The Roth 401K and Meal Planning Made Easy
Episode 289
Episode Guide
Episode Timestamps
ChooseFI Podcast Episode Show Notes
Episode Title: Roth 401k Insights and Meal Planning for Financial Literacy
Episode Summary:
In this episode, Sean Mulaney, known as the Five Tax Guy, discusses the implications of Roth 401ks and the importance of meal planning for enhancing financial literacy in families. Key comparisons between traditional and Roth 401k options are explored, alongside practical tips on involving children in budgeting and financial decision-making through meal planning.
Key Topics Discussed:
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Discussion of Roth 401k:
- Overview of how Roth 401k works compared to a traditional 401k.
- Tax implications for different income scenarios.
- Importance of considering future tax rates in retirement planning.
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Conversation with Sean Mulaney:
- Breaking down strategies for contributing to Roth vs. traditional 401k.
- Discussing flexibility in contribution strategies and considering a mix of both types.
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Meal Planning for Financial Literacy:
- Implementing meal planning as a tool for teaching financial literacy to children.
- Engaging children in meal decisions and budgeting allows them to understand and develop financial skills.
Actionable Takeaways:
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Roth 401k Strategy:
- Consider splitting contributions between Roth and traditional 401k accounts to diversify your tax strategies.
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Engaging Kids:
- Involve children in meal planning to teach budgeting and decision-making skills.
Key Quotes:
- “You can withdraw contributions from a Roth IRA tax and penalty-free!”
- “Meal planning connects kids to financial literacy in real-world scenarios!”
- “Normalizing financial conversations is key to engaging the next generation!”
Timestamps and Highlights:
- Podcast Intro
- Discussion of Roth 401k: Overview and implications.
- Conversation with Sean Mulaney: Deep dive into Roth 401k strategies.
- Meal Planning Segment: Discussing the importance of financial literacy through real-life applications.
FAQ:
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What is a Roth 401k?
- A Roth 401k allows you to contribute after-tax dollars, meaning your withdrawals in retirement can be tax-free, provided certain conditions are met.
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How can meal planning teach financial literacy to kids?
- Meal planning engages kids in budgeting and decision-making, making financial concepts relevant and applicable in their everyday lives.
Related Resources:
- Five Tax Guy website—Learn more from Sean Mulaney about tax strategies.
Discussion Questions:
- How can families implement meal planning to enhance financial literacy?
- What considerations should individuals take into account when choosing between Roth and traditional retirement accounts?
- How does engaging children in household budgeting impact their financial understanding?
Podcast Description:
Dive into the nuances of financial independence as Brad and Sean discuss Roth 401ks and innovative ways to teach financial literacy to children through meal planning. Gain actionable insights and strategies to optimize your financial future.
Closing Note:
- Podcast Extro
Understanding the Roth 401k and Financial Literacy for Families
In today's financial landscape, understanding your retirement options and fostering financial literacy among young generations is crucial. This article will equip you with direct strategies to optimize your Roth 401k contributions while also engaging children in personal finance through practical meal planning techniques.
Navigating the Roth 401k
What is a Roth 401k?
A Roth 401k allows you to contribute after-tax dollars, which means your withdrawals in retirement can be tax-free, provided you meet certain conditions. This financial tool is increasingly being offered by employers, making it essential for individuals to consider how it fits into their retirement strategies.
Benefits of a Roth 401k
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Potential for Tax-Free Growth: Contributions made to a Roth 401k grow tax-free. When you retire and begin to withdraw funds, you do so without incurring taxes, which can lead to significant savings over time.
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Withdrawal Flexibility: Although Roth 401k withdrawals work differently compared to Roth IRAs, if structured appropriately, you can access your contributions without penalty.
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Split Contributions: You don't have to commit entirely to one type of account. You can split your contributions between Roth and traditional 401ks, allowing you to diversify your tax strategies. For example, if you're unsure about future tax rates, you might consider contributing partially to both accounts to hedge against potential increases.
Tax Strategies and Future Considerations
When deciding between a traditional and Roth 401k, consider your current and expected future income levels. If you anticipate being in a higher tax bracket in retirement, opting for a Roth 401k could be advantageous. Conversely, if you expect your tax rate to decrease, you might lean towards traditional contributions.
Key Considerations:
- If you are at an artificially low income (e.g., after graduation), utilizing the Roth 401k is wise as you may lock in lower tax rates now.
- As the old saying goes, "It's all speculative." Being strategic now can yield benefits in your retirement years.
For more detailed insights into the Roth 401k, consider checking Five Tax Guy's website for additional resources.
Engaging Kids in Financial Literacy Through Meal Planning
The Importance of Meal Planning
Involve your children in meal planning as a palpable way to teach them about budgeting and decision-making. This approach fosters financial understanding and enhances their overall awareness of how daily choices affect finances.
How to Implement Meal Planning:
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Incorporate Lessons: Teach kids the basics of budgeting by having them plan meals for the week. This includes researching and selecting recipes that fit within a designated budget.
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Real-World Application: Allow children to explore grocery stores, either physically or virtually, teaching them about unit pricing and product comparisons. Understanding these concepts prepares them for life-long financial independence.
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Encourage Ownership: Give kids decision-making power in meal planning and shopping. This responsibility aids in developing a sense of ownership regarding their food choices and associated costs.
Creating Exciting Learning Environments
As parents, normalize financial conversations at home. Sharing your experiences and decisions about money encourages children to express their thoughts openly without feeling intimidated.
Techniques for Family Engagement:
- Use family grocery shopping trips as an opportunity to discuss budgeting. Ask your kids to help find the best deals and make comparisons between products.
- Celebrate their meal planning successes! Positive reinforcement will motivate them to continue learning and applying financial principles.
Conclusion
Navigating the Roth 401k and fostering financial literacy through engaging activities like meal planning are fundamental skills for today’s families. By considering the benefits of a Roth 401k, making informed contributions, and involving children in practical financial tasks, you can set your family on a solid path toward financial independence. Use these strategies to not only prepare for retirement but also to bolster the next generation's financial education.
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What You'll Get Out Of Today's Show
For almost 12 months, we've all been trying to do the best that we can. As frequently discussed on the show, we try to do things slightly different, optimize in the ways that we can, and make the best of the situation.
Jonathan's wife Dani has been coming up with all kinds of creative little activities for the kids. Even Jonathan was recruited for a rock painting project.
Brad has been listening to a new podcast, Ordinary Sherpa, created by Heidi, a member of Jonathan's Talent Stacker podcast. The podcast is about creating little adventures in life with your family.
At the same time, in the mastermind group Brad takes part in, he was inspired by a discussion related to dads really showing up to be a part of their kids' lives.
The podcast theme and mastermind group discussion converged for Brad when his daughter, Molly, asked him to go explore the creek with her. Rather than playing along for a minimally acceptable amount of time, Brad showed up like he really wanted to be there and they had hours of fun exploring together.
What if you started to show up for everything in your life with the attitude that you really wanted to be there?
It's difficult to be focused on growth in all areas of your life at the same time. There are different seasons when you will be able to lean into one over another but it's good to figure out a baseline you're comfortable with and recognize when it's time to rebalance.
Since Brad's financial life is on autopilot, it's not something he spends much time focusing on. However, sometimes things do backslide and he needs to return a little focus to it. Such as, he recently canceled two recurring charges for streaming services, not because their costs were going to have a significant impact, but because he was no longer getting value from them.
Relationships is an area Brad believes he could spend more time focusing on. If he were to ask himself, "Am I showing up as the best version of myself for my wife and kids every day?" his answer would be "no".
Who should be leaning into and leveraging their Roth 401K? Sean Mullaney, The FI Tax Guy, says the Roth 401K works similar to a 401K except the funds going in are taxable today and come out later tax and penalty-free.
Those currently in a high tax bracket looking to retire early are probably better off contributing to a traditional 401K. But someone just out of college in a 10% federal tax bracket may benefit from paying 10% in taxes today rather than 20-30% later on. Even someone who may have substantial taxable income in retirement may benefit from a Roth 401K.
A Roth 401K can also be a hedge against future tax rates for anyone who prefers to lock in their tax rate today.
If your 401K plan offers it, you don't have to do all Roth 401K or traditional 401K. You can split the difference.
For example, a 60-year-old new retiree with a large 401K will be taxed on every dollar withdrawn. We don't know what future tax rates will be.
Roth 401K withdrawals don't work the same way as traditional 401K withdrawals. You can structure it in a way that you can recover tax-free contributions, From a Roth 401K, you may need to rollover into a Roth IRA.
For the early retirees who don't plan to retire at a super early age or anyone with artificially low income for a few years, the Roth 401K is a strategy to consider.
If you aren't 59 1/2 yet, Roth 401K withdrawals are subject to the cream in the coffee rule where 2/3 of the withdrawal is tax and penalty-free but 1/3 is subject to ordinary income tax and a penalty. This is different than a Roth IRA where contributions may be withdrawn at any age tax and penalty-free.
When you roll over a Roth 401K to a Roth IRA, the Roth 401K contributions go in as Roth IRA contributions, and earnings become Roth IRA earnings. You could then take out the full amount of contributions tax and penalty-free before touching the earnings.
If you aren't 59 1/2 and need to access your Roth 401 contributions, it makes sense to roll them over to a Roth IRA first.
If you have employer stock in your 401K, there may be net unrealized appreciation. You do not want to roll it over from a traditional 401K to a traditional IRA without considering a tax planning strategy. This requires assistance from a tax professional.
If you want to do a backdoor Roth IRA, rolling over 401K to a traditional IRA isn't a good idea.
The fees associated with 401K plans have gotten better over the last 10-15 years. The investment choices are better with lower fees. It may not make sense to do a rollover.
As a general rule, retirement accounts have required minimum distributions (RMDs) once you turn age 72. The exception is the Roth IRA. While RMDs from a Roth 401K are not taxable, you want to keep that money growing tax-free as long as possible for you and your heirs. If you're 72, Sean would recommend you roll your Roth 401K to a Roth IRA for that reason.
Generally, you need a separation of service to do rollovers from a Roth 401K to a Roth IRA. Look for your plan's Summary Plan Description (SPD) which details withdrawals.
401K plans are subject to the ERISA law, where creditors cannot access the funds, except for ex-spouses and the IRS. IRA creditor protection varies from state to state. Something to consider before a rollover.
Dani and the ChooseFI Foundation are using meal planning as a financial literacy tool. Always looking for ways to get children interested and thinking bout decision-making and personal finance, they have put together Meal Planning Made Easy.
The meal planning project helps kids put financial literacy concepts into a real-world contest. The goal is to make financial literacy concepts more than just habits but to have kids take ownership and have fun doing it.
In the 3rd through 5th-grade video series, Dani talks them through meal planning. They are tasked with going into a grocery store, either in-person or virtually, and planning all three meals for one day.
The meal planning project is adaptable to fit every socioeconomic setting.
The tasks grow as children develop. High school students may plan meals for an entire week, searching the pantry first, and finding recipes to help on the budgeting side of things, just like parents have to do.
Sign up for Meal Planning Made Easy at Choosefi.com/mealplan.
Resources Mentioned In Today's Conversation
Sean Mullaney Roth 401K Withdrawals
Get started on your own journey to financial independence at ChooseFI.com/start.
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