High-earning business owners often overpay taxes by maxing out Roths at 30-40% marginal rates with no guarantee those rates stay low. Traditional, tax-deductible contributions offer more flexibility to manage income and offset gains. Save Roths for when income dips or other options run out.
Everyone loves Roths. Financial advisors love them. Podcasters love Roth iras. Instagram gurus love them. And I'm going to say the quiet part out loud. I don't. At least not the way most people are using them. And if you've ever been told Roths are a no brainer, this video is probably going to annoy you. But good, that means you should keep watching. Here's the core issue. A Roth is built on one massive mountain sized assumption. And that is the tax rules that you're relying on today will be honored exactly the same way in 20, 30, 40 years from now. That's not conservative planning. That's blind faith. Let me give you another real world example. When Social Security was introduced, people were told, hey, don't worry, you'll never be taxed on this because you've already paid taxes on these dollars through your payroll. Well, fast forward. Today, up to 85% of your Social Security benefits are taxable. Same government, same promise, different outcome. So when someone says Roth withdrawals will always be tax free, my simple response is, according to who and for how long? Now let's talk tax math. When you make a Roth contribution, you are choosing to pay tax at your highest marginal rate today. Not your average rate, your top rate. So for most business owners watching this, that's probably 30 or 40%, sometimes more. Let's say you put $10,000 into a Roth IRA. You didn't save $10,000. You gave up $3,000 to $4,500 in taxes right now for the hope that the future you might save something. That's not free money. That's a prepaid tax bill. Now here's the part that nobody likes to talk about. Most business owners are in their highest tax years while they're working. Later in life, income usually drops. Businesses get sold, expenses change, income streams shift. Yet Roth logic assumes you'll be in a higher tax bracket later. Maybe. But betting your entire retirement strategy on that assumption is pretty reckless in my opinion. Now let's talk about required minimum distributions, the favorite Roth talking point. Yes, but roths don't have RMDs. Meh. Cool. Neither does reinvesting tax savings you kept by just using traditional contributions. So if you take a $10,000 traditional deduction and save 4,000 in taxes, and you invest that $4,000, you're often ahead, even after RMDs. We've run the numbers and so have some honest advisors. It's not controversial, it's just inconvenient. Another issue here is flexibility. Traditional Contributions give you options. Roths lock you into a decision where later that you've made decades earlier. So with traditional money, you choose when to recognize the income. You can manage the tax brackets, you can often offset gains, you can time the withdrawals strategically. With Roths, you already paid, there's nothing left to manage. That's great. But if rules ever change, then what? History says those rules will change. Now, am I saying that Roths are always bad? No, I'm saying they're overused, oversold and misunderstood. Roths make sense when your income is temporarily low, when tax deductions aren't available, and when you've already exhausted all the better options. They should be a last stop, not the first recommendation. But what do most people get? Just do Roth. It's tax free. That's not strategy, that's marketing at calculated moves. We don't plan based on hope, we plan based on control, flexibility and pure math. Our hierarchy is simple here. Tax deductible strategies come first, employer contributions come next. And Roth only when it actually makes sense. If someone can't explain why Roth is better for your specific situation, not a theory and not on a whiteboard or not in a TikTok, then you're not getting advice, you're getting a script. Now, if this ticked you off, good. It means you're thinking. If it made you uncomfortable, even better. That's where real strategy starts. Let's add in one more piece. What happens if we go to a flat tax or a consumption based tax? Are they still keeping their promise that Roths are tax free? And if you still love Roths, that's just fine. Just make sure you choose them instead of being sold.
