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Made in India, printed with the white postseason logo, the Indians handed out red rally towels for every game and every watch party. They’re great for cleaning up spilled beer, protecting heads from sleet and rain, and when vocal chords fail, they can be spun around in unison with the fan brethren who refuse to go home as the games march ever so slowly to conclusion. Today they’re another momento of an “almost” season. And as we wallow in overcast skies and a game seven loss, img_2605it’s easy to forget the joy we felt along the journey. Who predicted in April that we’d be awash in rally towels, in November?

As the post season began, the Indians had the lowest odds of all the playoff teams to win it all. We were the underdogs, the team plagued with injuries and quickly dismissed. Our catcher was injured, and the replacements couldn’t hit. Our reliable clutch hitter and best outfielder only played the first few games of the season. Pitching and base-running were our strengths, and with two starting pitchers lost late in the season and our ace questionable with a quad injury, well, pitching didn’t look like a bright spot. Our outfield was patched together with rookies and aging veterans, with another outfielder suspended from post season for steroid usage. The chances for victory looked non-existent. And yet there is a reason we play the games.

Remember the Boston series? On the last weekend of the regular season, we swept the reigning World Champion Royals in Kansas City to claim the second seed in the American League playoffs and home field advantage in the division series. We then proceeded to shut out the Red Sox. The media bemoaned the end of Big Papi’s career with a loss at Fenway Park. And they covered the Red Sox fans in distress, and their tearful goodbye to their vaunted designated hitter. And to be fair, the post-game crew did ask our manager if he had any latent sympathy for the Boston team. We rolled our collective eyes. Let them weep in Boston; we’re still playing.

Winning early when part of your team is injured can be a blessing. Time heals. The media circus moves on, and the Blue Jays wore themselves out defeating the Texas Rangers with offensive fireworks and cocky confidence. They showed up in Cleveland for a best of seven series wearing Canadian flag capes and the consensus conventional wisdom of two nations that they would win. But our ace was feeling better, we played error free baseball, and after our starting pitcher was booted from a game due to uncontrollable pinky bleeding, we wove together a victory one inning at a time from the bull pen. Records were set for number of pitchers in a post season win. The Blue Jays were toast, and again we were blessed with a few extra days to recover. We’re going to need more rally towels.

And on to the Cubbies we go, the winningest team in baseball, the National League juggernaut, the sentimental favorite, the beneficiaries of an over-the-top payroll, and the darlings of a large market audience. They filled Burke Lakefront airport with their private planes. They interrupted press conferences at the white house. And they bid ticket prices to all time astronomical highs. And so the team with the longest world series drought in baseball came to play the injured Indians, the small market team with second longest drought in baseball. Maybe we would just curl up and lose gracefully. After all, the weather was miserable. But we didn’t. Our ace set a record for strike outs in game one, and we hit the ground running. cleveland-indians-tribe-time-towelRemember when we were up three games to one, and the Cubs faced elimination? The heroes were unexpected. Everyone contributed. We hung in there. But there are risks of using the ace too many times on short rest, and rookies can eventually make errors, and games can slip through your fingers, until the series rests on a game 7.

Seventy degrees in November is Indian summer in Cleveland. The crowd was evenly split, both teams played hard, with the Cubbies taking the early lead and Cleveland catching up. The game was all but won, when Cleveland tied it up in the bottom of the eighth. But injuries were taking their toll. The Cleveland ace was in heavy rotation, pitching his third game, yet another short rest outing. We moved to the bull pen early – strikeouts were scarce. And still we came back, relentlessly refusing to give up. Rain delay, and extra innings, the Cubs scored two in the top of the tenth. Cleveland could only answer with one. And the series swung to the National League Champion Chicago Cubs. It was a roller coaster of emotions, an epic game, worthy of the world series and the historic breaking of the Chicago curse.

Cleveland is no stranger to heartbreak, in fact we name them. The fumble, the drive, the shot, the departure, all have meaning to Cleveland sports fans. And we were not all quick to forgive when the King returned. It took a heart-wrenchingloss against Golden State for some to embrace “the return.” The 2015 Cavaliers gave their all, every ounce of effort, amid injuries of their own. It wasn’t winning or losing that brought us around, it was the monumental exertion of will and emotion, the willingness to give all to the team that earned the hearts of Cleveland fans.

The 2016 Indians played the same way, they left nothing on the table. They played as hard as individuals can play, and not willing to let their teammates down, believing against all odds that anything was possible, and making personal sacrifices for the good of the team. It is not the outcome we hoped for, but no one can doubt the effort.

So I’m keeping my rally towels. They’re the evidence of an epic game, an historic series, and an extraordinary season. We are the American League Champions. And we got to play baseball in November, in Believeland.cropped-cleveland_bg24

To Roth or Not to Roth, that is the question.

There are some inherent assumptions in the question itself – primarily that the questioner has already decided to kick some hard earned Washingtons into a retirement account.  Rainy days are inevitable, and even squirrels are wise enough to stash acorns away for later.  And while bank haters exist (and the millennial version perhaps hoards gift cards instead of stashing paper bills in coffee cans), the vast majority of us have enough faith in financial institutions to place a long term bet on a retirement account.  So given that Keurigs seem to be replacing coffee cans, and gift cards have expiration dates, a long term account in a financial institution is not a bad way to go.  But To Roth or Not to Roth, what should a saver do?

The term “roth”

William V. Roth, Jr. was actually a person, a senator from Delaware that suggested that perhaps some people would prefer to pay tax on their retirement account contributions instead of deferring the tax until later.  Americans traditionally have an abysmally low savings rate.  Deferring tax on contributions made to retirement accounts was a kicker initially intended to incentivize taxpayers to save.  The deal was that a taxpayer could deduct the contribution to the retirement account and thus pay less federal tax when the contribution was made.  But the tax would be assessed later when the money is distributed from the account.  The contribution would grow tax free until distributed, and both the contribution and the earnings would be taxed later.

The strategy worked.  Taxpayers began kicking money into Individual Retirement Accounts, and IRA became an everyday term for long term money.  The smart thinking was deferring tax was a good idea, especially if you’re in a higher tax bracket now than you will be when you retire and start reaping the rewards doled out by your IRA.  Throwing money annually into an IRA was a great rule of thumb for every taxpayer.  And then along came radical Roth.

Roth said, pay the tax now, not later, and the kicker is that both the contribution and the earnings will be tax free later.  As plot complications go, this one is a zinger.  First, most people don’t know what their marginal tax rate is now, let alone what it will be later.  And estimating what earnings will be when you take the money in the future is another fun calculation due to the compounding nature of interest.  Then there is the whole government trust issue, what if the government reneges on their promise that the contribution and the earnings will be tax free in the future (and that’s not too far fetched – the tax law is constantly changing, and taxing at least the earnings as a preference or for alternative minimum tax purposes is an idea that some would generate a lot of revenue for uncle Sam).

Pay now or pay later

Conspiracy theories aside, and assuming the government keeps their Roth promise, is it better to pay tax now on the contributions, or pay tax later on both the earnings and the contribution?  So there are few general guidelines.  The longer you’re stashing the money, the higher the earnings.  Under Roth rules, the earnings are not taxed.  So if you have a long savings horizon (eons before you get to stay home and eat chocolates in retirement bliss), paying now and avoiding the tax on the earnings is a good plan.  This is especially true if your tax bracket now is approximately the same as what you expect it to be when you retire.  But what if you’re not a spring chicken, you’re already hoarding chocolates in the freezer, and your big screen TV is already set to increased font size?  Your tax rate now may be much higher than it will be a few years down the road when you’re taking money out.

A good accountant could further complicate this by adding in time value of money (a greenback now is worth more than later) and considering the decision as a stream of annual contributions. And will this contribution be the first money you take out of your IRA or the last?   And I’m all for keeping accountants employed, but for simplicity sake, ignore that for now.  Make your decision on this year’s contribution only.

The Numbers

To do the basic calculation, you need to know four things:

  1. What is your tax rate now?
  2. How long before you retire?
  3. What will your tax rate be when you retire?
  4. How much will the contribution earn between now and when you retire?

Step 1: Take the contribution plus the earnings, and multiply by the retirement tax rate to determine the traditional IRA tax.  Subtract the traditional tax from the contribution plus the earnings.  This is your traditional IRA result.

Step 2: Then take the contribution multiply that by your current tax rate.  That is your Roth tax.  Tally your contribution, less the Roth tax, plus the earnings.  Compare that result to your traditional IRA result.

Step 3: Go with the higher result.

Here’s an example – 35% tax rate now, retiring in ten years, 20% tax rate upon retirement, 6% earnings over ten years, (6% * ten years = 60%, or 69% if you insist upon compounding).

For a one thousand dollar contribution:

Traditional – (1,000 + 600)* .2 = $320 tax – traditional result of $1,280.

(1,000 contribution plus earnings of 600 less tax of 320).

Roth – 1,000*.35 = $350 Roth tax, Roth result of $1,250.

($1,000 contribution- $350 tax + $600 earnings)

So, for all you taxpayers that still have 20/20 vision, go Roth!  Beyond a time horizon of ten years, the elimination of tax on the earnings beats the initial tax paid now on the contribution.  And if you already have a pair of drug store readers, and you can take a Roth contribution later than when the year you retire – then consider it.  But if you’re like most of us, and you need a little reduction in your annual tax bill to afford the contribution, then go traditional.  But whatever you do, the first decision, the one to save money, is a good one.  When was the last time you heard someone say they wish they had saved less?  Roth or not, we all need a few acorns.

About Nancy

Nancy Keene is the Chief Financial Officer at Dan T. Moore Company. She plays a major role in DTMCo.’s success and Investment Philosophy. Her blog series, Nickels and Dimes with Nancy, will periodically share her insights and wisdom on a plethora of financial topics. Visit Our Team page to learn more about Nancy.