This question essentially focuses on the taxation aspects of different types of retirement accounts. When thinking about this I am reminded of an excellent book I read a few years ago called “The Power of Zero”, by David McKnight. (https://www.amazon.com/gp/product/1984823078?tag=randohouseinc30439-20).
It provides a great explanation why no one single type of retirement account can deliver the maximum tax savings you’re looking for to boost your retirement savings. For most people, the “Optimal” tax strategy is actually to have ALL THREE different types of brokerage accounts while saving for and to draw from during your retirement: Tax Free (Roth, HSA), Pre-Tax/ Tax Deferred accounts (Traditional IRA, 401-K), AND regular Taxable accounts. They each offer certain different & powerful advantages vs the other two types of accounts.
This may initially seem counter-intuitive. If you had your choice, why wouldn’t you just want 100% of your retirement savings in a Roth account?? Simple! Done!! But as it turns out, the correct answer is actually “No”, not ideally. Even taxable accounts offer certain powerful potential tax advantages which are unavailable to tax free and pre-tax retirement accounts. Each type of account can serve a different purpose, and to take advantage of some of the biggest tax breaks available in our tax code, you really need to have funds available in ALL THREE of these types of accounts.
(Full disclosure; in an earlier life I was a CPA and I’ve been a finance guy my whole career, who does our own taxes every year w/ tax software, including about 14 K-1’s on our 2023 return. But I do believe most people can understand the concepts explained clearly with examples in David’s very readable book, which was not written “for CPA’s”…)
My wife & I currently have about 12% of our retirement savings in Tax Free retirement accounts, vs 61% in Pre-Tax/ Tax Deferred retirement and the remaining 27% in regular Taxable brokerage accounts. But I plan to max out our 22% marginal tax rate bracket with Roth conversions again in 2024, and then max out our 24% marginal rate with conversion in 2025, right before the Trump tax cuts are scheduled to expire. So, by the end of next year our Tax Free accounts ratio should climb to ~ 16%, our Pre-Tax accounts will still be the majority of our savings but reduced to ~ 57%, with the remaining 27% invested in regular Taxable brokerage accounts.
It’s true that I wish I’d been a little more diligent about allocating funds to my Roth account when I was younger, so these tax-free accounts would be closer to 30% (than only 16%) by the end of 2025. A “30/40/30” allocation would seem to me to be an almost ideal relative mix of tax free, tax deferred and taxable accounts in retirement. But I’m very confident we will still have enough assets left in our taxable accounts to give us the flexibility to still take advantage of all the various (underappreciated) tax benefits which are available ONLY within taxable accounts.
Definitely Roth IRAs. I like having the earnings grow tax-free and no RMDs. I’ve been helping our grandkids invest in Roth IRAs while they are in their 20s by matching what they invest.
I was already moving rollover IRA funds into Roths up to the top of my tax bracket for general best-practice reasons, but raised-consciousness regarding RMDs to-come has made me even more diligent about it.
This question essentially focuses on the taxation aspects of different types of retirement accounts. When thinking about this I am reminded of an excellent book I read a few years ago called “The Power of Zero”, by David McKnight. (https://www.amazon.com/gp/product/1984823078?tag=randohouseinc30439-20).
It provides a great explanation why no one single type of retirement account can deliver the maximum tax savings you’re looking for to boost your retirement savings. For most people, the “Optimal” tax strategy is actually to have ALL THREE different types of brokerage accounts while saving for and to draw from during your retirement: Tax Free (Roth, HSA), Pre-Tax/ Tax Deferred accounts (Traditional IRA, 401-K), AND regular Taxable accounts.
They each offer certain different & powerful advantages vs the other two types of accounts.
This may initially seem counter-intuitive. If you had your choice, why wouldn’t you just want 100% of your retirement savings in a Roth account?? Simple! Done!! But as it turns out, the correct answer is actually “No”, not ideally. Even taxable accounts offer certain powerful potential tax advantages which are unavailable to tax free and pre-tax retirement accounts. Each type of account can serve a different purpose, and to take advantage of some of the biggest tax breaks available in our tax code, you really need to have funds available in ALL THREE of these types of accounts.
(Full disclosure; in an earlier life I was a CPA and I’ve been a finance guy my whole career, who does our own taxes every year w/ tax software, including about 14 K-1’s on our 2023 return. But I do believe most people can understand the concepts explained clearly with examples in David’s very readable book, which was not written “for CPA’s”…)
My wife & I currently have about 12% of our retirement savings in Tax Free retirement accounts, vs 61% in Pre-Tax/ Tax Deferred retirement and the remaining 27% in regular Taxable brokerage accounts. But I plan to max out our 22% marginal tax rate bracket with Roth conversions again in 2024, and then max out our 24% marginal rate with conversion in 2025, right before the Trump tax cuts are scheduled to expire. So, by the end of next year our Tax Free accounts ratio should climb to ~ 16%, our Pre-Tax accounts will still be the majority of our savings but reduced to ~ 57%, with the remaining 27% invested in regular Taxable brokerage accounts.
It’s true that I wish I’d been a little more diligent about allocating funds to my Roth account when I was younger, so these tax-free accounts would be closer to 30% (than only 16%) by the end of 2025. A “30/40/30” allocation would seem to me to be an almost ideal relative mix of tax free, tax deferred and taxable accounts in retirement. But I’m very confident we will still have enough assets left in our taxable accounts to give us the flexibility to still take advantage of all the various (underappreciated) tax benefits which are available ONLY within taxable accounts.
Roth no RMD’s and withdraw when you want and need
Definitely Roth IRAs. I like having the earnings grow tax-free and no RMDs. I’ve been helping our grandkids invest in Roth IRAs while they are in their 20s by matching what they invest.
I was already moving rollover IRA funds into Roths up to the top of my tax bracket for general best-practice reasons, but raised-consciousness regarding RMDs to-come has made me even more diligent about it.