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There is a school of thought out there that Roth’s are not a true cure-all for everyone.
I have both. My job had a 401(a) in lieu of Social Security and a 457(b) deferred compensation plan. Both were pre-tax accounts, which I rolled into a traditional IRA when I retired.
I contributed to a Roth on my own, but it has only $173K in it. When I have to start taking RMDs from the traditional IRA it’s going to trigger the IIRMA surcharge on my Medicare premium.
I thought of doing a Roth conversion but haven’t.
I now look back and would have post taxed contributions to my 401k and put much more in my Roth 401k. Now I’m looking at moving this a Roth Ira.
Usually discussions on this topic center around tax considerations and contribution limits (in one form or another). Actually, I agree that typically those considerations should be the major focus. That said, one consideration that I rarely find mentioned is the differences in legal protections afforded between Roths, IRA’s, and other traditional retirement accounts (such as 401k’s). Suffice to say, depending on the state one resides in (or plans to reside in), anyone considering this topic should at least be aware that differences may exist and what they might mean at some point in the future. I’m a big fan of understanding as many aspects of a topic as possible before making a major decision.
I advise people to always prefer Roths. It’s only people who don’t save who might find some benefit in traditional accounts over Roth accounts, and they obviously aren’t listening to the question :-).
I do, however, find that the ability to decide on a contribution after the tax year for IRAs is an excellent way to hit a tax threshhold, if that applies. Making the conversions, though, as soon as possible, as I also advise, has to be done during the calendar year.
I contribute the maximum allowable amount to my 401k on a pre-tax basis.
My traditional IRA was converted to a Roth IRA in 1998.
Since there is uncertainty regarding my future tax bracket in retirement, the Roth IRA provides a level of tax diversification. Income taxes, generally speaking, are relatively low now but I suspect tax rates will increase in the future.
I’d favor Roth if I met the income requirements to own one right now. Tax rates are not likely to stay this low for much longer. Additional retirement savings for me beyond 401K has to go into a taxable account. If you can afford it, having Roth and traditional IRA/401K seems ideal for managing taxes in retirement as tax policy ebbs and flows.
Love this question. Right now we prefer Roths for two reasons that aren’t often discussed in the great Roth v. Trad debate:
With high 6 and sometime 7 figure income, it was much better to max out traditional 401k, which got a 50% match from my employer. No way is my income going to be higher in retirement and my RMD will not be anywhere near the $182,000 IRMAA limit for joint incomes. My income producing investments are within my $2M IRA rollover, so my taxable income isn’t impacted. My equities are all ETFs in my taxable account, so I can control my income. Converting to a Roth would just generate more taxable income so it wouldn’t be a good idea.
I don’t bother crunching the numbers too much because as with all tax policy – it will shift. I’ll have a pension, so traditional IRAs aren’t as valuable to me in retirement as someone without that income. Mostly though, I choose the Roth because I prefer to avoid deferring obligations wherever possible. Mentally, it’s just easier to not have to worry about taxes on that money, and buying enhanced peace of mind is worth it.
Whether someone should favor Roths or traditional retirement accounts depends a lot in where they are in life, their taxable income, and their current tax rate. There’s no one size fits all.
Once you retire and have an opportunity to make Roth conversions, matters get considerably more complicated. It is difficult to know if the tax arbitrage opportunity presented by conversions will work out as expected. That said, doing conversions in the name of tax diversification makes sense. Spreading assets across taxable, Roth, and traditional retirement accounts will not result in the lowest tax outcome, but it won’t result in the highest either.
I’ve not been able to contribute to a Roth for some time, but now that I am in a lower tax bracket due to a job change I am considering starting to convert some traditional IRA $ to Roth $. The tough call is knowing what tax brackets will be 25 years from now when I’d have to start drawing down my traditional IRA. Given I don’t have a crystal ball, I will be gradual about making the shift. And I’ll my conversions in such a way that I don’t tick up to a higher tax bracket.
I had a traditional IRA, and a Simple IRA at my small law practice, long before I even knew what a Roth was. But later on I started Roths for my wife and me, and in recent years have done several Roth conversions.
So, we’ve ended up with a combination. I understand (and hope) that can provide some flexibility (“tax diversification”) down the road.
When I was 18, I was all about the Roth IRA. After all, I was in a very low tax bracket while working at Publix Super Markets. I kept on the Roth train early in my career when I was working a low-salaried finance job. But then I scored a sweet gig in the energy trading industry which commanded a higher salary–so I switched to #Teamtraditional (aka regular contributions) with my 401(k). Still, I contributed to a Roth IRA since I was above the income limit for taking the Traditional IRA tax deduction.
Now, running my own business and having a Solo 401(k), I do Roth contributions for tax reasons (the small business QBI deduction essentially makes Roth 401(k) contributions more valuable).
As a general rule, if I can avoid paying 22% income tax, then I’ll do that (which means making Traditional IRA contributions). If I’m in the 12% bracket or lower, I go Roth. That’s my rule of thumb.