Check your inbox or spam folder to confirm your subscription.
Go to main Voices page »
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:
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.