often talk about having retirement funds in different tax buckets. Do you recommend residents of Illinois contribute to Roth 401(k)s? I ask because I believe contributions to a Roth would be taxed as ordinary income, however contributions to a traditional 401(k) would not be taxed by Illinois now or at the time of withdrawal. Seems like you are incurring the 5% (roughly) tax unnecessarily?” – Jeff P.
Tune in now to join us for this discussion!
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Announcer: You’re listening to Our 2 Cents with the team from SGL Financial, building wealth for life. Steve Lewit is the president of SGL Financial, and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Good morning, everybody. Welcome to Our 2 Cents. It’s Gabriel Lewit here and Steven Lewit.
Steve Lewit: The other penny.
Gabriel Lewit: Joining live with you here. Well, for us live, of course, on Thursday morning. And hopefully you are having a wonderful Sunday morning, Monday morning, whatever time you’re listening.
Steve Lewit: This weather is beautiful, isn’t it?
Gabriel Lewit: Yeah. It’s gorgeous.
Steve Lewit: Gorgeous weather.
Gabriel Lewit: It’s been. Well, I was in California for a couple days visiting.
Steve Lewit: Yeah, I was going to ask you about your trip.
Gabriel Lewit: Visiting wine country.
Steve Lewit: Yeah. So tell us.
Gabriel Lewit: Sonoma Valley. Apparently, there’s a competition out there, which I wasn’t fully aware of between Sonoma Valley and Napa Valley.
Steve Lewit: Definitely, yes.
Gabriel Lewit: And I was in the Sonoma Valley side, which Sonoma knights, I don’t know if that’s what they call themselves, but I’m going to use it, claim they’ve got the better valley and the better town. And Napa Valley people, which we didn’t get to Napa Valley, claim they’ve got the better wines.
Steve Lewit: Ah, so it’s a matter of, do you want to have fun and drink or drink and have fun?
Gabriel Lewit: I guess maybe.
Steve Lewit: Which goes first?
Gabriel Lewit: But speaking of weather is really dry out there, really. I mean, obviously you’ve heard there’s a drought, but you could kind of just feel it and see it everywhere you looked. I don’t know if that’s normal for Napa, but it was just bone dry.
Steve Lewit: All of California.
Gabriel Lewit: Bone dry. Yeah, very weird. And then coming back here to Illinois, everything is…
Steve Lewit: But I got to say this. You weren’t bone dry.
Gabriel Lewit: I did partake in a couple glasses.
Steve Lewit: Good for you.
Gabriel Lewit: Yes. And then of course you come back here, and it’s just gorgeous, cool, dew drops in the morning.
Steve Lewit: Yeah. It’s usually the other way around. California has the nicer weather.
Gabriel Lewit: So, kind of funny, but anyways, yeah. It was a good time. How are you doing?
Steve Lewit: I’m doing great. I missed you.
Gabriel Lewit: Well, thank you.
Steve Lewit: I missed you. I had to run the company.
Gabriel Lewit: So thoughtful of you.
Steve Lewit: I did all your work for you.
Gabriel Lewit: Hey, I’m pretty sure I was still doing it from the…
Steve Lewit: Yeah, you were.
Gabriel Lewit: From the plane.
Steve Lewit: Yeah. I kept saying, why is he sending me emails? He’s on vacation.
Gabriel Lewit: Well, that’s vacation folks.
Steve Lewit: Yeah, that is.
Gabriel Lewit: In today’s modern world, I think.
Steve Lewit: Yeah, man.
Gabriel Lewit: All right. Well, we’ve got a good show lined up for you. We’re going to take you through a couple cool topics here. We’re going to talk a little bit about Social Security, COLA projections.
Steve Lewit: I’m very happy about this, Gabriel.
Gabriel Lewit: Some of you out there will probably be very happy as well.
Steve Lewit: I one upped you.
Gabriel Lewit: You’re really excited about the fact that you get Social Security and I don’t.
Steve Lewit: Absolutely. And I’m getting an 11 point, maybe an 11.4% increase in my Social Security.
Gabriel Lewit: All right. Grinny grinner.
Steve Lewit: Yeah, man.
Gabriel Lewit: Why don’t you take us away on this topic then because you’re so excited about it.
Steve Lewit: Well, Social Security is pegged to inflation. Inflation is pretty high, and they’re estimating over 9%, possibly an 11.4% increase in our senior little bit older people, Social Security payments, which we paid into in our entire lives. And you didn’t yet.
Gabriel Lewit: Pretty sure I’ve been paying into it my entire life. Yes.
Steve Lewit: Yes, yes. But you don’t get the rewards yet.
Gabriel Lewit: I may never because some think it’s a giant Ponzi scheme.
Steve Lewit: Well, it kind of is. It kind of is. They keep…
Gabriel Lewit: Well, I’m going to keep paying all this money and then I’m going to get 50% benefits or something when I’m older paying for all you guys.
Steve Lewit: Well, it’s a pre-purchase of an annuity.
Gabriel Lewit: I’m just kidding. I don’t think it’s that bad. I do think there’s some concerns in the future, but this is good news. Not for me, but for all you out there getting Social Security.
Steve Lewit: Well look, let’s face it. If Social Security is a big part of your retirement income and inflation’s at 9%, which was the recent estimate, things get tight, budgets get tight. Gas is more expensive, even though it’s come down a little bit, food is more expensive. And that rate increase is really, really important to many people.
Gabriel Lewit: Yeah. It really is. And look, Social Security for most people won’t cover all their expenses. So it’s not likely that this will cover, this increase in dollars is going to cover, I think I saw somewhere it might have been… Yeah, it’s right in here. It says this would increase average retiree benefits by $190 a month on average.
Steve Lewit: Well, that’s cool. I mean, most people, Social Security is the foundation of their retirement income.
Gabriel Lewit: It is, yeah. I’m calculating here on my calculator.
Steve Lewit: Oh, my.
Gabriel Lewit: Let’s say you get 40,000 a year. Let’s say you’re on the high end.
Steve Lewit: You’re doing this to impress me. You’re doing this to impress me.
Gabriel Lewit: That would be $3,600 a year.
Steve Lewit: That’s right.
Gabriel Lewit: That would be 300 a month.
Steve Lewit: Yeah.
Gabriel Lewit: So some of you might get a lot more and if you’re the average benefit is for single so you double that, you might be getting three, four, $500 more per month.
Steve Lewit: It’s a lot of dough.
Gabriel Lewit: Next year. Yeah, big deal.
Steve Lewit: Yeah. I think it’s a big deal especially in the state of savings. Savings are well, what’s interesting because savings for a certain part of the population are awful, and savings for another part of the population are really very high. So there’s this division between wealth, the rich and poor, and the middle seems to have gone away.
Gabriel Lewit: What did that have to do with Social Security COLA increase?
Steve Lewit: Well, I’m…
Gabriel Lewit: I’m calling you on that one. I’m not sure. I thought you were leading somewhere with it.
Steve Lewit: I was.
Gabriel Lewit: And then you stopped.
Steve Lewit: I am demonstrating that this increase is very important to a large part of the population because they have no savings and prices are up.
Gabriel Lewit: Got it. Okay. Yeah. So of course folks, what will this mean for you? We would have to help you calculate that if you’re curious, but it might be somewhere in the nine to 11.4% range, right. This isn’t guaranteed yet. The way that it gets priced out is based on third quarter inflation adjustments, okay, based on inflation data. So we’re going to keep an eye on it, right. And you’re starting to just hear some positive news though, as we get close to this point where we’ll know exactly what that is next year.
Steve Lewit: It’s good to get positive news. Inflation itself is not positive, but the fact that there’s a formula that makes up for it and at least helps folks along the way, I think that’s great.
Gabriel Lewit: Yeah. And so the ideal thing would be of course that you get the bump to Social Security, inflation goes down, maybe. Right? And then you end up being a little bit ahead. That would be optimistic.
Steve Lewit: Exactly.
Gabriel Lewit: You never know. Alrighty. Well, what else? Anything else you wanted to talk about on that? That’s pretty straightforward.
Steve Lewit: Pretty straightforward. It’s like getting a raise, and you don’t give it back if inflation goes back down.
Gabriel Lewit: Yeah. You were saying earlier to also remember your Medicare costs may go up.
Steve Lewit: Definitely. So yeah, that’s a smaller number.
Gabriel Lewit: But yeah, let’s say it’s 170 bucks a month and that goes up 10%. That would be $17 a month. So still high, but less than you would get from the dollar increase on Social Security.
Steve Lewit: The giveth is far greater than the taketh.
Gabriel Lewit: Yes. Correct.
Steve Lewit: In biblical terminology.
Gabriel Lewit: Okay.
Steve Lewit: Okay?
Gabriel Lewit: Sure.
Steve Lewit: All right. You got that everybody?
Gabriel Lewit: That was special.
Steve Lewit: I can’t quote the line in the book it came from.
Gabriel Lewit: All right, folks. Well, we’re going to move on to our next topic here today.
Steve Lewit: It’s one of those days, Gabriel. What can I tell you?
Gabriel Lewit: I can tell you’re in a very special mood today. And if you have any questions on Social Security, give us a call. (847) 499-3331 is again, my direct line. I haven’t done that in a while. 3330 is our main line. So pick who you’d like. Okay? 333, no, 3344 is Steve’s line if you’d like to call him directly.
Steve Lewit: Now that you’ve confused everybody, would you give that phone number again?
Gabriel Lewit: All right. (847) 499-3330. Okay, that’s our main line. That’s the correct number.
Steve Lewit: That is the correct. You got me confused for a minute.
Gabriel Lewit: All right. So, we were going to talk a little about procrastination today, but hold on before we get to that… No.
Steve Lewit: Why are we hold… Oh.
Gabriel Lewit: You see what I did there?
Steve Lewit: You got me there.
Gabriel Lewit: I did get you on that one.
Steve Lewit: You got me there.
Gabriel Lewit: I got nothing, but I got no shortage of dad jokes.
Steve Lewit: We’ll get to it in a few minutes, folks.
Gabriel Lewit: I’m just teasing. Procrastination. Well, how does it hurt your financial future is what we were going to talk about or are going to talk about.
Steve Lewit: We see folks, we see so many people, and we see so many issues. And we talk behind the scenes when we have our meetings here. We say, why don’t people want to take care of things that are obviously an issue? It’s like, this is an issue, yet it gets pushed down to the bottom of the hit list. And it might be something as small as… Well, not small, but something as getting your trust done or your will prepared, or your power of attorneys, or just getting a review of your portfolio, little things get pushed back and big things sometimes even bigger, get pushed back, like having a financial plan. So why? It’s hard for me to understand procrastination because I’m not a procrastinator. Are you a procrastinator?
Gabriel Lewit: I would say it depends on what it is, but in some ways, yeah.
Steve Lewit: What does that mean?
Gabriel Lewit: Well, for example, I missed a dentist cleaning like, four months ago. It might even be longer than that now. And I totally meant to call back to get it scheduled. And I keep procrastinating on it, and I got to do that.
Steve Lewit: A pain avoider.
Gabriel Lewit: Well, I don’t have any cavities or anything there. It’s always been very good last couple years, but I just get busy. I go to work, family, kids. I always say, Hey, I’m going to call because they’re open during the day. And then I get to work, and it’s really busy during the day. And so then I don’t call and by the time I get home, it’s closed. So my problem is the hours.
Steve Lewit: So, in your mind, working or family is more important than your teeth?
Gabriel Lewit: Well, I’m going to get…
Steve Lewit: I understand.
Gabriel Lewit: I already did get them cleaned. I spin brush them every day.
Steve Lewit: But you prioritize. We prioritize things, and we kind of never let some things get to the top of the list.
Gabriel Lewit: It’s true. Some things just, they stay bubbled down on the list. They never bubble up.
Steve Lewit: All right. So Gabriel, here’s a theory. Is procrastination a function of how much pain you feel about the problem?
Gabriel Lewit: I would definitely argue yes.
Steve Lewit: Then we agree. We’re not arguing. Yes.
Gabriel Lewit: Then I’ll argue no. Well, yes and no, right. So I technically know that if I don’t keep cleaning my teeth regularly, you’ll be more at risk for cavities and yellow teeth and gosh, gum disease and all the other stuff there. It just doesn’t feel immediate to me.
Steve Lewit: Right. So the fear of that is smaller than your drive to do. In other words, if you were walking down the block and it was a dark night and you saw somebody coming at you with a hood, you would have a lot of fear, and you would do something about it.
Gabriel Lewit: Probably run the other way.
Steve Lewit: Right. But the fear of 20 years from now, or 30 years from now, or 40 years of having bad teeth is not very painful to you so you don’t do anything. And I wonder if that’s why people procrastinate because they don’t feel the result of their decision today. It’s in the future.
Gabriel Lewit: That’s true. Well, you put me on the spot.
Steve Lewit: I’m sorry.
Gabriel Lewit: Do you procrastinate?
Steve Lewit: Well, I was thinking about my cleaning. I do it regularly, but if I could procrastinate because I have Sarai make the appointments for me, I’m kind of spoiled. So if she didn’t make the appointments, I’d probably do the same thing that you do.
Gabriel Lewit: Well, I’ve got my next one already scheduled.
Steve Lewit: Good for you.
Gabriel Lewit: So, I didn’t reschedule the one I missed. And so then a I was going to reschedule it, and then I’m like, well, now we’re five months away from the next one. And then it just got too close. And then if I rescheduled, then I have to move the other one back. It just seemed like a lot of work. So I just kept the next one that was scheduled.
Steve Lewit: Yeah. So take something. Let’s bring it back to financial stuff. Why don’t people have a financial plan? Why do they either don’t want to do it or put it off doing it?
Gabriel Lewit: Well, I think for very similar reasons, I think it’s the mindset, hey, I don’t need this right now. I can go another six months without this.
Steve Lewit: Or six years.
Gabriel Lewit: Well, I think people think shorter term, they say this is important. I’m going to retire in a couple years. I should probably part start putting this plan together. But you know what? It’s not for a couple years. I could do this in a couple more months from today. And then a couple more months goes by, and they say the same thing. They say, well, it’s just a couple more months, what’s it going to hurt? And you can actually keep a couple more months saying you, Ooh, I just thought of a good example of this because I hit my snooze button this morning. I have a tendency of hitting the snooze button. And before I realize that I’ve hit this news button six times and an hour has gone past or whatever it’s been. Right. And you just realize, holy buckets, I didn’t mean to do that. I just wanted to snooze a little bit more.
Steve Lewit: Yeah. I get that
Gabriel Lewit: And I think the same thing can happen with your financial plan. You keep hitting the snooze button, and before you know it, four or five years has gone by, and now you’re right there at retirement. And you’re like, okay, I really do need to wake up now.
Steve Lewit: I like that. I like that a lot.
Gabriel Lewit: So that’s about… I guess I do procrastinate a little bit. I like my sleep.
Steve Lewit: Sure. But if you had a machine, okay. A roll forward, see the future machine, and you saw the impact of your decision not to have a financial plan or to keep pressing the snooze button meaning you’re late and then you get under pressure and then you get nervous and all that stuff, would you then do what you’re supposed to do because it makes it more palpable that you see the impact or the result of your decision to wait?
Gabriel Lewit: Yes. So can I give another example?
Steve Lewit: Sure.
Gabriel Lewit: So I had a plane flight the other day, right, for my trip. And I did not pick this. The flight left at 6:00 AM. So folks, if you’re doing some quick mental math, that means I had to leave my house at 4:00 AM. which means I had to hit my alarm button at 3:40 AM.
Steve Lewit: Gave you 40 minutes of sleep.
Gabriel Lewit: Okay. So you know what I didn’t do on that day was hit my snooze button. And you know why I didn’t hit the snooze button?
Steve Lewit: You didn’t want to come home.
Gabriel Lewit: No, I did.
Steve Lewit: You didn’t want to see your kids?
Gabriel Lewit: No, I think you’re miss… I did not hit the snooze button because I didn’t want to miss the plane because it was very important that I get up that day.
Steve Lewit: Oh, I see. You woke up, but didn’t hit the snooze button. I got it. Yeah. Okay.
Gabriel Lewit: So, I didn’t procrastinate.
Steve Lewit: Right, because you knew if you missed the plane, you could see the impact of what would happen. You could…
Gabriel Lewit: It would be very bad.
Steve Lewit: You would roll out…
Gabriel Lewit: The whole vacation would’ve been ruined.
Steve Lewit: All the events that would happen if you didn’t make that plane, you could roll those out in your mind when you said, darn, I don’t want to do that.
Gabriel Lewit: Correct.
Steve Lewit: Now, if you could do that with a financial plan and see all the negative things that would happen, I think people would run to get a financial plan.
Gabriel Lewit: Well, I think so. It makes it a little… Missing a plane flight is very real. I think everyone could have, I don’t know about you, I’ve ran to an airplane a couple of times. I’ve never actually missed one.
Steve Lewit: Done that.
Gabriel Lewit: So, I don’t know what missing one feels like, but I’ve been close enough where I’m like, man, this would really stink.
Steve Lewit: Well, it’s like getting a flight canceled. It’s like getting a flight canceled. Have you ever had a flight canceled?
Gabriel Lewit: I have, yeah. It’s a pain. It just destroys everything. It’s a nightmare, customer service. It’s painful.
Steve Lewit: Everything.
Gabriel Lewit: So, you want to avoid it at all costs. And I think to some people that’s more real than their retirement. In fact, it reminds me another statistic where you hear that people spend more time planning their vacation than they do planning their retirement.
Steve Lewit: Exactly. And they don’t put off planning their vacation. They don’t procrastinate on that.
Gabriel Lewit: So, we touch upon one of the reasons here, why people procrastinate, right, which is just not realizing the consequences of that procrastination or fully envisioning it, and then saying, I’ve got more time. I’ve got more time.
Steve Lewit: So, if you are a person looking for help, but you don’t know who to listen to, Gabriel. Let’s say, you’re, I need help. I need an advisor. I don’t want to do this myself anymore. Or my advisor isn’t getting the job done because he doesn’t talk about taxes and legacy. And I need somebody that’s a college professor instead of a high school teacher, but I don’t know who to go to. I can’t find the right person. Is that procrastination?
Gabriel Lewit: It is. I would say it’s definitely procrastination if you say that, but then you don’t do anything to try to find that person. So I think the first step with anytime you catch yourself procrastinating is trying to figure out what the real reason for that is. If you can, be honest with yourself and say, why am I procrastinating? Is it just because I feel like I’ve got time? Is it because I’m not really worried deep down? I think I’ll be okay anyways.
Steve Lewit: Or to look at my finances is too stressful.
Gabriel Lewit: Is it too stressful for me? Is it just because I don’t know who to talk to? Once you can identify what that cause of procrastination is, you’re better equipped. Doesn’t mean you’ll be perfect, but you’re better equipped to be able to handle it.
Steve Lewit: At least you can see the hurdle that you either decide to jump over or you fall over, or you just don’t go over at all.
Gabriel Lewit: Well, like I do procrastinate on something else right now. I procrastinate on working out.
Steve Lewit: Oh, yeah.
Gabriel Lewit: So, I always have a reason but mostly the reason is I’m just too tired or I don’t have enough time. And those are hard ones to solve. Not enough time is always tricky. And the truth is just as they would say for working out, same goes for your financial plan, like the Nike slogan, sometimes you just got to do it. And then you get yourself into the habit of doing the things that you know you should do even if you’re feeling really crunched for time.
Steve Lewit: Well, I just had a conversation with a client that procrastinating on getting their trust done. And so, it’s been going on a while. Our job as fiduciaries is to make sure people get done what they need to get done. And this person is telling me, I just don’t want to talk about dying. I don’t want to talk about all of that stuff. I don’t want to deal with it.
Gabriel Lewit: Right. Well, yeah, that’s something where of course you don’t. Makes sense, but it’s going to really well, it won’t hurt you longer term, but it’s going to really hurt your family.
Steve Lewit: Exactly.
Gabriel Lewit: Right. So you do want to start to think about these impacts that’ll occur down the road and maybe that will help spur you or motivate you to take some action.
Steve Lewit: I got one more to add.
Gabriel Lewit: Yes.
Steve Lewit: How much procrastination is because people feel they can, whatever they do, isn’t going to be good enough. It’s not going to work. Life brings us a lot of disappointments. Things we plan don’t work out. And how much of procrastination is, yeah. I’ll make a plan, but it’s not going to work out anyway. So why bother? Like a perfectionist kind of thing.
Gabriel Lewit: I’m sure there’s a little bit there. I wouldn’t say that would be one I’ve encountered the most. I’ve actually encountered quite commonly somebody saying I didn’t do this for longest time because I just knew how bad it was going to look.
Steve Lewit: It’s like the man that has a pain in his heart but doesn’t go in for it.
Gabriel Lewit: Yeah. You’re just so…
Steve Lewit: I don’t want to face it.
Gabriel Lewit: I don’t want to face it. Right. I’m just going to ignore it. I’m going to pull the blankets over it and not look at
Steve Lewit: I’m going to press this snooze button.
Gabriel Lewit: Yeah. We’re not going to look at this one for a while because you know it’s going to be bad. So yeah, it’s like when my son, he scrapes his knee, he’s like, I don’t want to look at it. Like if I don’t look at it, it’s not going to hurt.
Steve Lewit: Exactly.
Gabriel Lewit: Right. So there’s a little bit of that. There’s probably some perfectionism in there where somebody just says, you know what? Why bother seeing somebody, paying somebody? What are they going to tell me anyways? I could just do this myself, kind of mentality.
Steve Lewit: I went to another advisor, and they didn’t help me at all. So this guy or gal is probably going to do the same thing, yeah.
Gabriel Lewit: Yeah, so…
Steve Lewit: So, are we procrastinating to end this section?
Gabriel Lewit: We might be. Well, I was trying to think of how to put a wrap on this. Well, folks, procrastination is potentially dangerous for you. So that’s what we were talking about, one of the biggest things for your retirement. And I’ll just give you an example of one case that I saw very recently with the client had procrastinated a little bit last year and working together with me, came back, and talked with me. It was May of this year and said, “Gabe, I don’t even know how to say this to you, but I lost about $300,000 in my portfolio. And yeah, I don’t know if I can even retire anymore.” And now of course, the markets come back a little bit and we don’t know what the year will bring. So there’s some second chances here for some folks that are seeing a little bit of a rebound.
Gabriel Lewit: But if this last market crash made you realize, gosh, I was way too risky. I was riding the wave of the last 10 years of a bull market. And I think I pushed my luck a little too far. And I caught the brunt of that on the nose. There might be a reset button for you here, right? So an example of procrastination is also greed in some ways, right? I’m doing so well. I’m doing so well. I don’t want to make a change and…
Steve Lewit: I don’t want to believe it’s going to change.
Gabriel Lewit: Right. And so I’m going to just ride this out. And that can hurt you. Right? And so procrastination in any way, shape or form, the point I was making here can come back to bite you whether it’s an insufficient amount saved, you realize too late that you could have done X, Y, or Z. And all of these things can help be addressed and advanced by working with a very experienced advisor and creating a great plan.
Steve Lewit: Take in a check up with a doctor each year. It’s the thing to do. Is that the wrap?
Gabriel Lewit: That’s the… Yes. Folks schedule that dentist appointment, schedule that financial review with Gabriel and Steve.
Steve Lewit: I’m still waiting for the wrap, folks.
Gabriel Lewit: The wrap is schedule your gym session. And schedule your, what else do we? I don’t know. Yeah, but those are three. Dentist, gym, financial advisor.
Steve Lewit: Yeah. That’s all from the book of Gabriel.
Gabriel Lewit: Get them booked. Yeah, the book of Gabriel.
Steve Lewit: The book of Gabriel. All right. What do we got next?
Gabriel Lewit: All right. Well, we’re going to end today with a listener question.
Steve Lewit: Oh, this is a complicated question.
Gabriel Lewit: This is not too complicated, but it’s a good question.
Steve Lewit: It’s a good question.
Gabriel Lewit: Yeah. So we’ve got, Jeff had asked the question here that he wants us to cover here. Says Gabriel always enjoy your podcast. Thank you, Jeff, always. I think you’re a repeat question, asker and I might add, I always enjoy your questions.
Steve Lewit: Likewise.
Gabriel Lewit: And so you mentioned here, you often talk about trying to have retirement funds in different buckets, tax buckets and that makes sense. Do you recommend residents of Illinois contribute to Roth 401ks? I ask because I believe you would be taxed on a Roth 401k contribution. However, for traditional 401k contributions would not be taxed by Illinois now or at the time of withdrawal. Are you then incurring the 5% approximately tax unnecessarily by contributing to a Roth 401k?
Steve Lewit: Good question. Good question. You want to take that, or?
Gabriel Lewit: Yeah. So folks, just to unpack a little bit there, just to give a little, in case you’re wondering a Roth 401k, of course, is after tax dollars. So if you contribute to those, you do get taxed, right? And that’s state and federal. And the traditional 401k, you don’t. It’s pre-tax dollars. Now, the difference is when they come out, of course, pre-tax contributions come out, and they get taxed, right. They’re tax deferred. And then they get taxed later. And some states do not tax IRA withdrawals.
Steve Lewit: Retirement funds.
Gabriel Lewit: Retirement funds, okay. After 59 and a half.
Steve Lewit: And Illinois is one of those states.
Gabriel Lewit: Illinois is one of those states. And so I think Jeff, what you’re saying here is, if you contribute to the Roth in Illinois, you’re paying an extra 4.95, basically 5% tax to get it into the tax free bucket. But if you had done the pre-tax and took it out later on, you would not owe that same 5% or 4.95% tax, correct?
Steve Lewit: Correct.
Gabriel Lewit: Okay.
Steve Lewit: I got a few things going through my head.
Gabriel Lewit: So the question was, well, technically you’re asking, does it still make sense to recommend a Roth 401k? That’s the question, given those circumstances. Okay. So thoughts? Pops?
Steve Lewit: Yes. Okay. So I’ve got two levels on this. Bear with me, folks. So first of all, if I’m going to contribute to a Roth, then I’m using pre-tax dollars that will get taxed as ordinary income because I’m contributing to the Roth, and it’s not tax deductible. So if we add in, you ran the numbers on this Gabriel, so if we add in the state tax at what is it, 4.95 to the federal tax, and then project that out 10 or 15 years as compared to putting my money in the 401k and taking the deduction, the 401k with a deduction actually comes out a little bit behind.
Gabriel Lewit: Which 401k?
Steve Lewit: Okay.
Gabriel Lewit: You said the 401k with the deduction.
Steve Lewit: The regular 401k actually comes out ahead. I’m sorry.
Gabriel Lewit: Yeah. So let me…
Steve Lewit: Taking the tax deduction and making the contribution to the regular 401k, not the Roth 401k because of the state tax, comes out better than the Roth.
Gabriel Lewit: Yeah. So to clarify folks…
Steve Lewit: Thank you.
Gabriel Lewit: If you had contributed to the traditional 401k, the same amount as the Roth. Well, obviously with the Roth, you’re paying taxes, state and federal, each step along the way, right, each year as you’re contributing. Okay. And then if you in retirement, let’s say, take out the full balance. Okay. And if it was taxed at the same exact rate, now we’re going to circle back to that, that’s such a big asterisk. Then yes, actually the traditional 401k would come out ahead of the Roth 401k because if your federal tax is the same, then you’re just being taxed more at the state level by contributing to the Roth 401k. Okay. But it’s not that simple.
Steve Lewit: Yes.
Gabriel Lewit: Would you agree?
Steve Lewit: I don’t know where you’re thinking, but I know what I’m thinking. So you say your piece first.
Gabriel Lewit: Well, yeah. So if the federal tax goes up, right, then it’s possible. Depends on how much the federal tax goes up. But if your marginal bracket went up to 24%, for example, instead of 22%…
Steve Lewit: Which is a small increase.
Gabriel Lewit: It’s very small increase. Then the two would be about the same, right? If your taxes went up in retirement, it would be about the same. You’ve also got to factor in what if the Illinois state tax goes up? Okay. So there’s been talks about creating a new tax system in Illinois. Hasn’t passed yet, but that’s always a risk factor. So sometimes with tax planning, Roth versus traditional, it’s not as black and white as just rates today because those rates change in the future. And so for many folks, it’s more important to them, even in theory, if rates stayed the same or went down a little bit, to have the tax protection that comes with knowing that it’s forever tax free.
Steve Lewit: It’s well said. So if you believe, like I believe that taxes will go up or taxes on my kids will go up when they inherit all of this stuff, then getting it into the tax free bucket, even though if taxes remain the same, it might put you a little bit behind the advantages, the potential advantages outweigh the risk of taxes remaining the same. That’s number one.
Gabriel Lewit: Yeah. Now generally folks, if you’re in a higher income bracket anyways, if you’re in 24% or higher today marginal bracket, we’re going to almost always recommend the pre-tax option, regardless, unless you spend a very high amount. It’s less likely that in retirement you’ll be above that bracket point, but it’s very unique and customized to you and what some of your goals are. If your goal is a tax free income, some of our clients, they just have one goal. I want to pay no taxes in retirement.
Steve Lewit: I don’t want to worry about taxes in the future.
Gabriel Lewit: So, numbers be darned and comparisons between now and 30 years from now be darned. I’m just going all Roth.
Steve Lewit: So, let me ask you a question, Gabriel.
Gabriel Lewit: So, some people do that.
Steve Lewit: Why can’t Jeff contribute to his 401k, take the tax deduction, and then convert it to a Roth. And when he converts it, the money coming out will be tax free to Illinois because it’s a retirement income distribution.
Gabriel Lewit: You’re throwing me a wrinkle that I’d have to double check. If you’re over 59 and a half, I believe that applies. I’d have to double check if you’re under 59 and half.
Steve Lewit: Let’s check because I don’t think there’s any age requirement to converting a 401k to a Roth if there’s a Roth option in the 401k.
Gabriel Lewit: No, I know you can convert it. I’m just saying whether or not you’d be taxed. If you’re under 59 and a half, whether or not you’d be taxed a state tax or if that’s somehow tied to it being… That’s an interesting question.
Steve Lewit: Yeah.
Gabriel Lewit: Yeah. Stumped me.
Steve Lewit: Yeah. I just thought of that.
Gabriel Lewit: Well, folks, look at Steve here throwing me on the spot, man.
Steve Lewit: Yeah, man. Well, let’s not procrastinate on this one.
Gabriel Lewit: Yeah, we’ll get the answer for that one.
Steve Lewit: Sorry to do that to you.
Gabriel Lewit: But Jeff, hopefully that helps other than the follow up question to the question. But yeah guys, if you have questions on these, these are good things to pay attention to. What your future tax rate’s going to be is very meaningful in your future retirement planning. So give us a call. If we can help (847) 499-3330 or send us an email of course, email@example.com or go to sglfinancial.com, click contact us, and write us your questions. And we’ll of course always answer them.
Steve Lewit: Yeah. Please do folks. Anything that’s bothering you or you’re thinking about, or you’re confused about because I confused you, which sometimes I do, just let Gabriel straighten it out for you.
Gabriel Lewit: Amen.
Steve Lewit: Amen.
Gabriel Lewit: I couldn’t think of anything else to say. All right, guys, have a wonderful day. And we’ll talk to you on the next one.
Steve Lewit: All right. Stay well, everybody.
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