Why Roth Is So Amazing

Anyone with a finance friend has heard it before: Roth, Roth, Roth. Roth IRA, Roth 401K. Not only do I wholeheartedly believe in Roth, I think it’s worth it for all Millennials and Zoomers to try to stash as much as they can into Roth retirement accounts now. Note that there are several types of employer-sponsored retirement plans, so you might not have a 401K, but for the purposes of this entry, I’m going to stick with 401Ks because they’re the most common.

What is Roth?

When saving for retirement, you get to choose whether you pay taxes now or pay taxes later. Generally, if you think your income tax rate will be less in the future, which I’ll explain later is unlikely, then you’ll want to pay taxes later. To do this, choose a regular (or traditional) IRA and 401k (you might see the term “pre-tax”). If you think your income tax rate will be higher in the future, then you’ll want to pay taxes now. To do this, choose a Roth IRA or Roth 401K, if your employer offers Roth 401Ks (you might see the term “post tax”).

An additional notable feature of Roth IRAs and Roth 401Ks is that investments grow tax free. This is particularly useful for younger people, because they have decades of compounding returns ahead of them. Related side note: your employer might offer “after-tax 401Ks,” which are good but I consider them runner-ups to Roth 401Ks because investments don’t grow tax free, but they have higher contribution limits.

Why Roth now?

According to The 2022 Long-Term Budget Outlook from the Congressional Budget Office (a very interesting report), the United States can’t afford its current spending and relies on debt to keep services running. You’ve probably heard this before because this practice has been the norm for decades, but what’s important is that deficit budgeting can’t last forever and the US is reaching a debt-to-GDP ratio unseen since World War II.

To lower the debt-to-GDP ratio, a country has to decrease its debt or increase its economic growth (in terms of Gross Domestic Product). The current raising of interest rates to battle inflation indicates investments (and therefore growth) is going to decrease, so it seems unlikely that GDP will be able to grow any day soon. The only remaining option is decreasing debt.

To decrease debt, the US will have to reverse decades of deficit budgeting. There are two ways to achieve this: cut programs or raise taxes. My hunch is that the US will opt for the latter and raise taxes (which will further decrease the amount of money that can be invested to increase economic growth). If this happens, having a Roth retirement account will be extremely beneficial to avoid expensive income taxes in later retirement years. The potential value is extraordinary, and you can be miles ahead of everyone else just by saving as much as you can as early as you can.

More comments on national debt

The 2022 report changes its long-term forecast from years prior to a slightly more optimistic lens. That’s overall good news for the country! I’m still a bit skeptical about the relative tameness of the forecast, though. Healthcare costs continue to rise significantly, and this directly impacts the costs of Medicare, which is the most expensive program in the US’ portfolio. Social Security is also one of the most expensive programs, and if social security is going to survive, it’s going to cost significantly more, but it doesn’t look like the report considers these needed changes—maybe the authors assume we’ll fix Social Security by increasing birth rates or immigration? I don’t think either sounds likely in today’s social/political climate.

What concerns me the most is the US’ ability to finance another national emergency. In the report is a chart titled “Federal Debt Held by the Public,” which depicts how much the US had to borrow for World War II, and the US has fallen into that equivalent hole just from the Great Recession and Covid-19 economic stimuli. What if Russia’s war expands beyond Ukraine? What if the US experiences a massive natural disaster? What if the world encounters another pandemic?

You might be curious, what is the most the US could borrow? We talked about this in my MBA economics class, and concluded that no one knows. We also don’t know what will happen when the US reaches that limit, but there are some economic theories. The good news is that the US isn’t the most leveraged country in the world; that title belongs to Japan. Japan already has a debt-to-GDP ratio 2x higher than the US’, so we’ll see the consequences happen to Japan first and then determine next steps. Hopefully we find out before the next national emergency.