ROTH vs. Traditional - How Did You Choose?

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pmr2017
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ROTH vs. Traditional - How Did You Choose?

Post by pmr2017 »

Curious to know how you made the decision between investing in a ROTH IRA, or a Traditional IRA? Did you follow a standard formula, or train of thought? Or did you make a more personal decision based on your situation and/or goals?
retired@50
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Re: ROTH vs. Traditional - How Did You Choose?

Post by retired@50 »

I'd start here: https://www.bogleheads.org/wiki/Traditional_versus_Roth

It can be a tricky question depending on what you think your tax rate will be during retirement. Since this is in the future for many investors, it's hard to be certain. The general guideline is to use a traditional IRA or traditional 401k plan if you're in the middle to upper tax brackets.

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tashnewbie
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Re: ROTH vs. Traditional - How Did You Choose?

Post by tashnewbie »

It was an easy decision for me, because I couldn't deduct contributions to a TIRA. Therefore, it was a no-brainer to do Roth IRA.
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Brianmcg321
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Re: ROTH vs. Traditional - How Did You Choose?

Post by Brianmcg321 »

For me it was age and taxe rate. I started a Roth IRA when I was 23. The younger you are and lower tax bracket the better deal a Roth is.

Now I’m still in the lower tax bracket and contribute to a Roth 401k and IRA.
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Mike Scott
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Re: ROTH vs. Traditional - How Did You Choose?

Post by Mike Scott »

I have some in both but I plan to do all TIRA for the next few years because there is a good chance my tax rate on this money will be lower in retirement.
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celia
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Re: ROTH vs. Traditional - How Did You Choose?

Post by celia »

The earlier you are in your career, the better it is to do Roth, because your income will likely increase over the years as you gain more experience and "move up the ladder". As your income increases, you will move up to higher tax brackets. When your income tax is in the 22% or higher tax bracket, you can contribute to traditional (say, in an employer's 401K) and also to Roth in the Roth IRA. Even if you are in the highest tax bracket, you can do a Backdoor Roth, which is really just making non-deductible contributions to a Traditional IRA, then converting it to Roth.

At the end of your working years, you will be amazed at the power of compounding and if there were significant Roth contributions in your earlier years, that tax-free money will be all yours (instead of partly belonging to the IRS and state).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
terran
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Re: ROTH vs. Traditional - How Did You Choose?

Post by terran »

It's all about marginal tax brackets. Despite being in the 12% bracket (where most people would strongly encourage Roth) we still do a lot of traditional because:
  1. We're still able to get under the top tier of the Saver's tax credit, saving $400. This means the federal marginal bracket to go to the top of the 12% bracket ($104,650 AGI instead of $65k, a $39,650 increase) would be ($39,650 x 12% + $400)/$39650 = 13%. This would be much higher if we went just over the Saver's Credit limit instead of going all the way to the top of the 12% bracket.
  2. We plan to spend at least some of our retirement traveling internationally after establishing residency in a no income tax state saving 4-6% on state taxes compared to now
  3. We plan to retire early, giving us lots of time to Roth convert before social security kicks in
  4. Our spending is and will remain much below the lower tax brackets (12% now, 15% when brackets go back up as scheduled in 2025).
All that together means our current 17-19% marginal bracket if we go over the savers credit cliff is below what I expect our marginal bracket will be in retirement. The concerns I still have are that if we aren't able to travel for whatever reason then ACA subsidy losses could essentially add another 8-9% tax, and if we need/want to settle in a state with an income tax for some reason we also wouldn't come out ahead.

This year some income from an inheritance actually will push us over the saver's credit, so we'll be targeting the top of the 12% bracket by adjusting Roth/traditional and/or doing Roth conversions.

I also have a solo 401(k) which I mostly contribute to as Roth because contributing to tradition reduces Qualified Business income making the marginal tax savings on those contributions only 80% x 12% = 9.6%.

Overall, given out retirement plans I tend to go Roth only if the total marginal bracket is under 15% (what the federal tax bracket is scheduled to go to in 2025 for low, but not super low earners).
Tamarack
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Re: ROTH vs. Traditional - How Did You Choose?

Post by Tamarack »

The provided options are not necessarily orthogonal. For me, the decision came down to the standard train of thought of “compare your current tax rates against what you predict they will be in the future“.

However, the application of this heuristic is personal and depends on individual circumstances as well as your outlook. Will you have a pension and if so, how much? Will there be COLA adjustments? Do you file MFJ now and what is the likelihood that will change to single at some point in the future or vice versa? What do you think will happen politically and how might that impact tax rates and social security? Some have the philosophy to save everything pre-tax and in the end if you saved “too much”, there are worse problems to have. For myself, I used various calculators and spreadsheets, and I spent a lot of time with I-ORP. I landed on a hybrid approach for now, but that could change as life changes.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by DoTheMath »

My answer has been to do some of both. After college I did a Roth IRA as my tax rate was effectively zero so it was a no-brainer. Now that I earn quite a bit more, I continue with the Roth IRA but do Traditional for the 403b. My thinking is I want some flexibility to manage taxes in retirement by having the option which to withdraw from. That said, my expectation (for now at least) is that my marginal rate now and in retirement will be pretty similar so it probably doesn't matter much.
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DSInvestor
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Re: ROTH vs. Traditional - How Did You Choose?

Post by DSInvestor »

Traditional IRA deduction is a little tricky. Those who are covered by employer plan or married to someone who is covered by an employer plan are may be ineligible for the the Traditional IRA deduction if income exceeds certain limits. If you find yourself ineligible for the Traditional IRA deduction, then Roth IRA contributions are a no-brainer assuming you're eligible for those. If you're eligible for the Traditional IRA deduction but find that taking the deduction doesn't reduce your Fed and/or state tax very much, then Roth IRA is likely a better choice.

See IRS page on IRA deduction limits: https://www.irs.gov/retirement-plans/ir ... ion-limits

If your employer plan offers Traditional 401k and Roth 401k, that is a little bit easier as there is no income limit for taking the Traditional 401k deduction. This comes down to the your marginal tax bracket today vs your expected marginal brackets in retirement. A good plan by default may be to max out Traditional 401k at work and then Roth IRA as well.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by willthrill81 »

We're in the 22% bracket and will almost certainly be in the 12% bracket in retirement. Paying 12% rather than 22% (i.e. traditional contributions) is a no-brainer, even if we thought that tax rates would increase in the future. However, if/when we're able to contribute enough to traditional accounts to bring us down into the 12% bracket, our remaining contributions will be in Roth (i.e. 'locking in' that money at 12%).

It's important to keep in mind that the 'risk' associated with Roth vs. traditional is asymmetrical, as Northern Flicker pointed out in a recent thread.
Northern Flicker wrote: Wed Jun 24, 2020 4:44 pm If you end up saving more than you need, then not having enough traditional balance just means that, despite paying more taxes than necessary on Roth contributions during your working years, you saved enough and are doing fine. Having too high of a traditional balance means that your after tax retirement assets are less than they would have been had you done more Roth contributions, which just means that you could have overfunded your retirement by a bit more than it is by having done more Roth contributions.

On the other hand, if the level of retirement savings underfunds one's retirement or has little or no margin of error, then overfunding the Roth space increases the risk of running out of funds and decreases after tax retirement assets. I don't think it is possible to have too much trad space if assets underfund a comfortable spending level.

While your target levels may be consistent with Roth contributions, there are no guarantees of length of working career or investment returns. The conclusion is the Roth contributions that could have instead been traditional contributions increase risk of a retirement shortfall for all but very high earners.
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Last edited by willthrill81 on Mon Sep 07, 2020 10:29 am, edited 1 time in total.
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JS-Elcano
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Re: ROTH vs. Traditional - How Did You Choose?

Post by JS-Elcano »

I decided to contribute to a Roth (backdoor RothIRA + Roth 403b) because I want to live off this money to cover the 6 years between early retirement and qualifying for medicare.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by Iorek »

I am more or less in my peak earning years so I max out a traditional 401k and then use the tax savings to fund a Roth IRA to have some diversity/flexibility.
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MrBobcat
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Re: ROTH vs. Traditional - How Did You Choose?

Post by MrBobcat »

tashnewbie wrote: Mon Sep 07, 2020 9:25 am It was an easy decision for me, because I couldn't deduct contributions to a TIRA. Therefore, it was a no-brainer to do Roth IRA.
^As of now pretty much this.

When I was younger and in a lower tax bracket it was a no-brainer to put in Roth. That being said I'd still put money in a Roth (if I had the choice between tIRA and a rIRA, which I did for a while) as I don't have the best crystal ball as to what tax rates will be when I retire. I feel better/more secure about not having all my retirement assets in the same taxable egg basket. It may be a mistake and I won't have maximized my retirement accounts after tax but I can live with it same way I can live with paying my house off even though I probably would have made more in the market had I not sunk the money into paying the house off.
Last edited by MrBobcat on Mon Sep 07, 2020 10:44 am, edited 1 time in total.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by midareff »

Traditional had a tax advantage and I was single at the time. Did the max, and then did three years of double up. After that when and if there was spare money it went to taxable and Roth.
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kelway
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Re: ROTH vs. Traditional - How Did You Choose?

Post by kelway »

pmr2017 wrote: Mon Sep 07, 2020 9:19 am Curious to know how you made the decision between investing in a ROTH IRA, or a Traditional IRA? Did you follow a standard formula, or train of thought? Or did you make a more personal decision based on your situation and/or goals?
I just diversify about 50/50 between Roth and Traditional (considering IRA/401k in sum). It's not enough to imagine that tax rates must be higher in the future because I'm convinced they will find a way to get their hands on Roth money indirectly via a VAT someday.
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teen persuasion
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Re: ROTH vs. Traditional - How Did You Choose?

Post by teen persuasion »

We do traditional 401k and Roth IRAs. It lets us get the best of both, using the best tool for each.

Contributions to traditional employer retirement plans make us eligible for greater EITC, a refundable tax credit, by lowering both our w2 wages and our AGI (EITC tests on both). Using tIRA would not increase our EITC, because the tIRA deduction only reduces AGI, not w2 wages. The AGI reduction also reduces our taxes to the point that non-refundable credits like part of the CTC < 17, CTC > 17, part of AOTC, and retirement Saver's credit cover any tax remaining (and lets us receive the refundable portions as a refund). It also reduces our state tax, and increases our refundable state credits (30% of EITC and 33% of first $1k of CTC < 17).

We then use those refunds to fund our Roth IRAs, increasing the total that we can save for retirement, and providing diversification. There's no further tax advantage to using tIRAs, because our tax has reached zero, and tIRA contributions can't increase our EITC, so we are essentially getting the Roth IRAs for free.
SteveJones
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Re: ROTH vs. Traditional - How Did You Choose?

Post by SteveJones »

If you have them money to max out retirement plan Roth should always win because the limit is after tax and not before tax like a traditional. Maxing out a $6,000 Roth IRA is like investing $7,122 in a traditional IRA (which is you can't do because it is above the limit). Maxing out a Roth at $19,500 post tax dollars is like investing $23,790 in the Traditional (which you can't do because it is above the limit). If you can't come close to maxing out a plan than you do have to think about tax brackets. Other rule of thumb: If you are going to have a decent pension in retirement that will probably fill up the lower tax brackets making Roth even more appealing.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by razorbacker »

kelway wrote: Mon Sep 07, 2020 10:59 am
pmr2017 wrote: Mon Sep 07, 2020 9:19 am Curious to know how you made the decision between investing in a ROTH IRA, or a Traditional IRA? Did you follow a standard formula, or train of thought? Or did you make a more personal decision based on your situation and/or goals?
I just diversify about 50/50 between Roth and Traditional (considering IRA/401k in sum). It's not enough to imagine that tax rates must be higher in the future because I'm convinced they will find a way to get their hands on Roth money indirectly via a VAT someday.
A scary thought, the government changes the rules latter and starts taxing Roth accounts.
KlangFool
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Re: ROTH vs. Traditional - How Did You Choose?

Post by KlangFool »

OP,

It is easy.

Max up your Trad. 401K and put the tax savings into the Roth IRAs. It works for most people most of the time.

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anon_investor
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Re: ROTH vs. Traditional - How Did You Choose?

Post by anon_investor »

tashnewbie wrote: Mon Sep 07, 2020 9:25 am It was an easy decision for me, because I couldn't deduct contributions to a TIRA. Therefore, it was a no-brainer to do Roth IRA.
Pretty easy choice when the government makes it for you. Backdoor Roth it is!
tashnewbie
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Re: ROTH vs. Traditional - How Did You Choose?

Post by tashnewbie »

anon_investor wrote: Mon Sep 07, 2020 11:06 pm
tashnewbie wrote: Mon Sep 07, 2020 9:25 am It was an easy decision for me, because I couldn't deduct contributions to a TIRA. Therefore, it was a no-brainer to do Roth IRA.
Pretty easy choice when the government makes it for you. Backdoor Roth it is!
Definitely. Even easier when my 401k doesn't offer a Roth option. Decisions made for me!
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Re: ROTH vs. Traditional - How Did You Choose?

Post by meaghansketch »

For me:

- No tax deferred option at work (common in my industry, I've been in my career 15+ years with no pension or tax deferred option at any of my jobs, "just switch jobs" is not an option for me

- No match (see above)

- Not self employed so can't do self-employed account

I started when I was in my early 20s with a Roth but when I started earning a bit more (and dealing with a bit higher taxes) I decided to set aside rules of thumb and really do the math . Once I did so I realized that in my situation I was just never going to accumulate a tax-deferred account large enough to deal with very high taxes (assuming tax treatment stays how it is). $6000/year *30 years at a 7 percent rate of return ends up at around $600,000 - or $24k/year taking out 4%. I was paying 25%+ in taxes to avoid paying 12% in retirement and it didn't make any sense. Not only that, I had a decently-sized Roth account at that point and I knew that if I just left it to grow on its own I would be able to withdraw from it as needed to keep my tax rate low even in years with higher than average expenses.

A couple blog posts helped me cement my thinking that this was actually the right choice for me - the Great Roth Controversyhttps://www.gocurrycracker.com/roth-sucks/ blog post on GoCurryCracker and this post https://www.madfientist.com/traditional ... -roth-ira/ on Mad Fientist which shows that even if traditional turns out to have been the wrong choice for me, I can always convert to Roth later (in a low-tax year) giving me the best of both worlds
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Re: ROTH vs. Traditional - How Did You Choose?

Post by bsteiner »

As Niels Bohr and Yogi Berra said, it's hard to make predictions about the future. However, a good starting point is that Roth contributions and conversions generally make sense to the extent you can do so at a tax rate less than, equal to, or a little higher but not too much higher than the tax rate that would otherwise apply to the distributions.

As to future tax rates, I generally assume that the tax law will be what it's scheduled to be. In other words, that Congress won't make any changes, and any changes that are scheduled to happen in the future will take place as scheduled. If the rates go up or down by a few points, it probably won't make a large difference in the planning. There's no way to predict possible larger future changes in the law.

The SECURE Act makes the Roth somewhat more attractive than it was before. Since most beneficiaries will have to take distributions within 10 years, that will bunch the income and put some beneficiaries in higher brackets than they would have been.

There are some other benefits to the Roth. See my articles in the April 2013, https://www.kkwc.com/wp-content/uploads ... r_ATRA.pdf, and June 2018, https://www.kkwc.com/wp-content/uploads ... ations.pdf, issues of Trusts & Estates.

On the other hand, it will more often make sense to leave retirement benefits to a charitable remainder trust, in which case a Roth conversion wouldn't make sense. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by livesoft »

pmr2017 wrote: Mon Sep 07, 2020 9:19 am Curious to know how you made the decision between investing in a ROTH IRA, or a Traditional IRA? Did you follow a standard formula, or train of thought? Or did you make a more personal decision based on your situation and/or goals?
It was very very easy. We were never given a choice.

First, in the early days Roth IRAs did not exist, so traditional IRA was the default decision.

Second, then when Roth IRAs existed folks who contributed to 401(k)s and 403(b)s with high enough income could not contribute, so traditional IRA was the default decision.

Third, then when income limits changed and folks with 401(k)s or 403(b)s could contribute to Roth IRA, but could not contribute to a deductible tIRA, then Roth IRA was the easy decision.

You should look to see if you even have a choice because not having a choice means no decision to make.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by ruralavalon »

There was no choice to make. The Roth IRA did not exist until 1997. Roth contributions to 401ks were not permitted until 2006. I retired 2011, so Roth was not a choice for most of my working life.
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peppers
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Re: ROTH vs. Traditional - How Did You Choose?

Post by peppers »

When megacorp started its long term savings and security plan in 1979, the choice was simple.

Do you want to contribute to the plan? Yes or no.
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hoffse
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Re: ROTH vs. Traditional - How Did You Choose?

Post by hoffse »

We are 33/33 and will be all-Roth for 2 more years. We max out 2 Roth IRAs and 2 Roth 401ks in addition to college savings, etc.

We are currently in the 24% bracket but will almost certainly pop up into the 30’s somewhere in a couple years and stay there until we retire.

The tax rates are scheduled to go back up after 2025, so we are paying artificially low taxes right now. It’s the perfect time for Roth.

Finally, by focusing on Roth in the first 1/4-1/3 of our careers that money has the advantage of additional time in the market. We still have plenty of time for traditional contributions once our tax bracket increases, but this gives our Roth money the longest runway for growth.

YMMV.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by willthrill81 »

hoffse wrote: Tue Sep 08, 2020 10:49 am The tax rates are scheduled to go back up after 2025, so we are paying artificially low taxes right now. It’s the perfect time for Roth.
Even if tax rates do increase, that does not make Roth the default best choice today. For instance, we're in the 22% bracket now and expect to be in the 12% bracket in retirement. Even if the 12% bracket goes up by 50% and becomes 18%, we're still better off with tax-deferred contributions today over Roth. So in our situation, it's a no-brainer to go with tax-deferred due to the large gap in current tax rates.

However, if someone is in the 24% bracket now and expects to be in the 22% bracket in retirement, the current 2% gap means that the advantage of tax-deferred is much less, and only a 10% increase in the 22% bracket in the future would be enough to make Roth contributions superior today.

Also, married couples who have little to gain from tax-deferred contributions, as in the second example above, could still be better off with Roth contributions even if tax rates don't change due to the 'surviving spouse being thrust into a higher tax bracket due to RMDs' issue. The greater the age gap between the spouses, the more significant this issue is likely to be because it will extend the expected length of time that the widow(er) will be in the higher tax bracket.
Last edited by willthrill81 on Tue Sep 08, 2020 10:57 am, edited 1 time in total.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by Mindbender »

meaghansketch wrote: Tue Sep 08, 2020 8:59 am For me:

- No tax deferred option at work (common in my industry, I've been in my career 15+ years with no pension or tax deferred option at any of my jobs, "just switch jobs" is not an option for me

- No match (see above)

- Not self employed so can't do self-employed account

I started when I was in my early 20s with a Roth but when I started earning a bit more (and dealing with a bit higher taxes) I decided to set aside rules of thumb and really do the math . Once I did so I realized that in my situation I was just never going to accumulate a tax-deferred account large enough to deal with very high taxes (assuming tax treatment stays how it is). $6000/year *30 years at a 7 percent rate of return ends up at around $600,000 - or $24k/year taking out 4%. I was paying 25%+ in taxes to avoid paying 12% in retirement and it didn't make any sense. Not only that, I had a decently-sized Roth account at that point and I knew that if I just left it to grow on its own I would be able to withdraw from it as needed to keep my tax rate low even in years with higher than average expenses.

A couple blog posts helped me cement my thinking that this was actually the right choice for me - the Great Roth Controversyhttps://www.gocurrycracker.com/roth-sucks/ blog post on GoCurryCracker and this post https://www.madfientist.com/traditional ... -roth-ira/ on Mad Fientist which shows that even if traditional turns out to have been the wrong choice for me, I can always convert to Roth later (in a low-tax year) giving me the best of both worlds
Thanks for posting those links. They were really helpful in helping my thinking.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by MathWizard »

1. When in the 15% (currently 12%) federal tax bracket, Roth Contributions made the most sense,
as I was sure I would never be under that bracket.

2. Roth contributions could be withdrawn penalty and tax free, so it mad sense as a 2nd tier
Emergency fund, also as a college savings fund (thankfully never need for those purposes).

3. Tax diversification, to avoid some taxes on SS benefits when I take them.

4. A Iarge promotion/salary increase jumped me into the 22% bracket, where Traditional was
not fully deductible, so I maxed 403b and ROTH. I did not use ROTH 403b option, since all
of the regular 403b was tax deferred.
Onlineid3089
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Re: ROTH vs. Traditional - How Did You Choose?

Post by Onlineid3089 »

I chose Roth for the IRAs because my job is covered by my state's pension. That will fill up the lower tax brackets, and I don't anticipate any years of low income to do conversions. We do traditional in my wife's 401k and also treat the HSA and taxable account as retirement funds.
Haeysh
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Re: ROTH vs. Traditional - How Did You Choose?

Post by Haeysh »

Also consider if you have now, or might have in the future, an inherited IRA with RMD payments. I am doing 50/50 401k/Roth going forward with this fact in our equation 🙂
khangaroo
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Re: ROTH vs. Traditional - How Did You Choose?

Post by khangaroo »

I read somewhere that you should have diversify your tax-advantaged accounts so since the traditional IRA mimics a 401k and I was already maxing that, I wanted to diversify my accounts by opening a Roth IRA.
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Re: ROTH vs. Traditional - How Did You Choose?

Post by PhrugalPhan »

At first I did 100% traditional since I didn't have a choice. Instead I split between retirement and extra contributions to my mortgage. When that was gone was about the time Roth was added as an option for my retirement (457). So I started at 1/3 Roth. Over time I upped it to 50/50. Then one day at an employee retirement meeting it was mentioned that we would never pay lower taxes than today due to having a pension, so we should be doing as much Roth as we could stand.

So I did an analysis of my current traditional balance, what it would be if I waited until 70 and made no more traditional contributions, and what the RMDs would be. It turned out I was already at the point my RMDs, when added to SS & pension, would push me into a higher tax bracket than today. That was 2.5 years ago. Since then I am doing 100% Roth - in fact between the 457 & Roth IRA I am putting in $46,000 this year as Roth. Also this should help with IRMAA taxes in the future.
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