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.
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.
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.
That’s by far the most important factor.
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.