Roth IRA vs Conventional IRA

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Sammy123
Posts: 31
Joined: Mon May 16, 2022 2:05 pm

Roth IRA vs Conventional IRA

Post by Sammy123 »

This may be the most worn out topic in personal finance, so sorry to bring it up again. I've been told (and read) that there are these huge advantage of Roth IRA related to the money growing tax free over time. But when I open Excel and make spread sheet columns comparing each, that seems not to be true. Consider a spreadsheet with two column as follows:

Conventional IRA - Column A) Take tax income deduction up front thereby having MORE money to invest then pay income tax at the end when you take distributions.

Roth IRA - Column B) Pay income tax up front thereby having LESS money to invest (conventional IRA) then pay no tax at the end.

If you keep the tax rate the same, the value of the two portfolios at the end turns out to be identical. So all it really comes down to is whether you believe your income tax rate will be higher or lower in the future. If you believe your income tax rate will be HIGHER in the future when you take distributions you are better to go Roth IRA (pay the tax today at today's lower rate). If you believe your income tax rate will be LOWER in the future when you take distributions you are better to go Conventional IRA (pay the tax in the future at the future lower rate).

Is that simple or am I missing something?
User avatar
vineviz
Posts: 13313
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Roth IRA vs Conventional IRA

Post by vineviz »

Sammy123 wrote: Thu Sep 22, 2022 9:13 am Is that simple or am I missing something?
It's pretty much that simple, though obviously there plenty of nuances when you look hard enough.

The benefits of tax-deferral are, IMHO, generally overestimated.

And if Roth conversions ever go away there will be a lot of "max out your tax-deferred accounts" investors who will end up being much worse off than if they'd taken a balanced approach to saving across a variety of tax exposures (i.e. tax-deferred, Roth, taxable).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
BogleTaxPro
Posts: 273
Joined: Sat Apr 04, 2020 6:08 pm

Re: Roth IRA vs Conventional IRA

Post by BogleTaxPro »

You're missing our (usual) assumption that whatever you invest in will have gains over time.

In the Conventional IRA, those gains will be taxed when you take distributions...and at whatever your nominal rate is at that time. That is: even if it's capital gains instead of interest/dividends, it will not get any capital gains tax treatment.

In the Roth IRA, the gains will never be taxed. Not when you get them, and not when you take distributions.
the_wiki
Posts: 354
Joined: Thu Jul 28, 2022 11:14 am

Re: Roth IRA vs Conventional IRA

Post by the_wiki »

Sammy123 wrote: Thu Sep 22, 2022 9:13 am

If you keep the tax rate the same, the value of the two portfolios at the end turns out to be identical. So all it really comes down to is whether you believe your income tax rate will be higher or lower in the future. If you believe your income tax rate will be HIGHER in the future when you take distributions you are better to go Roth IRA (pay the tax today at today's lower rate). If you believe your income tax rate will be LOWER in the future when you take distributions you are better to go Conventional IRA (pay the tax in the future at the future lower rate).

Is that simple or am I missing something?
Yes, it is that simple. Good job figuring that out yourself.
iflyjetzzz
Posts: 158
Joined: Fri Dec 19, 2014 12:30 am

Re: Roth IRA vs Conventional IRA

Post by iflyjetzzz »

In my case, Roth makes sense.
My wife and I both have military pensions so that automatically gives us six figures of income even before social security payments.
We earn enough now that we max out our retirement funds and still have savings outside of retirement accounts. In addition, I convert more than $40K of employer 401k contributions to Roth annually. I will stop making those Roth conversions in my last three years of working and will then make the conversions when I retire.

We don't plan on ever spending our Roths, but the money's there if it's ever needed. We plan on passing the money on to our heirs so it would be great to continue growing and passing everything on tax free.
User avatar
enad
Posts: 218
Joined: Fri Aug 12, 2022 2:50 pm

Re: Roth IRA vs Conventional IRA

Post by enad »

Sammy123 wrote: Thu Sep 22, 2022 9:13 am This may be the most worn out topic in personal finance, so sorry to bring it up again. I've been told (and read) that there are these huge advantage of Roth IRA related to the money growing tax free over time. But when I open Excel and make spread sheet columns comparing each, that seems not to be true. Consider a spreadsheet with two column as follows:

Conventional IRA - Column A) Take tax income deduction up front thereby having MORE money to invest then pay income tax at the end when you take distributions.

Roth IRA - Column B) Pay income tax up front thereby having LESS money to invest (conventional IRA) then pay no tax at the end.

If you keep the tax rate the same, the value of the two portfolios at the end turns out to be identical. So all it really comes down to is whether you believe your income tax rate will be higher or lower in the future. If you believe your income tax rate will be HIGHER in the future when you take distributions you are better to go Roth IRA (pay the tax today at today's lower rate). If you believe your income tax rate will be LOWER in the future when you take distributions you are better to go Conventional IRA (pay the tax in the future at the future lower rate).

Is that simple or am I missing something?
The Roth individual retirement account (IRA) has some unique features. While other IRAs, including the traditional IRA, simplified employee pension (SEP) IRA, and Savings Incentive Match PLan for Employees (SIMPLE) IRA, are subject to required minimum distributions (RMDs), the Roth IRA is not
Watch me pull a rabbit out of my hat
Exchme
Posts: 811
Joined: Sun Sep 06, 2020 3:00 pm

Re: Roth IRA vs Conventional IRA

Post by Exchme »

All OP has proven is that the commutative property of multiplication is true, but that's not the relevant math. The real point is that except for a few circumstances, the balance left in tax deferred still has taxes due on it at the time it is withdrawn, so it should not be compared to taxable or Roth monies without taking that into account. So the real goal is to level out the marginal tax rate on the IRA withdrawals over the years.

There are many considerations in that planning such as tax rates are scheduled to go up starting in 2026, for married folks one may pass early-leaving the other in a single bracket, there could be a need for long term care, there could be a desire to gift the IRA money to charity, there could be a desire to optimize the value to heirs and so forth. Plus of course there are complexities in the tax code like ACA premium credit phaseouts, IRMAA tiers, SS taxation, LTCG tax phase-ins, NIIT, etc. that have to be considered.

Many folks will never get out of the 12% bracket, so it's not terribly important for them. Very well-to-do folks may be stuck in high brackets no matter what, so it's not very important to them either. For folks in the middle brackets like me, depending on my assumptions, the present value often ends up as 5-10% of the amount converted, which is not at all bad for just shuffling money around.

The topic is not simple and evaluations should not be done with oversimplified tools, you will just fool yourself.
JayB
Posts: 185
Joined: Sat May 28, 2022 9:57 am

Re: Roth IRA vs Conventional IRA

Post by JayB »

Sammy123 wrote: Thu Sep 22, 2022 9:13 am This may be the most worn out topic in personal finance, so sorry to bring it up again. I've been told (and read) that there are these huge advantage of Roth IRA related to the money growing tax free over time. But when I open Excel and make spread sheet columns comparing each, that seems not to be true. Consider a spreadsheet with two column as follows:

Conventional IRA - Column A) Take tax income deduction up front thereby having MORE money to invest then pay income tax at the end when you take distributions.

Roth IRA - Column B) Pay income tax up front thereby having LESS money to invest (conventional IRA) then pay no tax at the end.

If you keep the tax rate the same, the value of the two portfolios at the end turns out to be identical. So all it really comes down to is whether you believe your income tax rate will be higher or lower in the future. If you believe your income tax rate will be HIGHER in the future when you take distributions you are better to go Roth IRA (pay the tax today at today's lower rate). If you believe your income tax rate will be LOWER in the future when you take distributions you are better to go Conventional IRA (pay the tax in the future at the future lower rate).

Is that simple or am I missing something?
Your reasoning is sound, but remember that conventional IRAs have RMD requirements whereas Roth IRAs do not require withdrawals at any age. If you don't think you'll need to spend the funds until well after age 72 (the current starting age for RMDs), then the advantage will go to the Roth IRA. You might want to model this in your spreadsheet. When considering tax rates in the future, you also need to contend with the possibility that the current tax brackets revert to the their old higher levels starting 2026 if the current tax code is not renewed. Also, a fair number of retirees are finding that they are subject to additional cliff taxes (e.g., IRMAA, NIIT) when they withdraw from IRAs because of their income and asset levels; these taxes may not have been applicable when IRA contributions were being made. The NIIT is not currently indexed for inflation. And current tax brackets are indexed according to the chained CPI, which is lower than the CPI-U, so this can be a hidden form of bracket creep that pushes more income into higher brackets over time.
Topic Author
Sammy123
Posts: 31
Joined: Mon May 16, 2022 2:05 pm

Re: Roth IRA vs Conventional IRA

Post by Sammy123 »

Thank you all for your enlightened feedback.
solarcub
Posts: 177
Joined: Sat Feb 08, 2020 10:09 pm

Re: Roth IRA vs Conventional IRA

Post by solarcub »

One of the advantages of the Roth IRA is that it lets you pretend to be poor when you are not. Under present law, you could have unlimited income from a Roth IRA and still qualify for Affordable Care Act subsidies for being poor. If your income is from a 401k or Traditional IRA, that would count as income and you wouldn't get the subsidies.

That may or may not matter to you, depending on how you get your healthcare.
sc9182
Posts: 1143
Joined: Wed Aug 17, 2016 7:43 pm

Re: Roth IRA vs Conventional IRA

Post by sc9182 »

solarcub wrote: Thu Sep 22, 2022 10:41 am One of the advantages of the Roth IRA is that it lets you pretend to be poor when you are not. Under present law, you could have unlimited income from a Roth IRA and still qualify for Affordable Care Act subsidies for being poor. If your income is from a 401k or Traditional IRA, that would count as income and you wouldn't get the subsidies.

That may or may not matter to you, depending on how you get your healthcare.
Don't get worked-up too hard to "pretend" to be poor long-away in future., lest you end-up actually being poor due to small'ish Roth portfolio. There may be ways to reduce portfolio withdrawals (and have lesser AGI) - if you are shooting for lower AGI for a few years (for any reason of your choice). Consider Home-equity loan, reverse-mortgage, 401K loan (if still actively working), 0% credit-card loan, margin-loan, portfolio loan, cash-out refi, cash-out car loan, college loan (if kids still going to school) -- etc ., to tide over a few years of lower resulting AGI ..

Quoting-Self from Another thread:
"Strive for achieving higher numbers/portfolio-sizes. Life meanders multiple ways potentially cutting portfolio size in half or even worse - sequence of returns, bad-returns/bad-investments, sub-par financial decisions, theft, marriage/divorce/marriage/divorce vicious cycle, disability, un-employment or under-employment, bad-health not-covered by insurance, death or worse-yet a lawsuit .. :( "

Infact, in ACA donut-hole states (13 some states?) -- you may actually need to show some income (133% FPL for your family size?) - to be eligible for ACA., otherwise you be possibly punted to Medicaid .. which has asset-based qualification ..
Last edited by sc9182 on Thu Sep 22, 2022 11:42 am, edited 3 times in total.
invest4
Posts: 1184
Joined: Wed Apr 24, 2019 2:19 am

Re: Roth IRA vs Conventional IRA

Post by invest4 »

invest4 wrote: Sun Aug 14, 2022 11:54 pm
Admiral wrote: Wed Aug 10, 2022 3:51 pm
invest4 wrote: Wed Aug 10, 2022 2:30 pm Looking further ahead, I found the following post informative and enjoyable for this topic:

Asymmetric risk in the Roth vs Traditional question

viewtopic.php?t=318512
Right. That is a good (and v. long) thread. For the TL;DR crowd, basically since it's impossible to know which choice will be "better" (if "better" means having more money to spend in retirement) due to all the assumptions needed about the future, one should simply consider the risks.

To wit: The risk of saving too much in Roth potentially means not having enough money in retirement. The risk of saving too much in Traditional potentially means having too much money, some of which is going to be used to pay higher tax.

For most people, the latter is a better "problem," with the usual caveat that having a mix of taxable, tax free, and tax-deferred accounts is usually the best approach.
Please see recent post and link from a similar thread which Admiral has also kindly summarized.

Alas, I would still encourage people to read the whole bit in order to better understand and inform your decision accordingly.
Please see above from a different thread on same topic.
old medic
Posts: 30
Joined: Sat Apr 17, 2021 5:13 am
Location: NC

Re: Roth IRA vs Conventional IRA

Post by old medic »

iflyjetzzz wrote: Thu Sep 22, 2022 9:32 am We don't plan on ever spending our Roths, but the money's there if it's ever needed. We plan on passing the money on to our heirs so it would be great to continue growing and passing everything on tax free.
This mirrors our reason for building our Roth accounts.
bryanm
Posts: 388
Joined: Mon Aug 13, 2018 3:48 pm

Re: Roth IRA vs Conventional IRA

Post by bryanm »

OP,

You've basically got it. Two extra considerations:
  • There is a tax arbitrage available due to our progressive tax system: you always contribute at your current top rate, but at least some taxable income in retirement will be taxed at the lowest marginal rate. So, until your pre-tax retirement nestegg supports withdrawals in your current marginal tax bracket, you get a tax advantage from a conventional account. Basically, you always want some pre-tax income during retirement.
  • Conventional provides optionality, in that it can convert to Roth. The opposite is not true. If you happen to have low income years, you can do conversions then to maximize tax savings.
I agree with others that a mix is ideal, but I personally prefer conventional and recommend it to anyone in a higher tax bracket.

Bryan
sc9182
Posts: 1143
Joined: Wed Aug 17, 2016 7:43 pm

Re: Roth IRA vs Conventional IRA

Post by sc9182 »

old medic wrote: Thu Sep 22, 2022 11:41 am
iflyjetzzz wrote: Thu Sep 22, 2022 9:32 am We don't plan on ever spending our Roths, but the money's there if it's ever needed. We plan on passing the money on to our heirs so it would be great to continue growing and passing everything on tax free.
This mirrors our reason for building our Roth accounts.
Yes, quite possible - assuming all your heirs are high-achievers, and high-AGI earners all thru-ought their careers - who prefer Roth assets -- yes, Roth may turn out to be better choice - given multi-decade run-way; Heard such everyone-is-high-performer families (and their future high-performing spouses) do exist in/around Lake Wobegon.

If you have a realistic normal family, where some of the heirs - who happen to be in lower-brackets., or (or charities you intend to donate, or use Trad-IRA withdrawals towards LTC/medical needs in excess of 7% AGI) - Trad-IRAs do carry some advantages.
iflyjetzzz
Posts: 158
Joined: Fri Dec 19, 2014 12:30 am

Re: Roth IRA vs Conventional IRA

Post by iflyjetzzz »

Exchme wrote: Thu Sep 22, 2022 9:43 am All OP has proven is that the commutative property of multiplication is true, but that's not the relevant math. The real point is that except for a few circumstances, the balance left in tax deferred still has taxes due on it at the time it is withdrawn, so it should not be compared to taxable or Roth monies without taking that into account. So the real goal is to level out the marginal tax rate on the IRA withdrawals over the years.

There are many considerations in that planning such as tax rates are scheduled to go up starting in 2026, for married folks one may pass early-leaving the other in a single bracket, there could be a need for long term care, there could be a desire to gift the IRA money to charity, there could be a desire to optimize the value to heirs and so forth. Plus of course there are complexities in the tax code like ACA premium credit phaseouts, IRMAA tiers, SS taxation, LTCG tax phase-ins, NIIT, etc. that have to be considered.

Many folks will never get out of the 12% bracket, so it's not terribly important for them. Very well-to-do folks may be stuck in high brackets no matter what, so it's not very important to them either. For folks in the middle brackets like me, depending on my assumptions, the present value often ends up as 5-10% of the amount converted, which is not at all bad for just shuffling money around.

The topic is not simple and evaluations should not be done with oversimplified tools, you will just fool yourself.
Excellent post. There are a lot of factors involved, including finding your SS payments taxed above a certain income level. And yes, IRA distributions count in calculating taxes on SS. https://faq.ssa.gov/en-US/Topic/article ... 2425%2C000.
User avatar
LadyGeek
Site Admin
Posts: 85023
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Roth IRA vs Conventional IRA

Post by LadyGeek »

I removed an off-topic post. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
bryanm
Posts: 388
Joined: Mon Aug 13, 2018 3:48 pm

Re: Roth IRA vs Conventional IRA

Post by bryanm »

iflyjetzzz wrote: Thu Sep 22, 2022 12:26 pm And yes, IRA distributions count in calculating taxes on SS. https://faq.ssa.gov/en-US/Topic/article ... 2425%2C000.
Just to clarify, I think the intent here was to say that traditional IRA distributions count? I don't think Roth distributions count, but let me know if I'm misunderstanding.
iflyjetzzz
Posts: 158
Joined: Fri Dec 19, 2014 12:30 am

Re: Roth IRA vs Conventional IRA

Post by iflyjetzzz »

bryanm wrote: Thu Sep 22, 2022 1:24 pm
iflyjetzzz wrote: Thu Sep 22, 2022 12:26 pm And yes, IRA distributions count in calculating taxes on SS. https://faq.ssa.gov/en-US/Topic/article ... 2425%2C000.
Just to clarify, I think the intent here was to say that traditional IRA distributions count? I don't think Roth distributions count, but let me know if I'm misunderstanding.
Correct; my bad. TIRA distributions count but Roth distributions do not.
skierincolorado
Posts: 1716
Joined: Sat Mar 21, 2020 10:56 am

Re: Roth IRA vs Conventional IRA

Post by skierincolorado »

Sammy123 wrote: Thu Sep 22, 2022 9:13 am

Is that simple or am I missing something?
Almost. Don't forget it is the marginal rate that matters. If you have no money in trad 401k/ira then your income and marginal rate in retirement could be quite low.

Another benefit of Roth is you can save more on an after tax basis in a tax sheltered account. For people at the limits that can be a benefit.

Qualifying for ACA subsidies either when working or in retirement can play a big impact too. There can be ways to keep income low for a few years in retirement in order to use AcA.

If there is any chance for career growth in one's profession, I think people under 30 should use mostly Roth. I myself did both, but not enough Roth because I failed to realize how much my income and tax rate would increase. But in years where I qualified for AcA subsidy, doing traditional was worth it.

For a standard upper middle income career path 50-100k starting salary in early or mid 20s growing to 120-300k inflation adjusted by peak career) it would be mostly Roth in 20s transitioning to mostly or nearly all traditional in peak earning years from age 35-50 and assuming retirement between 45 and 55. A longer working career might need to do 1/3 Roth even during peak working years so as to prevent very large RMDs from traditional during retirement.
sc9182
Posts: 1143
Joined: Wed Aug 17, 2016 7:43 pm

Re: Roth IRA vs Conventional IRA

Post by sc9182 »

skierincolorado wrote: Thu Sep 22, 2022 2:12 pm
Sammy123 wrote: Thu Sep 22, 2022 9:13 am

Is that simple or am I missing something?
Almost. Don't forget it is the marginal rate that matters. If you have no money in trad 401k/ira then your income and marginal rate in retirement could be quite low.

Another benefit of Roth is you can save more on an after tax basis in a tax sheltered account. For people at the limits that can be a benefit.

Qualifying for ACA subsidies either when working or in retirement can play a big impact too. There can be ways to keep income low for a few years in retirement in order to use AcA.

If there is any chance for career growth in one's profession, I think people under 30 should use mostly Roth. I myself did both, but not enough Roth because I failed to realize how much my income and tax rate would increase. But in years where I qualified for AcA subsidy, doing traditional was worth it.

For a standard upper middle income career path it would be mostly Roth in 20s transitioning to mostly or nearly all traditional in peak earning years from age 35-50 and assuming retirement between 45 and 55. A longer working career might need to do 1/3 Roth even during peak working years so as to prevent very large RMDs from traditional during retirement.
good points made. Don’t forget to check if HSA and match are available., consider MegaBackdoor Roth (MBR) if made available.

Some folks say, do Backdoor Roths., in my humble opinion- Backdoor Roth is not as much a clean-cut process — then again., if you are savvy and willing to put up with its nuances and quirks — be happy to proceed. Given choice - we would love to max out MBR instead., and sleep like a baby.
User avatar
teen persuasion
Posts: 1841
Joined: Sun Oct 25, 2015 1:43 pm

Re: Roth IRA vs Conventional IRA

Post by teen persuasion »

Exchme wrote: Thu Sep 22, 2022 9:43 am All OP has proven is that the commutative property of multiplication is true, but that's not the relevant math. The real point is that except for a few circumstances, the balance left in tax deferred still has taxes due on it at the time it is withdrawn, so it should not be compared to taxable or Roth monies without taking that into account. So the real goal is to level out the marginal tax rate on the IRA withdrawals over the years.

There are many considerations in that planning such as tax rates are scheduled to go up starting in 2026, for married folks one may pass early-leaving the other in a single bracket, there could be a need for long term care, there could be a desire to gift the IRA money to charity, there could be a desire to optimize the value to heirs and so forth. Plus of course there are complexities in the tax code like ACA premium credit phaseouts, IRMAA tiers, SS taxation, LTCG tax phase-ins, NIIT, etc. that have to be considered.

Many folks will never get out of the 12% bracket, so it's not terribly important for them. Very well-to-do folks may be stuck in high brackets no matter what, so it's not very important to them either. For folks in the middle brackets like me, depending on my assumptions, the present value often ends up as 5-10% of the amount converted, which is not at all bad for just shuffling money around.

The topic is not simple and evaluations should not be done with oversimplified tools, you will just fool yourself.
Bracket may be confusing - you actually want to consider your marginal tax rate instead.

People in low tax brackets may have relatively high marginal rates due to phaseouts of tax credits, especially refundable credits like EITC. We often owe zero federal tax (due partially to non-refundable credits like the Saver's credit), but pre-tax contributions to a 401k and HSA net us considerable refunds. The phaseout on EITC for > 1 child is 21%, and our state matches EITC at 30%, an effective additional phaseout of 6.3%. Stack that 27.3% on top of state ~6% and you are at 33.3% before considering federal 10 and 12%, and another 7.65% on FICA avoided on HSA contributions thru payroll - portions of our retirement contributions have nearly 50% marginal rate. We will never reach that in retirement.

That said, there's a limit to chasing these high marginal tax rates - tIRA contributions have no such advantage, so we contribute to Roth IRAs (with the refundable credits we just maxed - tax free money). So we have a mix of pre-tax and tax free, roughly 60/40. We also have time to Roth convert amounts yearly before SS at 70 and RMDs at 72, to shift the balance even further to Roth. Some/most of those conversions will be inside the standard deduction space, so again at zero tax cost.

One nuance I learned of rather late - my state excludes the first $20k of IRA withdrawals/conversions per year from taxation (after age 59.5) - per PERSON, not combineable. Standard deduction of $16k + $20k (his) + $20k (mine) = $56k tax free, IFF we each withdraw $20k minimum from our own accounts, only $36k if my accounts are depleted. My accounts are light, due to a late start and low income. I'm working on increasing my accounts, and we plan to whittle down his accounts first while mine grow, so that in the future when we want larger withdrawals we can sustain them with some from each. So we want a balance between DH's and my traditional accounts, too.
skierincolorado
Posts: 1716
Joined: Sat Mar 21, 2020 10:56 am

Re: Roth IRA vs Conventional IRA

Post by skierincolorado »

sc9182 wrote: Thu Sep 22, 2022 2:34 pm
skierincolorado wrote: Thu Sep 22, 2022 2:12 pm
Sammy123 wrote: Thu Sep 22, 2022 9:13 am

Is that simple or am I missing something?
Almost. Don't forget it is the marginal rate that matters. If you have no money in trad 401k/ira then your income and marginal rate in retirement could be quite low.

Another benefit of Roth is you can save more on an after tax basis in a tax sheltered account. For people at the limits that can be a benefit.

Qualifying for ACA subsidies either when working or in retirement can play a big impact too. There can be ways to keep income low for a few years in retirement in order to use AcA.

If there is any chance for career growth in one's profession, I think people under 30 should use mostly Roth. I myself did both, but not enough Roth because I failed to realize how much my income and tax rate would increase. But in years where I qualified for AcA subsidy, doing traditional was worth it.

For a standard upper middle income career path it would be mostly Roth in 20s transitioning to mostly or nearly all traditional in peak earning years from age 35-50 and assuming retirement between 45 and 55. A longer working career might need to do 1/3 Roth even during peak working years so as to prevent very large RMDs from traditional during retirement.
good points made. Don’t forget to check if HSA and match are available., consider MegaBackdoor Roth (MBR) if made available.

Some folks say, do Backdoor Roths., in my humble opinion- Backdoor Roth is not as much a clean-cut process — then again., if you are savvy and willing to put up with its nuances and quirks — be happy to proceed. Given choice - we would love to max out MBR instead., and sleep like a baby.
I wish we had MBR, but have to do regular backdoor for now. Wife just started new job and mbr was not in plan docs we have received so far but hoping it will be available
MathWizard
Posts: 5628
Joined: Tue Jul 26, 2011 1:35 pm

Re: Roth IRA vs Conventional IRA

Post by MathWizard »

There is an advantage to tax deferral.

If you live in a HCOL, high tax state income tax state, you can move to a low/no income tax state,
and you have lowered your tax rate.

Tax deferral up to the top of a tax bracket and Roth after that can be very effective.

You can Roth convert in a down year, saving some taxes on the conversion.

You will want to have some money in tax deferred to fill up the 0% bracket (otherwise known as the standard deduction)

Having some of both Roth and tax deferred is working well for me.

Downside of too much in tax deferred -

RMDs pushing you into a higher tax bracket.
Taxation of social security benefits
Non-spousal heirs (your kids) have to pull money within 10 years, likely while the are earning a living
making the 1/10th of the inherited tax deferred funds be taxed at their highest (or possibly higher yet) rate.
placeholder
Posts: 5915
Joined: Tue Aug 06, 2013 12:43 pm

Re: Roth IRA vs Conventional IRA

Post by placeholder »

If you're just talking iras then it's important to note that the cutoff for being able to deduct when covered by a company plan is pretty low so often roth ira is the only option although for many the same decision needs to be made with 401k and similar plans as many offer roth these days although mine didn't for most of my working career.
Post Reply