[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.

[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. Today, I want to tell you about my very first job. And I was fresh out of college. And I — when I say very first job, I really should specify that I mean my first professional job. See, I just got out of college and the mortgage market was really hot. And so I got a job working as a mortgage banker for a loan origination firm. And as I’m signing all the documents for employment, just kind of envisioning the future that I was going to have in this growing and booming mortgage field, I got to the form where it said “It’s time to sign up for retirement savings.” Now, I was a young man in my early twenties. Retirement was not on my mind in any way, shape, or form. And I stopped because I’m reading the form to sign up and I have no idea what they’re talking about. There’s 401(k)s and tax deferments and considerations and funds. And I find myself almost paralyzed, looking at this form to sign up for how I’m supposed to save for retirement — this critical thing that I’m supposed to do as an American worker. And I have no idea what to do. And so I called my HR department and say, “Hey, like I could use some help. Could you give me some guidance here?” And they said, “No, that’s a personal decision. It’s a hundred percent on you.” And so now, I’m back to this form with a dizzying array of choices and options and no clear guidance to go on.

[00:01:46] I tell that story, ladies and gentlemen, because in the United States, retirement is entirely on the citizen to save for. This is different than like every other country in the world. Most other countries have a pension fund that’s public. Think like Social Security but on steroids. And that’s, you know, if you’ve been watching the news, you know about a lot of the riots in France. Changes to that system is why Paris is on fire right now. But in the United States, we don’t do that. We’ve pushed, historically, have pushed things to the employer. Back in the, you know, ’30s, ’40s, ’50s, ’60s, ’70s, and even into the ’80s, there was a pension with the company. The idea is that this company was going to continue to grow and they would pay out the retirement benefits and that was a benefit they gave to try to attract workers. And then in the 1980s, that really started to go away. And so what we ended up with instead was this patchwork system as administered through the U. S. tax code for retirement savings.

[00:02:43] And so today what we’re going to do is we’re going to talk about three of these and try to bring some clarity and some education as to what’s actually being discussed when we talk about 401(k)s, 403(b)s, and IRAs.

[00:02:57] In my life as a financial coach, when people come into the practice, I hear all sorts of confusion around this. But in brief, a 401(k), a 403(b), and an IRA are a tax-advantaged retirement savings account. What that means is that in order to try to incentivize you to save, Congress has carved out a part of the U. S. tax code that will give you a benefit, typically in the form of a break on taxes, if you use these accounts to save for your retirement. And the idea, of course, from Congress’ standpoint is that everybody is just really intimately in touch with all of their tax considerations of all of their decisions, right? No, that’s not reality at all, but Congress doesn’t work in reality. And what ends up happening is they say, well, if you save for retirement up front, then you’re less likely to become a ward of the state in your old age. So they want to encourage that so they do that through tax incentives. A 401(k) and a 403(b) — one of the reasons that I always chuckle when I’m talking about this subject is that we call them that — a 401(k) and a 403(b) — because that’s literally the section of the United States tax code that outlines the tax treatment of those plans. It’s not like it’s a clever name. It’s literally a tax form.

[00:04:14] And so when the other piece of confusion is that like they don’t all operate the same because all three of these — 401(k), 403(b), and an IRA — have both what’s called a Roth and a traditional setting, which we’re going to get to here in a second, and that adds this extra layer of complexity. And if there’s one thing that I know about human nature is that if you want to paralyze a human, give them more options than they can process. And our retirement system is exactly this. The financial giants in this field make a lot of money by offering you too many choices that for you to process and understand. And then, they use terminology that is opaque and confusing on purpose in order to create something called information asymmetry. And therefore, then they say, “Oh, yes. Savings for retirement. Critical, crucial, very important.”

[00:05:08] And, you know, I could just take care of that for you. For 1% of everything that you let me manage every year, I can handle it and you never have to think about it again. When I started in my professional life, I actually sat down and went, “No, I’m a smart guy. I can figure this out.” And in the many things that falls into Dylan reads stuff so you don’t have to, I consumed every book on retirement savings I possibly could. And what I found was that there’s actually some very simple ways to do this, and it’s not nearly as confusing as the large investment firms would want you to believe. So my purpose here today is to really give you that value-added information so that you know what people are talking about. And why I think this is so critical is that if you look at the population of millionaires in the United States, their wealth is predominantly held when they hit millionaire status in their 401(k), 403(b), and IRA. And so this is huge in terms of wealth creation and how you can make your money make you money as time goes on is through these vehicles.

[00:06:15] So let’s just start. The example that I always give is that the easiest way to kind of start thinking about these things is to think about a car. Now, I’ve said on the show before exactly what I drive. I drive a Nissan Sentra. But more specifically, I drive a Nissan Sentra S with a six-speed manual transmission. What I just told you was the company, the car, the trim, and the engine. Four things: the company, the car, the trim, the engine. And when we describe that, we start with the broadest category possible first and then narrow down to specifics as we go down. It is the same thing when talking about investment and retirement funds. We start with the broad stuff, and then we narrow our way down.

[00:07:03] So the first place we’re going to start is the company. So this would be the comparable to a Nissan, Toyota, Buick. There are basically three very large companies that handle a lot of 401(k)s, 403(b)s, and IRAs. This is not an exhaustive list in any way, shape, or form, but it’s a place for us to get started just to kind of illustrate the point and how to think about this. Those companies are Vanguard. Fidelity, and Charles Schwab. Like I said, there’s tons of other ones, Transamerica, Principal Group, etc. But let’s just stick with these three. Vanguard as a company is known for its low-cost investment options. So they’re the people who have a lot of the passive funds and we’ll explain all that what that means here in a bit. But they have these passively managed funds that come at very, very low expense ratios. So essentially, they’re low-cost index funds. Fidelity, on the other hand, makes a lot of its money by offering a very broad array of services to their clientele. The other thing about Fidelity is that Fidelity is always kind of like tinkering with how people do investing. So they’re a source of a ton of studies, and a lot of those studies I have quoted here on the show. And Charles Schwab, well, Charles Schwab is a legacy company that’s desperately trying to not be your dad’s investment company. But like Buick, they’re still a fantastic company with fantastic products, but they just kind of feel older. But when we talk about these companies — Vanguard, Fidelity, or Schwab — that’s what they are. That’s like saying you have a Nissan or a Toyota or a Buick. They’re these broad things. Each one of these companies is going to have all investment options that are available to the public, like all of them will. So even if you’re working with somebody like M1 Financial, M1 Financial has an IRA option. If you’re working with something like Betterment, they have an IRA option. But the company just kind of dictates, you know, who’s holding on to the funds and managing all the paperwork and the taxes and sending you your 1099s when appropriate. So when people say, “Well, I have a Vanguard,” it doesn’t tell you anything. You’re just saying, “Well, I have a Toyota.” Well, okay. But if you have a Toyota, but like, is it a RAV4? Is it a Tacoma? What is it?

[00:09:09] Which brings us to the next thing, which is type of car. So we start with company, big and broad. Now, we narrow it down — the type of the car. So the three that we’re talking about today are the 401(k), 403(b), and the IRA. And like I said, these could be any company that offers — that basically offers them. And there’s thousands of them out there. Okay. So what is a 401(k)? A 401(k) is an employer-sponsored plan. In order to have a 401(k), it has to be offered by your employer when you are a W-2 employee. Some 1099 contractors as a benefit have access to this, but not always. If you are an employer — so like for me, I work for a publicly traded company. So my company has then turned around and gone over, in my case, Vanguard and said, “Hey, we would like to offer 401(k) and we would like you to manage that part of it for us.” And they Vanguard says sure. There’s a negotiation, and they create a 401(k) plan. And inside of that plan, there’s certain investments that I’m allowed to buy. I can buy my company’s stock. I can buy, you know, anything else that they have listed out. But I’m limited to whatever that plan says. So I can’t just like YOLO it all into Tesla or something like that. I actually have to stick to that plan. The important thing here is that it’s employer-sponsored, and because of that, your employer will typically give you a match. Typically, it’s like 50% to the first 8%. So if I put in 8% of my income into this, they’re going to give me an additional 4% on top of that. And this happens in the form of a paycheck reduction. So when I get paid my paycheck, of course, my pay stub is going to have all the taxes taken out because, you know, the government always wants their cut. But I’m also going to have my benefits. So there will be a line item that says X amount of dollars going to a 401(k). That’s part of the plan. That’s like the type of the car, right? So like I said, I drive a Nissan Sentra. This is the Sentra part of that description.

[00:11:10] A 403(b) is more or less the same thing. Now, I know, I know. There’s some fine points and differences between them that are super critical, but they’re also very minor. And the biggest difference between a 401(k) and a 403(b) is that 403(b)s are specific to not-for-profit and government-sponsored plans. That is, if you work for the county or the state or the federal government, you’re going to have a 403(b). When I was a teacher, I worked for, you know, technically for the state of Arizona, and so I had a 403(b) that was attached to my pension. My wife, when she was working in the National Laboratories under the Department of Energy, she had a 403(b). When she moved into the private sector, she then had a 401(k). And again, who sponsors that? What company they decide to manage that is going to be dependent on whatever governmental or not-for-profit entity you’re dealing with. In both cases, though, the arts and crafts are more or less the same. The entity who’s sponsoring the program picks the company, picks the investments, you’re offered that, it comes out as a paycheck reduction, and they both have the same limits. So you can’t just put 100% of your paycheck into a 401(k) or a 403(b). You’re limited based upon what the IRS says that you can do. Why the IRS is involved will become apparent here in a second. But that limit for 2023 is $22,500. So you can put in that much money into these tax-advantaged accounts.

[00:12:37] Then that brings us to an IRA. An IRA stands for an individual retirement account. And what it is it’s an individual plan. Employers will not sponsor an IRA. You as an individual have to go select your company, and then you go and you select your plan. And so, this is where you’re going to — you would have to like go to Vanguard’s website or go to Fidelity’s website or go to M1 Financial’s website. Whoever’s going to be the, you know, company that you’re going to open this account with, you have to go to their website and you have to sign up for it. Now, these individual plans are self-funded. And one of the advantages to doing an IRA over a 401(k) is you’re going to have a lot more freedom over what you’re actually doing, right? So like for example, I have an IRA with Vanguard. And I go in there and they say, “Hey, you can buy anything you want if it’s a Vanguard fund.” So I can buy Vanguard mutual funds, Vanguard ETFs, you know, Vanguard bonds, whatever. But if I want to buy outside of Vanguard, they’re going to charge me a trading fee to do that. If I were to do this with, say, M1 Financial, they’re not going to charge me that but I’m limited to only ETFs or the mutual funds that are publicly traded. Because Vanguard does then have some funds that I really like, they’re very low cost, they’re exactly what I’m looking for, but they’re only available if you invest with Vanguard. Same thing with the Fidelity ZERO funds, which have no cost associated to them so it’s all upside. You don’t ever have to pay them a cent to own these funds. But the trade-off is you would have had to select Fidelity as the company in order to buy those funds. So if you’re in an IRA outside of Fidelity, you couldn’t buy their zero-cost index funds. That’s just not how that works. The other thing with an IRA though is it’s also more limited. The 2023 limitations on how much you’re allowed to put in there is $6,500. And that’s going to not come out of your paycheck. You’re going to have to either set up a regular bank draw or you’re going to have to manually send the money into that account.

[00:14:44] But these are different types of financial vehicles and ways that you can save. And so these three, when people are saying like, “I got a Charles Schwab 403(b).” Well, cool. So what they’ve told me is they picked the company Charles Schwab, and now they have the type of car that they’re using and driving around — the 403(b).

[00:15:04] Now, let’s just stop for a second. Take a breath because it’s a lot of information. And you can always go back and listen to it. You can also find me on Instagram and send me a message and I’m happy to talk about this because this is literally my jam. But I keep saying they’re tax-advantaged accounts. What does that even mean? And that’s where we get into the trim package. And when it comes to retirement accounts, you basically have two trim packages, right? I drive a Nissan Sentra S. S is my trim package that I selected. So when you go into a 401(k), a 403(b), or an IRA, they’re going to ask you, “Do you want Roth or traditional?” No matter what car you buy, you’re going to have to pick a trim package. No matter what tax advantage retirement account you’re going to choose, you’re either going to have to select Roth or traditional. So let’s talk about why these are tax-advantaged and what that even means for you.

[00:16:01] But before we do, I of course have to make the caveat of hashtag not tax advice. We’re going to start talking about taxes. I’m a CPA. I am not acting as a tax CPA in this role, and I’m not even a tax CPA in real life. I’m an auditor. And so this should not be considered tax advice and you should not be making decisions based upon what you heard on a podcast. I have to encourage you to have a tax professional and have a conversation with them as to what is best for your unique financial situation. My goal is to give you information only that will help you with that conversation.

[00:16:36] Okay. So what is Roth versus traditional? It’s basically the difference in how the taxes are treated. So let’s start with traditional because who doesn’t like tradition, right? So now that you have you’ve chosen traditional, every dollar you put in is lowering your taxable income, you get a tax benefit right now, but the trade-off for you is twofold. Number one: when I put that dollar in, I get a tax benefit now, and it’s going to grow tax-free until I withdraw it. But when I withdraw it, I’m going to be taxed as if it is my income. So it’s going to lower my taxable income now, but everything that’s in that account when I withdraw it in my retirement is going to be considered taxable income to me. So just stop and think about that. Even the contributions that you put in — the contributions were not taxed when you earned them and you put them into this account. So the contributions and the growth is going to now be taxed together as income. It’s not going to come out as capital gains, which is a lower tax bracket than individuals. But the benefit to you is you might be 30 years old now and you might not retire until age 65, you know, in an ideal world, I guess, you’ve got 35 years of tax-free growth. So you’ll be so rich, what do you care? The other thing about traditional accounts is that if you withdraw early, you have to pay an additional 10% penalty in addition to the income tax on it because remember the withdrawal is considered income to you. So you get a 10% penalty for early withdrawal out of this account. The last feature of traditional counts is the required minimum distributions. Once you hit 70 and a half years old, you’re required by law to take a minimum distribution out of that account, which will then be taxed. Yes, you could turn around and just invest it right back in the market, but it’s coming out of the tax haven no matter what you do. Okay. So traditional means that tax benefit now in exchange for more taxes later, has a 10% penalty for early withdrawal no matter what you do, and a required minimum distribution. Those are the trade-offs. Now, we can sit here and grumble about it, but like there aren’t bad decisions here. There are only trade-offs.

[00:18:45] The other option is something called a Roth. What a Roth means is you’re deciding that you’re going to pay taxes now in exchange for no taxes later. And so like if you have a Roth contribution and you want to max out your 401(k), so you’re going to put in $22,500 in this year, you’re going to pay taxes on that. So you’re going to have to actually earn more than that because you’ve got to pay the tax on it and then you put it into the Roth. But the benefits to you are it’s going to grow tax-free and then those contributions and all the growth when you withdraw it in retirement comes out 100% tax-free. So you took your tax penalty now in exchange for not having to worry about it later. The other thing about a Roth is that because you paid taxes on it now and you’ve already paid taxes, that money’s already been taxed, if in the future, you’re like, you know, I really need some of that extra money back and you withdraw the contributions, it’s tax-free. There’s no penalty whatsoever on it because you’ve already paid the money. You’ve already paid the taxes. And so like, so for example, let’s say that I put $5,000 into a Roth IRA and it grows to $6,000. And then I’m like, man, my car just broke down and I got to replace the engine. I need five grand. I can withdraw the five grand from my Roth IRA at any time and not have to pay a penalty. But every dollar that I’ve earned on that money in that account, if I withdraw it, it’s going to come with a penalty. I mean, that is, I’m going to get taxed unless it’s been there for five years. So that’s a kind of a quirk of the Roth. If you’ve had the account for five years and that money has been growing, you’ve been making contributions, after five years, you can withdraw it without a penalty at all.

[00:20:33] Okay. So traditional — that’s tax benefit now, more taxes later; Roth — taxes now, no taxes later. That’s the major difference. I’ve had people come into the practice and I said, “Well, you know, do you have any retirement accounts?” “Well, I have a Roth.” Well, what kind of Roth? Is it a IRA? Is it a 403(b)? Where — who has it? It’s one of those 401(k)s, right? Like so we’re not being specific here. So the way you would say that is that I have a Vanguard IRA that is a Roth. And so you say, okay. Well, now I know something. I know that you have access — you can use that Roth as a savings account for all intents and purposes because you’ve already paid taxes on it, then you can withdraw your contributions at any point. But which one should you do? This is a common question of like, well, I don’t know. I don’t know. Let’s just do a Roth. I don’t like taxes, but I don’t like the idea of more taxes later. But I want to have the tax benefit now, but I don’t want more taxes later. So maybe I’m in a little — like my God, we can tie ourselves in knots. Here’s how you figure this out. Consult your CPA. If you have a tax guy, go talk to him. If you don’t have a tax guy, most CPA offices if you called them up and said, “Hey, I got a question on taxes and I just want to pay you for a one-off,” most of them will take the call. And if, you know, at the end of the day, which way you decide to jump is a personal choice. So if you’re looking for advice, consult your tax guy.

[00:21:51] The last bit that when it comes to talking about retirement funds is the engine of our hypothetical car. Like I said, I drive a Nissan Sentra S with a six-speed manual transmission. It’s a four cylinder in case you’re interested because Dylan should never be allowed to have more than four cylinders. I cannot be trusted with high-powered machinery. But the engine, in terms of retirement savings, are the funds and investments that you buy in the plan. So maybe you’re looking at it and saying, “I need an engine that’s going to be hyper-efficient, and it’s going to be very low-maintenance, and that’s what I’m going for.” Okay, cool. Well, your answer is passively invested index funds. They’re low-cost, they’re dependable, they’re very, you know, very few moving parts, and you can set them and forget them. Right. Done. Well, you might say like, “I want a sporty engine and I’m okay if it just breaks a lot and then we’re going to redline it, and then some days it’s just going to cost me more money than I paid for it.” Okay. Well, then you want actively manage funds or maybe you want to pick individual stocks or maybe you’re nuts and you want to try to just use a crypto-only option. It’s going to depend on the company you go with. ‘Cause like I said, if you chose Fidelity, you’re going to have access to the zero-cost index funds that Fidelity offers. But if you chose Vanguard, you’re not going to have access to that, but you’re still going to have access to a lot of low-cost funds. And if you chose Charles Schwab, well, go ask your dad what he did.

[00:23:08] And we’ll talk more about this engine component because this is where even people who understand everything I’ve talked about today and they understand it really well, they get themselves tied up into knots about what engines and what investments to pick, as if somehow there’s like some way that we can optimize for this, and I’m going to talk about that in one minute. But I do want to point out that today, we talked about 401(k)s, 403(b)s, and IRAs. And again, my entire purpose here is to just give you more information than you had before so that you can have an educated conversation with your tax guy. Now, there are other plans. Like I just listed three, but there are more: SEP IRAs, different local municipality programs, and all sorts of other stuff. But those are edge cases and I don’t want to muddy the waters any more than I’m at. But here’s the takeaway if you are in one of those edge cases. Fundamentally, at the end of the day, from a tax standpoint and from an arts and crafts standpoint, they fundamentally all operate relatively the same.

[00:24:05] So what’s the bottom line you should take away from this? Well, there’s a couple of things that you should really be thinking about when it comes to saving for retirement, specifically in like how you’re investing. This is one of these things like money is emotional. There’s no getting out of that. But there’s also a mathematical component to this because it’s not entirely emotional. There is these math components. And one of the things that the math components will really tell you is that consistent contributions are more important than the funds you chose. Like picking a plan and going, okay. I’m going to — I’m doing my 401(k). I’m going to max out that 401(k) — and that should be a goal for any diligent saver. Remember there are stages to life. If you’re in the income-building stage, you’re not gonna be able to max out your 401(k). But if you’ve built your income and you’re in the saving stage of life, you really should be looking at how you can max out your 401(k) and your IRA because you can have both. The consistency is what wins here. The consistent contributions and just staying with the plan and not messing with it is what will lead to large returns over time. I’ve talked to you before at the top when we talked about like this is where the majority of millionaires in the United States have their wealth is in these 401(k)s. If you read a book — it’s called Millionaire Next Door — and you read that book, one of the things they’ll point out is that the other thing that these millionaires next door had in common is they picked a plan and went with it. Some picked actively managed funds, some picked passively managed funds, some picked individual stocks. And in the end, it was the consistency that actually mathematically matters. And our goal here is and the goal of a financial coach or a financial advisor is often to manage your emotions around the ups and downs of the market.

[00:25:46] But, of course, there’s also the fly-by-night organizations who come in and be like, you know what? We have these great algorithms that are going to optimize this whole thing. Ladies and gentlemen, those programs will make you money. Just like pick any fund, it’s going to eventually make you money. But you’re also going to lose money, too. The optimization programs don’t really outperform the broad-based index funds. And that’s what the math shows. But again, when you’re choosing the engine for the car, if you’re like, “Man, I just want the excitement,” well, then by all means, please try it, and let me know if it works. But for my money, I just don’t want the ups and downs and the headaches, so I just chose something that’s certain. It creates inevitability over time.

[00:26:25] It’s always important to understand, particularly as we navigate things like the debt ceiling crisis and all the other bullshit that our Congress puts us through and all the uncertainty that people love to foment in the media, that time in the market beats trying to time the market 100% of the time. And that is to say that when you’re investing in these vehicles, it really needs to be a set-it-and-forget-it type of thing if you’re in it for the long haul. So at the end of the day, pick your company, pick your car, pick your trim, pick your engine, and then just drive. Don’t go constantly going back and trying to change things and losing sleep over, well, did I not get the optimum result? We’ll only know what the optimum result is or was with the benefit of hindsight, which we don’t have right now.

[00:27:16] And maybe to put a finer point on it, Fidelity, like I said, does a lot of studies. There is a legend that goes around about an internal study that Fidelity did. I personally actually think that this is a hundred percent true, although there are some people who will argue with me. What Fidelity did is they were looking at retail investors. That’s me and you. The average Joe on the street is a retail investor if they’re invested in stocks, bonds, mutual funds, etc. And Fidelity was asking themselves: of our population of retail investors, who does the best over time? And what they found is that the people who had the best, most consistent returns were people who either forgot about their accounts — that is to say that they had put money in them and then forgot that they had the account and so never messed with it — or people who had died and they didn’t know that so Fidelity just continued to have the account open and no heirs came over to withdraw the funds. And in both cases, they had superior performance to everyone else, which just illustrates the point that when you set it and forget it, if you just stay in the market, time in the market will beat timing the market a hundred percent of the time. And so what I’m telling you, ladies and gentlemen, is at the end of the day, we sweat these decisions like crazy. And it’s in the best interest of all the financial institutions to make you sweat bullets over this. But at the end of the day, it really doesn’t matter. Because you’re going to make money regardless of what you do if money is to be made in the market. And so pick a plan, pick a strategy, stick with it, and then go live your life and enjoy what you’re actually here to enjoy.

[00:28:53] And I know exactly how that feels because when I joined the mortgage industry, I had the fortune of doing so when it was just about to get to its most feverish level and I made some really good money. I had some really bad months too. But the whole time, I had decided that I wanted to put in X amount of dollars into this fund and I was just buying a broad-based index fund. And in 2008, when everything imploded and it all collapsed around us, I was forced to have to look at what I put in there because I had to get it out of that and it had all been pulled to cash. And I opened up my statement — it was with Fidelity at the time — and I looked at it and I almost had a heart attack with how much money I had actually saved in the three years that I was in the mortgage industry. And it illustrates the point that I want for you. As Warren Buffett once said, “Consistently save over time into an S&P 500 index fund. And when you turn 65, then for the first time in your life, look at your statement but have your cardiologist standing by because you’re going to have a heart attack with how wealthy you’ve become.” And that, ladies and gentlemen, is a future that I want for each and every single one of you.

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