The Problems With Derek Sall's Article "Why A ROTH Is A Bad Idea (Yes, You Can Lose Money)"

All right, I gotta address this. I almost feel bad about doing it. I was trying to avoid it, but then my email box filled up with people writing me, telling me I had to address this. The WCI forum had a big thread on it. I think it was in the Facebook group. I think it was on the subreddit. It certainly was. In the comments section on Doximity where it ran. There was an article that was written by a fellow named Derek Saul. Derek founded a website called Life in My finances back in 2010. It's kind of a typical for profit affiliate marketing website. Right. So it makes money the same way as we do, by selling stuff. In their case, they tend to connect people with credit cards. They connect people with bank accounts, and that's how they make money. Their editorial team consists of five people who look by their pictures to be in their 20s and have the title financial. But it sounds like Derek Sall, the founder, is the one who actually wrote this particular article. And we'll put a link to it in the show notes if you didn't see this thing. But the content of this website is geared at people who are looking for credit cards and bank accounts. It's certainly not written with a target audience of physicians and other high earners in mind. However, despite that, the folks over at Doximity that send out that I don't know what it is every couple of weeks or every month, newsletter with finance. You know, they pick up some white coat investor articles from time to time as well. But they picked up this article and sent it out in this email and they've got a big mailing list. Right. I don't know where they get all the emails from. Probably from Am I on? I think they own Am I on these days. But anyway, they sent it to a lot of doctors. And so a lot of doctors got this article in their email box that was called why a Roth IRA is a bad idea. Yes, you can lose money. And the introduction to this article was just as clickbaity said. I lost nearly $400,000 to a Roth. It's not just me. The average person is losing $163,000. Nearly everyone says a Roth IRA is a great investment. Nearly everyone is wrong. And there are so many problems with that introduction. You may have heard about this if you read my monthly newsletter for December. I talked about this and that. But there's so many problems with that introduction that's hard to know where to start. I mean, the first one is that first. First of all, the Roth IRA is not an investment at all, right? It's an account. And it's important not to confuse accounts and investments. And it's hard for me to take somebody seriously, or at least a title maker that made the title for this article seriously, who doesn't know the difference between the two. You should think about investing accounts as types of luggage. There's backpacks, there's carry on bags, there's suitcases, there's trunks. And each of those might be the proper type of luggage for a given type of trip. But you can put any kind of clothing into any kind of luggage. You can put a tux in there, you can put a bathing suit, you can put, you know, some shorts, you can put hiking pants, whatever, all that goes into any kind of luggage. So think of your investment accounts, your Roth IRA, your 401K, your 529, your HSA, whatever, as luggage. And think of your investments, your mutual funds, your investment properties, your stocks, your bonds, your crypto, whatever, as clothes. You can put any type of clothes into any type of luggage. You can put any type of investment into any type of account. But a Roth IRA is not an investment. Also, a Roth IRA by itself really can't ever be a good idea or a bad idea. It's only a good idea or a bad idea in comparison to something else. For example, when you're saving for retirement and you're comparing your Roth IRA to a taxable account or to a non deductible ira, a Roth IRA is pretty much always the better option. It's pretty much always the good idea, at least in the long run. I guess if you're losing money in the account, you're better off with a taxable account where you can tax loss, harvest it. But for a low earner who can actually deduct IRA contributions, which is almost nobody in the audience to which Doximity sent this article, it's entirely possible that a traditional IRA is a better option for the retirement savings than a Roth ira. For most of us in our peak earnings years, it actually makes sense to defer taxes rather than pay them upfront, which is what you do with Roth contributions, whether they're made to an ira or a 401. And that's another problem with this article. Shortly into the article, the author rapidly flips from talking about IRAs to 401s. And while the logic and tax treatment may be similar in the author's financial situation, there are different things and get different tax treatments for many people, such as high earners. And if you can't tell These two apart again, maybe you really shouldn't be writing about them for large audiences. Frankly, if it took you 13 years from the time you started a financial blog until you realized that tax deferred contributions are the way to go during pre earnings years, I'm not sure I want to take your advice anyway. However, despite the problems in the article, and there are problems in the article, the main point of the article is actually good. It's absolutely correct. The point of the article, if you really read the whole thing, is that most people should make tax deferred contributions to their 401, not Roth contributions. The amazing thing here is that most people, 92%, according to a survey the article talks about, think they should be making Roth contributions, when actually only about 9% of them, according to the survey cited in the article, should be. I kind of blame Dave Ramsey for some of this. He's not helping, right? He's pretty much an all Roth, all the time kind of guy. He's not really into nuance, as you've noticed, if you ever listen to him. But you know, there's lots of people out there that talk about Roth, Roth, Roth. It's so great, it's tax free, you never pay taxes again, Right? But it's not always the right thing to do. And the article makes that point. And he's right about that. But you know, there's a chart in that article that's even dumber than some of its pros. It talks about who's in that 9% that should be doing Roths. Does it mention high earners who can't deduct a traditional IRA contribution? Nope. It says the following people are in that 9% if you're under 33 years old, which is almost irrelevant. Your age is almost irrelevant. I mean, more time does slightly tilt the calculation toward Roth. For those who are maxing out their accounts, it says those who contribute more than $5,000 a year, which is basically irrelevant to the Roth versus tax deferred discussion, and those who plan to withdraw $100,000 or more in retirement, which again is pretty much irrelevant. The Roth vs tax deferred decision is a complex one, there's no doubt about that. The first question, though, that one should ask is whether you even have both options for that particular account. For most wciers, a tax deferred contribution to a traditional IRA is not even an option. Clearly the Roth ira, likely via the backdoor Roth IRA process, is better than a non deductible IRA contribution. Many people don't have a Roth option in their 401, 401, 403 or 457. For them, it's an easy decision to go with the tax deferred option. When I was in the military, there was no Roth tsp, so I made tax deferred contributions. However, if both options are available, the main factor determining which is the better option for you is to compare your marginal tax rate now to the rate at which you will be withdrawing money from that account, say rate or rates, because you fill the brackets as you go with income in retirement. Now, those tax rates involve a lot of unknowns, which is why this is a difficult decision and many people choose to just split the difference. So Derek doubles down on his argument later in the article and says that a Roth IRA is only worth it for about 10 0.2% of the population says the 9% figure came from that survey with people who were entirely too optimistic about their future finances. And he goes on to argue that this is all some sort of weird government conspiracy to get the money now instead of later. Now, if you've listened to me for a while, you know I don't put much stock into government conspiracy theories. Mostly because I've been in government, right? Conspiracy theorists ascribe way too much competence to shady government officials. Just watch Congress for a while and your estimate of the likelihood of those people running an effective long term conspiracy will go way down. I used to watch a bunch of government workers try to day trade their tsp. It would have been hilarious if it wasn't so sad. So no, I don't think there's some vast government conspiracy trying to get people to use Roth accounts instead of tax deferred accounts. Honestly, I'd be happy with people doing Roth accounts rather than nothing, which is what most people are doing. So I think if the government's encouraging people to save in a Roth ira, that's probably a net good thing. But at any rate, I kind of hate this article and the message is sending out there, which is that Roth contributions are wicked and you should always stay away. Even if the message actually in the article is basically correct, that those in their peak earnings years should generally prefer to tax deferred retirement accounts. And lots of people don't realize that. Derek eventually got the reasoning right. Late in the article he said most people who earn less in retirement than they do today, which is true for most people. You'll be paying a higher tax rate now than you will in retirement if you do Roth accounts. That is true. And many retirees today pay nearly nothing in Taxes, which is also true, you know, I mean, what are most retirees living on? Social Security? If you have less than a certain amount on that, you don't pay taxes at all on it. At most, you're paying taxes on 85% of your Social Security. Lots of people won't be paying anything on money they're withdrawing from Roth accounts. You probably won't be in very high bracket on what you're taking out of tax deferred accounts. Lots of people will be in the 0% qualified dividend and long term capital gains brackets in retirement. I mean, there's just, you know, retirees don't actually pay that much in taxes most of the time. Now, you might be in a different situation. You might be a super saver. It might make sense for you to do Roth contributions, but the general rule is still going to be tax deferred during your peak earnings years. So despite the fact that I think he mostly got the idea right, I just wish he'd done it in the much less flashy manner that Harry Sit, AKA the finance Buff did in his article that he published like 15 years ago when Roth 401s showed up on the scene. Recently updated the article. He calls it the Case against the Roth 401k. I just wish Derek had read that article when it first came out in 2008. He would have saved a lot of money if he lost $400,000 by using Roth instead of a tax deferred account. He really should have been paying more attention to the discussion online when those accounts came out. Okay, so what lessons can White Coat investors take from this debacle with this article? Number one, read more than the title of an article. If all you had read was the title, you'd think Roth IRAs are terrible. Obviously they're not, so read more than the title of an article. Two, recognize that most financial information out there is not written specifically for you, even if it came to you via Doximity. Three, you better have a good reason to make Roth contributions when tax deferred contributions are an option. And finally, yes, keep doing your backdoor Roth IRA each year. All right, I think we've beaten that. Subject to death. A Roth is not a bad idea. It is certainly not a bad investment. It's not an investment at all. The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.