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Hello Aspiring Chillers,

Buffett vs Banksy: The surprising winner

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Past performance is not indicative of future returns, investing involves risk. See disclosures masterworks.com/cd.

Where to Invest:

1. Education

2. Retirement Accounts

3. Stocks

4. Real Estate

5. Crypto

6. Buying a small business

7. Starting my online business

What are our options?

When I set out to write this article, I had some thoughts on which retirement accounts would be best for the collective. As with all things in life, you run into different cases where specific options are better for some people than others.

So, first, we're going to go over the major options for retirement accounts and what some of the benefits might be. Your individual situation might be different, but these are fairly common benefits.

Let's not bury the lead. These are in order of best to worst accounts if everything else is held the same. That is a big assumption; it is not likely that everything is the same.

1. Roth 401(k): A retirement savings plan where contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.

2. Traditional 401(k): A retirement savings plan where contributions are made with pre-tax dollars, reducing taxable income, and withdrawals in retirement are taxed as ordinary income.

3. Roth IRA: An individual retirement account with after-tax contributions, tax-free growth, and tax-free withdrawals in retirement.

4. Traditional IRA: An individual retirement account with tax-deductible contributions, tax-deferred growth, and taxed withdrawals in retirement.

Everyone touts the greatness of the Roth IRA, but in none of the scenarios I've run, where there is even a small employer match, is it better than a 401(k). This is mostly due to understanding that the actual tax bracket you are in is probably about the same as the one you will be in when you retire. The reason it is better is mostly due to the "free" money that is the employer match. If there is no match, then the 401(k)s are pretty much the same account as the comparable IRA.

Example:

The idea of Roths is that you have added flexibility over traditional accounts because you can withdraw your principle without a penalty since it is after-tax dollars. I wanted to compare accounts based on 2 scenarios:

1. You leave your money in the account until retirement age.

2. You pull your full balance out at 10 years to invest in something else.

The goal is to understand exactly how much money you would have in each scenario where everything is held the same except the account you are using.

Assumptions:

• Annual income: $50,000

• Contribution rate: 6% ($3,000 pre-tax or $2,752.80 post-tax )

• Employer match (for 401(k)s): 3% ($1,500)

• Annual return: 7%

• Federal Tax: 22%

• Penalties: 10%

I am not saying you should pull money out of these accounts but it shows that unless there is an employer match portion the IRA and Roth IRA are not really any better than a normal brokerage account and you get more flexibility with that account.

Why do people love Roth IRA?

Honestly, I am starting to question this myself after pouring 40 hours of research into this topic over the last couple of weeks. The idea is that you do not know what tax bracket you will be in and what the rates will be when you retire, but you do know now. The base assumption is that in retirement, our tax rates will be higher than they are currently.

If you live your whole life in the bottom 3 brackets of income, which you have to be in at some point to even open a Roth IRA, why do you think that you are going to be in the top tax brackets in retirement when you are not making any ordinary income from your job any longer?

If you happen to move up to those higher income brackets throughout your career, there is still a cap on how much you can put in a Roth IRA each year. So, sure, you could max it out and maybe make a bit more money, but the percent of your money in that account is going to be so low in comparison to other accounts it basically does not matter.

Even when the rich were getting taxed more in the 70s and 80s, normal people were getting taxed very similarly to how they are today. That is over 50 years ago, while the system for taxing those with a ton of money changes more often, the lower brackets pretty much stay the same throughout history. I believe that all of the shilling of this account is overblown. Is it better than a traditional IRA? Yeah, probably, but if you have a 401(k) option with any employer match at all, that is going to be the better option.

This is true most of the time, even if you want to pull money out before 59.5 years old. This does depend on your income levels when you withdraw, but in reality, if you are looking to use that money, you probably are not making as much as you once did.

I guess from my perspective, this feels like a neat tool that people can use for a perceived benefit, but I question how many people actually come out ahead with the account over the other options.

Even if we went to pre-Reagan-era tax rates, how many people would actually see a sizable increase in their tax rate?

Basically none!

All of this to show you that unless you plan to make move $600K a year in retirement your tax percentage is likely to stay the same or go down in retirement. So thinking you tax rate will be higher is a waste of time and effort. Take the free money from the 401(k) if it is available.

I hope this gave you a decent overview of retirement accounts and how in reality anyone of them is fine as long as you are saving and are getting your employer match. If you have an specific questions please feel free to reply to this email. I go through each and every one of them!