Roth versus Traditional retirement account contributions

Mike Piper has an very good article comparing contributing to Roth or traditional retirement accounts. He discusses the most important factor: current marginal tax rate versus an estimate of your retirement marginal tax rate. He then states “But when in doubt — and frankly that’s a lot of the time because it’s hard to predict what marginal tax rate you’ll face many years from now — I think it’s prudent to prioritize Roth contributions.” He lists 3 reasons: “Roth accounts do not have required minimum distributions (RMDs) during your lifetime; Contributions to a Roth IRA can be taken back out, tax-free and penalty-free at any age; and if you’re maxing out your contributions, Roth accounts have the advantage of effectively letting you shelter more dollars than tax-deferred accounts do.

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If I was starting out my career now and wasn’t in real estate, I would invest every dollar in a Roth IRA in growth funds and amass as much money as possible by the time I was 60. I would then shift the portfolio to very high yield and generate as much dividends as I could and take those as distributions each year. That would keep my taxable income at a very low level in retirement…


The vast majority of people will come out ahead putting money in retirement accounts pre-tax, simply because most people will never save enough to make their retirement income as high as their working income. If you include the effect of marginal tax rates, which most comparisons don’t (just like this link), the effect is even more dramatic.

That said, it is good to have money in a Roth account. The first and third of those reasons only really apply to super-savers. The second is really not a benefit for anyone except to the extent it encourages people to save more than they otherwise would. Being able to diversify your withdrawal options between Roth and traditional can be helpful for tax minimization.

It also typically makes sense for younger people to save in a Roth, and switch to saving in traditional later on, in higher-earning years.

ratbert2k agreed!! Also in retirement, you will not be paying into SS (7.5% or 15% if you are self employed) or your 401K/IRA ( which in my case was 20%), so you will not need as much income unless you find other new expenses like travel. Having both Roth and Traditional IRAs allows you to use after-tax funds if you have a big expense one year (like a car or expensive trip) and keep your marginal tax rate below a desired level.

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I could go on a lot of nice trips for the amount I pay into social security and my retirement accounts.

In my case shooting for at least the same income I had pre-retirement made traveling two to four months a year pretty painless. An important offsetting factor is to retire with no debt and no mortgage.

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That’s by far the most important factor.

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I think it depends on where your income falls bracket-wise.
My retirement income is obviously lower than when I was working. Add in some (small) investment income, then as soon as I take out any traditional IRA money, I’m back in my working income bracket (marginal rate).
I honestly wish I had put all of my retirement income into a Roth, rather than a traditional IRA/403b/401k. The promise of “you’ll be in a lower tax bracket in retirement” might hold true for high earners, but not regular folk like me!
I’m not complaining, I’m grateful for what I have. But if asked for advice, I’d say Roth, not pre-tax retirement savings.

Everyone here has competely forgotten about the Medicare IRMAA tax. If you have quite a large IRA, and RMDs force you into higher IRMAA brackets, you will get scorched on your monthly Medicare premiums. I’m glad I did some IRA conversion and used Roth IRAs and 401(k) because now I should be able to avoid all of that. But had I been a tax-deferral maximalist, I’d be in serious trouble right now, with no way to back out of it. The RMD age being raised to 75 for me in a way makes it worse, because then the eventualy RMDs would be huge. Plus, if you HATE someone in your family, make them the beneficiary of your tax deferred IRA after Secure Act 1.0 and 2.0 !!! If they are force-fed a large IRA, their tax bracket will be exploded higher for a decade. Like if I fell over today, and my two kids got my IRA, each of them would have $60,000 higher taxable income for a decade, that would wreck their taxes. I know, I know, First World problems.

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If most of your retirement was Roth, you’d have more freedom in being able to choose where to live, because that income would not be exposed to State income tax. Vermont, for example, a lovely place, but the State income tax is withering. Interestingly, only a few countries recognize the USA Roth as tax-free… kind of a strange random list…

United Kingdom (UK)

New Jersey, surprisingly, has become a bit more friendly to retired folks. NJ does not count Roth Distributions or Soc Sec as taxable income, they have a property tax freeze (age and income limits apply), and a pension exclusion (total income limits apply $150k for couple, $75k for singles). It’s still expensive to live in NJ, but a number of seniors choose to anyway–proximity to family, major cities, beach, etc. Services are better than in most low-tax states. Lots of 55+ and assisted living places being built all over NJ.

Nancy, did you mean to write “NJ does not count tax-deferred IRA / 401k Distributions or Soc Sec as taxable income”? I would expect them not to count Roth, because it’s not Federally taxable.

OMG they make getting a tax break hard, impossible actually. NJ Dept of Taxation

“When you make withdrawals from a traditional IRA over a period of years, the part of the annual distribution that represents earnings is taxable. For example, if the amounts not previously taxed in the IRA represent 33% of the total value of the IRA, then the taxable portion of the distribution is 33% of the total amount withdrawn in that year.”

Who has those kinds of records after rolling various 401ks into your IRA? No one. That’s a useless tax break. Thanks for nuthin’ guys.

Better to move over the state line to Pennsylvania, where you can avoid retirement taxation.

" Retirement income is not taxable: Payments from retirement accounts like 401(k)s and IRAs are tax exempt. PA also does not tax income from pensions for residents aged 60 and over. Social Security income is not taxable: Just like with a pension, in Pennsylvania, Social Security is tax exempt."

Coincidentally next door to low taxed NH. The MA folks have staked their claim!

It depends…if you have 15 year money at 2.25% there is no reason to pay it off…

Yes, to many, but as I noted on another thread, I will never forget my wife beaming when she wrote that last mortgage check, and we were 100% debt free.

She was ecstatic for a month. Some things are too important.

One disadvantage to Pennsylvania is that it has inheritance taxes:

I saved records of all of my IRA/401k/403b contributions, and put them on a spreadsheet. There’s also the Form 5498 listing contributions, end-of-year pay stubs, or tax returns.

So I know the total that I contributed that was pre-tax Federal, but not pre-tax State.

I’ve moved the money around – 401k rolled to IRA, etc. But the bottom line is to know the total that you contributed, and the total of ALL of your IRAs now. Then it’s a percentage.
This, by the way, is the same as the Federal tax calculation for IRAs that have some already-taxed portion – there’s some circumstances where people can make contributions that aren’t pre-tax (maybe having to do with income limits? idk). But it’s the same as the Federal tax calculation.

only for a month?!? I’m still ecstatic!!

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Do ya think the extra $60K might help pay some of their increased tax burden?

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