"Nearly Everyone Says The Roth Is A Great Investment & Nearly Everyone Is Wrong" | Is This Right?
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- เผยแพร่เมื่อ 30 มิ.ย. 2024
- Roth vs Traditional Google Doc: www.vertex42.com/Calculators/...
Article referenced in video: lifeandmyfinances.com/investi...
00:00 Intro
00:51 Roth vs Traditional
02:20 Examples
05:40 Similar NOT The Same
06:59 RMDs
07:47 Employer Match
08:40 Income Limits
08:57 Backdoor Roth
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Disclaimer: Please note that this video is made for entertainment purposes only and not to be taken as financial advice. Always make sure to do your own research.
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Thanks for watching, I appreciate you!
Hi Erin: I’m a retired CPA. I like your video a great deal, but would like to add several things to consider. First: there is an investment / tax aspect to consider. If you have an investment loss in a traditional IRA your government shares in that loss to the extent of your marginal tax rate. In a ROTH, with no tax savings, you bear the full extent of the loss. If there is less money available to you there is less to tax. Obviously no one want a loss, but stuff happens. Second: Tax laws change often. Nothing prohibits a future congress from taxing anything. Look how social security went from non taxable to partially taxable. The way our government is spending us into bankruptcy I believe it will need to tax heavily to keep afloat. Third: Since most people are in a higher tax bracket while working, I did and suggest others take the savings up front using a traditional IRA. If your taxes drop consider a ROTH conversion. There are also tax laws that help reduce retirement taxes if you use them. Qualified Charitable Distributions for example. Everyone will need to weigh all the facts for their situation. I believe in sure things, not what might happen. Thanks again. God Bless!
Love this!! Comment pinned! 🙏
Great comment! There is also the time/cost factor of money. $6,900 today buys what $1,000 did in 1973. In other words if I pay $6,900 taxes this year it is exactly the same as paying $1,000 in 1973. As a small business owner my philosophy was worry about this years taxes this year and future taxes in the future.
"Nothing prohibits a future congress from taxing anything". Nah, I don't believe it. Congress doesn't act in a vacuum, and they don't have unlimited power. They operate within a framework of social, financial, political, and legal considerations. Taxing Roth would be clear act of "double taxation", which is simply not legal, and would NEVER pass as it is political suicide for anyone voting for it.
And if your counter is, "but what about taxing of Social Security?" - that's a bad example. The 50% SS tax bracket is NOT double taxation as that money was never taxed up-front. Although you could argue that the 85% SS tax bracket is a small amount of double taxation.
Retired eh ? You need to come back and work. The profession is facing a shortage !
Great points! Did not take some of this into account for my comment below.
Thank you! 💯
Not only will I potentially be in a lower fed tax bracket (certainly won't be higher, since income will be lower) during retirement, but I may also be living in a state with no retirement income taxes.
You're absolutely correct, each situation is different.
There is no blanket "one is better"
No state income tax... but federal is still going to tax.
Personally, I don't think that the government has the political will to literally raise taxes (at least not any time soon). Instead, we will see inflation raise people's income, and the government will conveniently forget to adjust the tax brackets up to account for that inflation. The running joke in high school econ class in the 90s was that we were all going to be millionaires, and we will all still be lower middle-class lol. If everyone moves up to a higher tax bracket, then we all get a tax hike even if there is no tax hike.
@@CaedenV
Yes, I said lower fed tax bracket, I didn't say no fed taxes.🤷🏻♂️
In my case, my wife and I were raising a houseful of kids and had no tax liability at all so a traditional Ira would not have done me any good. So I started a Roth IRA and funded it each year. By the time my youngest daughter left home it had become such a habit that I never considered doing anything else. I retired and rolled my company retirement plan over into several traditional IRAs . I have done a few Roth conversions and now that my wife is retired too we take structured withdrawals from both accounts. By predetermining our income for the year we qualify for a large subsidy on our health insurance and our premium is reduced to $2.30 per month. If an emergency comes up (and some HAVE) we can access the Roth IRA and not affect our subsidy. I start Medicare next year but my much younger wife will be on the ACA for 11 more years so we will be dealing with this issue for awhile. Thank God for Roth IRAs!
There is more than income tax to consider. Roth withdrawals are not subject to IRMAA penalties and do not cause taxation of social security benefits.
^this. Also, with social security, traditional withdrawal could cause the social security tax torpedo which will most likely causes the tax bracket of the traditional withdrawal to be higher than it is in their working years. Though overall, the effective tax rate is lower, it can be deceiving that they are paying less tax when they are probably not in term of tax bracket for each additional dollar.
On top of social security and IRMAA/Medicare impact, there are also spousal considerations. The widow’s tax trap is a big deal if you have a lot of assets in tax deferred accounts.
The traditional is almost always the best option if the tax savings are invested in the year they are realized, but investors have to have a tax-efficient conversion and spend-down plan in place.
Traditional accounts REALLY benefit early retirees because there is more runway to execute these strategies.
The Roth will be used in magi and Irma calculation for Medicare part d and b costs I Am paying 3times base rate because of unknowing withdrawal
The Social Security aspect is critical. If all your money is in a Roth, you would be in a zero tax bracket. No tax on Social Security. Rather than guessing whether your tax bracket would be lower in retirement, you choose a lower tax bracket by investing in a Roth.
@@rexstrom5362 That can be hard to arrange if you have the income to max out a 401k, as it seems likely you’ll have a nice taxable portfolio as well. I’m looking at this and wondering if maybe it’s better to accept that my SS benefits will be significantly reduced, by an even more aggressive means testing regime than applies now, as I will be claiming after the coming Trust Fund torpedo hits, and try to maximize my potential lifestyle instead of minimizing my Social Security haircut. In other words, yes I’m still maxing out my Roth, but deliberately gimping what my taxable portfolio can earn for me, letting the tail wag the dog so to speak, seems counterproductive.
I lean towards Roth as controlling taxes in retirement is much more important that while working. A combination of Roth and 401k allows you to balance out withdrawals between the two to ensure you're in the lowest tax bracket possible.
I think the right answer is definitely both, but I would front-load the Roth portion as much as possible. I think the "retirement" vs "working years" comparison is simplistic. If your career is growing, Roth is better at the beginning of your career and Traditional is better at career peak, and if you do it in that order you can maximize both opportunities. What often happens though is the reverse - people value the immediate tax savings in early career and the estate planning advantages of Roth in late career. A little foresight could go a long way.
Yes. Important to understand that MOST people are in lower tax brackets (and effective tax rates) in early career phases-so Roth makes sense then. When income and rates are higher, later in years, it may make sense to save in traditional. Each case needs to be analyzed. Not a simple easy answer.
I like both.
The money we have in our Traditional 401k is the money we will spend in retirement
The money we have in Roth is the money we will be giving to our kids when we die.
That’s totally backwards. Spend the tax-free Roth money first and then your kids get the traditional money as non-taxable gifts or low/no tax inheritance.
@@jaypie0864 I disagree see my reply 7/25/23
@@jaypie0864 The kids would still need to pay income tax on the Trad 401K money or Trad IRA money that didn't yet have income tax paid on it.
For me, Both! You did nail the logic behind where to put your money. For me I did not not know for sure. I knew I was in a high bracket when I was deciding, therefore, maximize the traditional to reduce taxes in the high bracket. If and when I could I fund my Roth I did. Because of the great recession in 2008-2009 (and even a few years after) my business was doing horrible and my income was way down so I fully funded a Roth in those years. I even converted traditional IRA dollars to a Roth IRA at the 10% tax bracket.
Now in retirement this is paying major dividends. I am very flexible where I can take my money from. I now pay ZERO taxes in retirement. I planned on being in the 10% bracket. -0- is so much nicer. You can plan but you don't really know how things will be when you retire. The tax code and brackets change. Being flexible was my key to be able to do this.
And on another note, that last point very few employee type people (non-business owners) don't understand the risk of owning a business. The business cycle is real.
Thank you Erin for your thought provoking videos. I recently "found" them and working through selected ones. I really like your point about circumstances being different. One critical component that I don't think you mentioned in this video is not only factoring in potential tax rate in retirement but also impact on how much of one's social security will be taxed. Folks that don't make enough to hit this threshhold or too much it doesn't impact. However, some are in that range where having more of that taxable income in retirement not only impacted by tax rate but also maybe even more of their social security income will be taxed making the overall impact noticeably "more" than taxes earlier. I'm sure you know this but throwing it in in conjunction with this video.
Enjoy your videos! I’m also interested in learning more about backdoor and mega-backdoor Roth conversions. Thanks for your work on all of the videos. They are informative and I’m certain helpful to many.
Awesome, thank you!
Great topic Erin, love all the comments it created.
I am fortunate that my employer offers a Roth 401(k), and a mega Roth in plan conversion. Additionally, we do backdoor Roth IRAs.
Finance is Personal!
Awesome video yet again. However, I noticed the article you mentioned as being for a ROTH 401(k), but you mentioned ROTH IRA. Another thing for people to be aware of is that a ROTH 401(k) is different than a ROTH IRA with regards to the types of investments. A ROTH 401(k) offers a limited number of funds to invest in, and they often come with hefty fees/loads, while a ROTH IRA through a brokerage allows investors to choose their own investments. The fund managers don't always perform as well as they should either. I've had a workplace retirement account that pulled losses on nearly every find for several years in a row, while I averaged 20%+ annual returns choosing my own investments in my ROTH IRA. This is another reason why I avoid fund investing. I outperform fund managers.
Keep up the good work. You are doing everyone a favor by bringing them information they most likely would not have otherwise!
Thanks Erin, good video. Yes, this is a highly subjective topic. Both types of accounts have their pros and cons.
The main reason to convert to Roth from a traditional IRA is if you are at risk of running into high RMDs from a traditional IRA (that might push you into higher tax brackets) at the age at which you are forced to take RMDs. If not, then it makes no difference unless tax rates increase significantly OR if either spouse dies and you suddenly find yourself in a single (and much higher) tax bracket, then you’re going to wish you had more in a Roth. Another advantage of Roth, is it’s just a less worrisome place to park your money and it gives you great flexibility while planning withdrawals. Finally, Roth is easier to work with if you are planning to leave some wealth to your heirs.
Very timely video for me! Just moved an old Rollover IRA account into my current 401k (rollover money was from a previous job 401k).
That cleared my IRA accounts to zero and I plan to start the back door Roth IRA process next month. I definitely would like more videos on mega Roths, etc.
Love the thought put into this versus the standard response, "Always the Roth!" I've switched back and forth over the years depending on known upcoming expenses (e.g., college tuition, etc.). I think as long as you're saving/planning for the future you're going to be ok.
The correct answer is both. Then you should also put something into a taxable account as well, if you can. Having multiple accounts with different tax treatment gives you maximum flexibility to minimize your taxes in retirement.
Completely agree! Having all 3 accounts gives you flexibility to manage taxes throughout retirement and healthcare expenses prior to age 65.
I really love the both approach
Hi Erin, I have contributed and rolled over to pretax IRAs (and a deferred comp program for state workers). I’m now 62 1/2. I look at Roth IRA as a tool that lets you manage your taxes on withdrawals by withdrawing up to a tax bracket from my now taxable sources and topping off any needed funds from a Roth.
With that in mind, I plan to retire from my work at 65. My wife is older (75) and only gets $6,600 a year from SS. I plan to wait until at least 67 to take SS, giving us a couple of very low income years during which we will be able to do the Roth conversions, again, up until the next tax bracket. Though the current difference is only between 22% and 24%, which isn’t much, I anticipate there will be years when I can leverage the converted funds to push us down into the 12% tax bracket.
Please do a video on the limits on converting traditional IRAs to Roth IRAs, as in my preliminary look, as long as you’re willing to pay the taxes on conversion, you can convert as much as you want after a certain age. I’d like to know if I’m reading this wrong.
Do you see any immediate flaws with this plan? Thanks a lot for your videos. They always get me thinking!
Actually, it turns out that I’ll turn 65 in January 2026, the same month the tax brackets revert. Time for more calculations. It would be nice if retirement didn’t have so many moving targets!
Hi Erin. Thank you so much for all the good you do. I have 5 years left to work. I have been considering doing a Roth IRA conversion but coming up with paying the tax would be difficult. I think a better option for me would be to stop investing in the traditional 401k and start investing in a Roth 401k for my remaining years working. I know this is after tax dollars, but I will pay a little at a time while working and it seems to be a simpler option. Also, I need to make sure that the employer match will continue into the traditional as you mentioned in your video, I don’t want to lose that. Again, your videos are truly amazing.
I love the graphs and updated statistics that you provide.
Thanks!
Excellent video. Not many TH-camrs have covered this comparison. Thanks!
Good discussion Erin!
My 2 cents as a recently retired 63yo that had no clue about Roths till the last few years and then could not contribute due to the earnings limit.
My first point is that many people(me included till recently) think that since Roth earnings are tax free, that you will end up with more money. Mathematically that is of course not true as pointed out by some on this thread, and falsely argued by others. The math is strictly about tax brackets.
Second point is that low tax bracket workers get the greatest benefit from CONTRIBUTING to a Roth. Modest income makes it unclear, and high income makes it often unwise to contribute too much to Roth because of potentially paying more now than later. (Actually able to contribute Roth last year in teen bracket)
Third, if it looks to be close to a wash, go with the Roth because of the secondary advantages of tax free flexibility, lower IRMAA, and possible ACA needs.
Finally, if your cash portfolio is large($2million plus) Roth conversions are likely to make a lot of sense. Below that the advantages of aggressive conversions tend to be minimal or only recommend for a small portion.
For us a lot of money went into IRAs at 30% plus. We are not looking at needing to pull any money beyond the teens. If our investments kill it, then maybe some RMDs will hit the first 20% bracket. But, that is still well below where we contributed. We do expect to have a little room over the next couple of years in our teen brackets and will convert that. Also spending down portfolio to get to 70 for SS for myself(wife took early for complex reasons) which lowers RMD issues.
Thanks again
Thanks for sharing your perspective!
Best things about Roth are: 1- You know exactly what the balance in that accout is at any time, and 2- Your heir/s would also receive that exact balance as they will not be subjected to paying any tax, and 3- When you withdraw funds from your Roth in retirement, those funds will Not have an impact on your AGI when filing your annual taxes.
I love all your videos! I'm definitely interested in learning more about the backdoor Roth conversion
Noted!
We have both a Traditional and a Roth due to the way that our employer's savings plan was structured many years ago. We keep both because it allows the flexibility of withdrawing from one or the other to avoid tax bracket creep as long as the RMD limits are met.
As usual, this is a great overview of the options and considerations. Love your videos!
Thanks so much! 😊
9:18 The Backdoor Roth conversion step does not have an annual limit, and there are no penalties associated. You do, however, get a 1099 for the earnings on the gains, which is why you want to do the conversion promptly. (The 1099 will also include the original contribution that is converted; the 8606 is how you claim tax exemption for that part if you did not deduct the contribution from your income.)
not true. the backdoor roth is specifically when you contribute to a Trad IRA and immediately convert so there is no growth and is used by ppl with incomes above the threshold for Roth contributions so it does have a de facto limit of the current IRA contribution limits. A conversion from an established Trad IRA has no limits and the entire amount is taxed. A conversion from someone with non-deductible contributions to a trad IRA is a PIA
The point I was correcting is the statement about conversion into the Roth having an annual limit (which she claimed was in danger because of possible gains); this isn’t correct. There is no annual limit on the Roth conversion step.
The reason for converting promptly has nothing to do with limits, and everything to do with being practical. Converting gains is a taxable event, and delaying too long is a wasted opportunity because gains occur in the traditional IRA account that could have been earned tax-free in the Roth. It is, however, generally recommended to wait a day between the deposit and the conversion to avoid any claim by the IRS that it was in fact a direct Roth contribution which isn’t allowed for higher earners.
And yes, having a mix of pre-tax and after-tax funds in a traditional IRA is a pain that triggers tracking on form 8606 or the taxpayer is in danger of paying income tax twice on some of their money. In many cases, there is a way to clean this up if you also have a 401k that you can move pre-taxes funds into.
Erin, found your channel a few weeks ago, and while I might disagree on some minor points with you, I'm still learning a lot! Two points about Roth vs Traditional that I'm just coming to understand (I'm 65). First, the government changed the rules for inherited IRAs, and now your beneficiaries (not spousal) only have 10 years to pull funds from an inherited traditional IRA. That can force them into really high tax brackets. Second (this only applies to married filing jointly), when one spouse dies, the other jumps into a considerably higher tax bracket (all other income staying equal). So we're considering doing more Roth conversions than we have in the past.
Welcome to the channel Mike!! 😊
Another good video. I humbly think you missed the two most important points. 1) how different contributions affect taxes and costs beyond the tax bracket such as qualifying for various tax credits, aca subsidies or irmaa, 0 or 15% on long term capital gains, social security taxability, etc. This is where the differences can become very significant, potentially in either direction depending on circumstances.
2) Roth accounts have effectively higher contribution limits. This is really important for high earners or super savers.
We did traditional to reduce our taxable income. Now that we are retired, having a larger "tax free" bucket waiting for me at 59.5 would be nice.
Also, Secure Act 2.0 now allows 401(k) plans to do Roth employer matching.
Great video again. Funny how we just changed our 401k back to traditional, since we are fairly confident that we will not need what we make today at that time, we invest 39% (if calculated based on pre tax income and non match , with match 48% ) currently. That said we are still going to keep doing our back door Roth , and our mega back door Roth with our employer. So we have both to pull when retire . That is just our strategy. Can’t wait to FI by 48 lol 😂. Most likely will keep on working, great company and awesome benefits lol.
40K SUBSCRIBERS!!!!!! WOO HOO........ Love your videos........ I contributed to a traditional and are now converting it to a Roth during retirement. I'm 62 y/o and figure I will pay the taxes now at the lower rate and any additional money's will be tax free.
CONGRATS!!!!! next up..... 50K
Thanks John!!! I grabbed a extreme shot when it happened 😊 thanks so much for your support 🙏
Hi Erin, I use both 401K and Roth but don't forget you only pay taxes on the money going into the Roth but never pay taxes on the gain. Also it's easier to pay taxes when you have the income instead of when you are retired. Just my opinion. Your videos are great and I am a fan so keep it up.
I think that is what puts Roth over the top. No taxes on gains.
While you don’t pay money on the gains for Roth, it’s important to run the numbers to figure out what gets you more money in the end. I see far too many people choosing Roth when they are in the high tax bracket, and plan on retiring in a lower bracket. Also, it’s possible to control your tax brackets in retirement through different types of retirement accounts.
The main reason to convert to Roth is if you at risk for high RMDs at age 73 or 75. If not, then it makes no difference unless tax rates increase significantly.
Another point, I believe (has to be verified) that you can take $ out of Roth UP TO the amount you put in… I don’t believe the 5 year rull applies to what you put in. Also, don’t think you have the 59 1/2 rule on it, either… if I were retiring early I’d want to really understand how that works, as it could be more flexible.
@coryeggers8967 There is no tax advantage unless the tax rates are higher when you retire. Mathematically, there is no difference if the tax rate is the same. So I'm not sure what you mean by your comment.
I'm looking to convert portions of a traditional IRA to a Roth IRA when I turn 65 because I'm not eligible for full social security benefits until 67, so during those 2 years I will be in a significantly lower tax bracket. I also want to minimize RMDs later in life to manage taxes. One thing no one seems to discuss is the impact on taxes from an unexpected inheritance, especially in the form of an annuity.
Excellent video Erin, thank you.
Thanks Jim!
Great video. I would love to see a video from you about mega Roth conversations including 401k conversion.
Thanks. Love your videos. Keep up the great work kido.
Thanks Robert!
40K Subscribers... Congratulations!
Thanks! 😃
use both. use traditional to get to bulk spending on your tax bracket. then use Roth for expenses over that tax liability. This keeps health care cost lower before age 65.
A critical difference in RMD's between a Traditional IRA and Roth IRA account is that the government still requires RMD's from a traditional IRA account once you reach the RMD starting age. If you have saved in a traditional IRA account, it could grow substantially such that your RMD amount will push you into a higher tax bracket once you reach the RMD starting age. I work with my CPA and CFP to determine the appropriate amount to convert from a traditional IRA to a Roth IRA account each year while targeting the desired tax bracket for my total income.
Which is not until age 73. And 75 starting in 2033. Most people die before then.
@@WheresWaldo05 well, 33% soc sec recipients are 75yo+, while 51% are 62-74yo. considering that the author's calculator is based on someone living to be 100yo, RMD plays an important part in the consideration. In fact, by his own calculator, he actually made the wrong decision to switch to trad 401k from roth 401k. you can't wish away things like he did. moreover, there is nothing that prevents Congress from changing RMD age again.
@@hanwagu9967 Very good points. I think the biggest factors of the ROTH decision are age and if you have children. I plan to pile into ROTH early for tax free growth, then phase in traditional accounts as I get into higher tax brackets. It seems ROTH accounts are very simple to deal with for you and also for any children that may inherit the remaining account.
HSA's are triple-tax advantaged but so are traditional retirement accounts! Tax free going in, tax free growth, and tax free income up to your standard deduction. Anyone with only ROTH accounts is just handing money to the government that they don't have to, you always want at least some traditional
Because I'm an old, almost all of my retirement funds are in traditional 401K/IRA accounts. I've got a small ROTH I'm contributing to currently, but I'm trying lately to figure out if a conversion, or a series of conversions over the next several years, (as I retire), might make sense. With a younger, working spouse, and Medicare, (thus IRMA), coming up... it's all quite complex to calculate.
Max out both 401(K) and the Roth! Pay your self first and Learn to live on what’s left. I started less than maxing both but kept increasing getting to maxing out the Roth first and now, finally reaching the max point on the 401(K). The tight budgeting to get there will be helpful in retirement!
So you are saying live while you are incapable of living and be a slave in your strongest years and can actually move sround quickly with energy? Nah. I am going to do as much as a i can while i can and just work longer if i have to. Retirement age is going to suck. Even if at age 50. It is all downhill from there.
@@WheresWaldo05That's what all the "spenders" say. Take care of your body and your finances. Guarantee when you're in a wheelchair money will still have as much value.
@@hogroamer260 according to research data, at 39 i have more in my 401k than the average american 60 year old. When i retire, whatever age that is, i will immediately collect social security as i may not even live 5 years after retirement. Unlikely since i am absirdly healthy and althletic. But as a male my heart could still give out since males clearly work harder during a lifetime. Why would i want to life on raman noodles and invest absurd amounts of money and have to stay home and only work since i am investing so much during my best years of being able to go live life? Makes zero sense? Or is loving from age 60 to 90 not being able to do thing physically better like sitting in a recliner with more bags of money than i know what to do with better? I will pass on the latter.
i'm not sure you quite understand things here. Ther are Roth 401(k) and Roth IRA, and there are traditional 401(k) and traditional IRA.
@hanwagu9967 I don't think you understood my comment, good luck.
Hey Erin,
Great video as always! By coincidence, I just had a similar conversation with my brother about this.
He just finished Dental School and wanted to invest into Roth accounts. I reminded him that he'll likely never have a higher tax rate than he has now - unless he moves to a state with state income tax.
A couple of questions:
1. Didn't the government just pass a law saying that your employer could also pay the match into a roth 401k account?
2. On a previous video, you mentioned that a brokerage account is you favorite type, and that's what you do for yourself.
While I understand the power of flexibility - especially since you were FIRE - how do you go about not taking advantage of the tax benefits of IRA and 401k?
Just to clarify, yes, the brokerage account is my favorite account. However, I fully maxed out my retirement accounts. I take full advantage of them as well.
Good video...doing a calculation to figure out whats better is a challenge. Thanks for laying out many of the considerations. How would you factor in that many 401ks have % of assets substantial fees that are pulled from the balance? Better to pay fees with pretax money...so one factor in favor of traditional?
Please do a video on the backdoor Roth. I’ve been enjoying the content as you explain things pretty well.
One important thing to remember when deciding between Roth versus traditional contributions are that traditional contributions are taken off the TOP of your current income, but will make up the base of your income in retirement (assuming you don't have a defined benefit pension - if you're so fortunate more of a Roth tilt might be necessary).
Very true. The marginal rate will not apply to a substantial fraction of most people’s distribution from the traditional 401k/IRA. The effective rate is typically lower, while contributions are always at the highest marginal rate.
The Roth vs. Traditional debate is always an interesting one when it comes to investing for the future. It's fascinating how many people prefer the Roth, and I can see why. The tax-free growth and tax-free withdrawals in retirement are definitely appealing. But as you rightly pointed out, finance is personal, and there's no one-size-fits-all answer. What factors do you personally consider when choosing between a Roth and Traditional account, and have you found any other strategies or tools helpful in making this decision?
Hi Erin! You are indeed better than average👍
I tried the ROTH one year and the next year decided the taxes withdrawn were too much of an impact to our monthly income so I went back to the traditional 401k. Now retiring soon and have already performed a ROTH conversion (it's like I get a do over) to put some money in a ROTH IRA
What about capital gains tax? Is that different between the two accounts or the same?
Just sharing a thought that may have been missed here -
You are working, and in the marginal 22% bracket. Not all your money is taxed at 22%, only the amount over $94,300 taxable, married filing joint. The deposit to the 401(k) saves you that 22%.
You retire.
The first $29,200 is taxed at 0%, it's the standard deduction amount.
The next $23,200 is taxed at 10%, then, next 71,100 at 12%, and only money above taxable $94,300 is taxed at 22%. So your top rate is 12%.
Take out exactly $123,500 and tax due is $10,852, an average 8.7%.
That said - If your current marginal rate is 10 or 12%, Roth 401(k) or Roth IRA is the way to go. Pretax only to avoid the 22% bracket.
My observation is that money put into pretax accounts is off the top, i.e. saving you the marginal rate you are in. At retirement, you have those lower brackets to first fill. In a perfect world, I'd load Roth as a young person, in the 10 or 12% bracket, and depending on trajectory of income shift to pre-tax to save at 22% or higher. Again, in my opinion, the best thing financially a parent can do for their kid is to start funding the Roth as soon as they have legitimate income. Started one for mine when she was 12. At 25, just over $260K.
Retirement stealth taxes are a good reason for Roth. Withdrawals don't effect taxable social security amounts and don't bring Ms. IRMAA to your door. You can always take what you contributed out with no penalties if life should force you to before you actually hit 59.5 (and 5 year rule). Best strategy for me is social security plus draw down from traditional IRA and use my Roth to deal with expected planning errors.
I use both. Some years paying the lower taxes is more beneficial than others. Then when I can access those funds (now only 5.5 years away), I can choose which to draw from.
Another advantage of going ROTH is for estate planning if that's important to you. If you plan to transfer much of your estate to a qualified charity a traditional account would work just fine but if you want to transfer it to a non-spouse at your death, they will inherit the money tax free if the money is in a ROTH.
Great point! You can consider the Roth as a pass on gift to your children. All Tax Free! With this mind, I am going to invest the Roth with all stock because I am not tapping on it in my life time.
Most people pay the same amount into the roth as they would in the traditional. It inadvertantly causes people to save more.
I really enjoyed your video. I’m at the point where I’m gonna be paying double my current rate when I hit my RMD’s. If you think there’s a good chance, you will have a long lifespan I recommend starting out with a traditional, and when you can afford it, pay the tags on it and go roth. While you’re working, if you get a really good year, do a small conversion.
Rmd's are age 75 in 2033
@@WheresWaldo05You must take your first required minimum distribution for the year in which you reach age 72 (73 if you reach age 72 after Dec. 31, 2022). However, you can delay taking the first RMD until April 1 of the following year.
@@hogroamer260 I said in 2033 it is age 75 they start. I said nothing about up until 2033.
I contribute to my roth 401k and my employer contributes to my regular 401k, and that’s my strategy!
Nice!
Yes!, please make a video about the mega back door Roth.. Thank you Erin!
Will do!
The thing most people miss in discussions of this is that if your ENTIRE nest egg is in Roth accounts, then you will have no taxable income in retirement - i.e., your tax bracket will be 0%. If your current tax bracket is more than 0%, it almost certainly makes sense to have at least some money in traditional accounts. And that holds true even if you know for sure that taxes are going to go up.
Another factor to consider is taxation on dividends/capital gains/etc while in retirement.
@@hm51008 That only comes into play if you have money in an ordinary brokerage (i.e., non-retirement) account. For retirement accounts, all your gains are taxed either as ordinary income (in traditional accounts) or not at all (in Roth accounts) - the tax structure for dividends and capital gains is irrelevant.
Some SS is taxed .... want to stay as low as I can but still be able to the ACA subsidies for healthcare :)
@@johannamiller527Yep. I should’ve acknowledged I wasn’t assuming a 100% ROTH strategy. Sorry about that.
Most of our assets are in brokerage accounts, and most of our IRAs are Traditional. If I had it to do over again, I would have tried to get that IRA balance closer to 50% traditional / 50% Roth.
Hard to say what the future holds for tax law changes but nothing would surprise me, including changes impacting Roth.
Great point, especially with the large standard deduction available. Being all Roth usually means you will pay more lifetime taxes, not less. However, Roth does have some secondary advantages in terms of tax planning, IRMAA, and ACA, as some are mentioning. Almost everyone will benefit from some Roth, almost no one will from all Roth. The hard part is for those in between.
So I think I am in the position of having to do the Roth conversion. I don't see my taxes necessarily going down in retirement and I certainly don't expect to need all the cash, but the benefit of removing the RMD issues makes the Roth attractive. I guess its good to have options.
I went the route of early retirement from a regular job so I primarily did Traditional so that I could invest more (the taxes saved) then convert slowly into Roth after stopping full time work. I.e. The Roth IRA ladder!
Hi Erin. I Like your Chanel. Could you please do a video about the mega back door Roth?
I was back in school with a career change when the Roth came out so didn't know anything about it. All of my investments were put in a traditional 401k. Now that I am closer to retirement, I max out my Roth IRA and contribute to both traditional and Roth 401k's... To give me some choices. My wife will still be working when I hit the RMD age, so want to want to limit our tax burden from RMDs.
You need to start considering estate planning, medicare planning and RMD planning .... the ROTH has many advantages beyond just the money grows tax free
Absolutely- more to consider than just taxes!
Great video! Yes, please, on the mega-backdoor Roth IRA video. Also, how many dollars can you convert per year by doing a backdoor Roth conversion?
Finally a retirement advisor that isn't saying Roth conversions are the best solution for everyone. Thank you.
I fully realize that when someone is saying that Roths are great, it comes along with the assumption that their audience probably has a substantial pre-tax portfolio and could be facing some long term tax consequences. But that is an assumption and if they don't state it up front, then it's easy to interpret it to mean it applies to everyone.
I'm actually a bit frustrated with the lack of advisors stating their assumptions and am learning more and more about when they don't do it.
Thanks Erin for giving a full picture of this tax management strategy so people have a better understanding of when they should consider it and when they can ignore it. This will help a lot of people.
it's also an assumption, a bad one, that if you have and are investing $10k/yr into a trad 401k that somehow you are only going to have the current average balances reported in recent survey's from various sources. That is precisely what the author of the article did. In fact, if you actually looked at his numbers, his own decision to change to trad 401k from roth 401k contradicts his 401k calculator. His assumption was that his retirement distribution of $90k to match his current working pay was taken from 401k distributions. This netted $400k difference over the lifetime withdrawal of his 401k which was projected to be little over $1.2m at his retirement. However, the fact that RMD would kick in and soc sec benefits, his own calculator completely obliterates his argument for his situation and his decision to switch to trad 401k.
My Rule: Add the top of the marginal tax bracket you want to stay within to the standard deduction. Subtract the sum of all anticipated, income taxable income. Multiply the result by 25.
The value you get is the most you want to have in tax deferred accounts when you reach retirement.
The trick is then to invest only in Roth accounts early in your career then switch to tax deferred accounts closer to retirement and end up with the calculated amount in tax deferred accounts.
I am funding my kids Roths since they were 16. Also have more control of what to invest in that an employer plans.
It's really interesting to read all of the comments. Personal finance is definitely personal with the various view points being expressed. I have a combination of Traditional 401k, HSA, Roth, and brokerage accounts. I want the flexibility of managing my taxes and healthcare expenses during retirement by being able to withdraw from a mix of these accounts.
One item I see repeated. That the government has to raise tax rates because of the debt. I've been hearing this for the last 15 - 20 years. What I'm finding so far being near retirement (< 1 year) is that my tax rate is going to go down significantly in retirement. I think that is what most retirees find when they retire. Could they raise taxes? Sure. That's why I believe you should diversify the accounts so that you can deal with various situations in your retirement. I have my own personal philosophy that works for me, but others may come to different conclusions.
Right, everything is definitely situational and personal
@@ErinTalksMoney I just got a different article in my news feed today that says the exact opposite of the article you are reviewing in this video. It made me laugh out loud. They are saying everything should be Roth accounts (IRA & 401K) and to never have tax sheltered 401k or IRA accounts. They even boldly stated that no one has lower taxes in retirement versus when they are working. (That made me chuckle.) It's amazing how there is no consensus in the industry on these accounts. Is it any wonder people are confused.
My mother retired but didn't activate SS income immediately. During that gap, she withdrew her traditional 401k. Ended up paying 0 to minimal taxes. But she didn't have much of income and taxable investments outside her job.
I'm still a firm believer you do both and have the option above and contingencies.
Supersavers with good jobs often end up with retirement account balances in the millions and huge tax bombs in their 401ks and IRAs. We have agressively been partially converting each year in our first 8 years of retirement. About $800k converted so far, most at a net effective tax rate in the low 20% range with other deductions which we are ok paying. We delayed taking SS so far as it just decreases the amounts we could convert plus 85% of it would be taxable; better to put it off and hope the conversions reduce income later.
Odds are we would have been permanently pushed into the 24% tax bracket when RMDs hit if we hadn't started converting. Then when one dies and the widow tax hits, the survivor likely pushed up into the 32 or 35% bracket. Reducing the 401k and IRA balances are critical to avoiding that scenario, and conversions are a valuable tool to achieve that.
And this is the 'best case" assuming tax brackets don't increase over the coming decades as many comparisons of Roths and 401ks/IRAs assume.
We believe taxes must increase to fund the govt. debt. Our plan is to pay the known low ~ 20% net rate now and not get hit with much more later. Worst case if we are wrong, we will leave our kids Roth accounts that may pay them $100k or more annually tax free for a decade before they have to empty those accounts.That is our bet.
Definitely interested in a video about a backdoor roth.
Boy, when I started saving for retirement, it was a different world. I set things up and put on autopilot. The max to an IRA was 2,000. There was no Roth. Now at 65, I am thinking maybe I should start rolling some over to Roth.
I don't know how you all did it, seems like the info was not as available as now and the rules keep changing 😅
On top of social security and IRMAA/Medicare impact, there are also spousal considerations. The widow’s tax trap is a big deal if you have a lot of assets in tax deferred accounts.
The traditional is almost always the best option if the tax savings are invested in the year they are realized, but investors have to have a tax-efficient conversion and spend-down plan in place.
Traditional accounts REALLY benefit early retirees because there is more runway to execute these strategies.
What I find most boggling is not what tax bracket I’ll be in or how tax rates will change but how rules and regs will change, especially for those of us with some years ahead before retirement. That’s absolutely impossible to plan. I fund both, not out of some great strategy, but out of indecision.
My salary has recently dropped due to a sunsetting bonus structure, and my salary is now in the same tax bracket as my anticipated retirement spending would be if I were spending it today. So I’ve switched to Roth 401(k) contributions (except the minimum amount to get company matching) because, 1.) it’s difficult to imagine that tax rates won’t go up in the future; and, 2.) to have as much money as possible in the non-RMD bucket when the time comes.
Erin, When I am subject to RMDs, If I do a partial Roth conversion each year, would that count against my required RMD?
No. RMD happens first when doing the math for withdrawal. But! If you are charitable, you can use RMD money to make donations, effectively turning an otherwise non-deductible donation into a deduction. If you don't itemize. I'd recommend converting to top off the 12% bracket each year if you are retired but pre-RMD.
If you retire and use money that you’ve saved in a regular savings account to live on for a year or two, you can convert chunks of your traditional 401k to a Roth 401k during this time and pay very little taxes since you have no taxable income. Just a thought. You can then use the Roth to help stay in lower tax brackets over your retirement years.
YES I WOULD LOVE TO KNOW MORE ABOUT THE MEGA BACK DOOR ROTH...ALSO I HAVE A QUESTION I AM GOING TO RECEIVE AN ANNUITY CHECK FROM MY UNION WHEN I RETIRE I WANT TO CASH IT OUT BUT I WANT TO DO WITH THE BEST TAX SITUATION POSSIBLE ANY IDEAS I WAS THINKING OF PUTTIN IT IN MY BROKEARAGE ACCOUNT AND BUILD BACK THE TAX PENALTIES THX IF YOU RESPOND ...
I will do a video on the mega back door Roth. As for what you should do in a personal situation, if you have any questions, consider seeking out the advice of a professional like an Accountant.
Thx
I'd like to see a video on the pro rata rule, which I probably don't understand correctly, but seems like it could reduce some of the Roth advantages.
My decision was pretty much already made for me!
Emplpyer doesnt offer Roth options, and my AGI is too high to deduct for traditional IRA contributions, so I end up with a traditional 401k and Roth IRA and that's the end of it unless employment changes.
Had that situation myself at a previous job for a number of years.
I am 70, retired at 65. Thinking of converting my 401k to a Roth, but that’s a tax issue. I have always done my taxes and I think it’s time to hire a tax advisor, especially since I’m considering RE investing. Didn’t know about Roth not requiring an RMD in 2024. 😮
Thanks for sharing vital information we need. Really enjoy your channel. 👏
Thanks for watching, I’m glad you got something out of the video!
Roth ira's never required rmd's
Definitely talk to a tax adviser. Unlike contributions, conversions gave to be done before the first of the year so you can't play games when doing your tax return. The conversion has to be done on the tax year. Also, because of the wording you used, hope you understand you can convert a little at a time. It's not all ir nothing.
I think it is easier to have used the Roth at the beginning (initial contribution) rather than having used the tax "deferred" bomb and then later having to do the Roth conversion when your tax bracket top margin indeed is apt to have risen
Another advantage of the traditional is it lowers your AGI which can allow you to get into additional government programs like the COVID stimulus programs.
We view the accounts as working together. We contributed to the company matched 401K and self funded my ROTH account. The way we view it is when it comes out we use the 401K funds for the money we need in retirement but use the ROTH funds to keep our tax level below tax thresholds. So, if the money we need will take us above the upper bounds of the 22% tax bracket then we pull funds from the ROTH so we don't go over the tax bracket upper bound. Both account types have their advantages and disadvantages. The plan should be to use both vehicle's attributes to your best advantage for a good life.
Great points!
Agreed, just make sure when you start hitting RMDs for your traditional accounts that they aren't so high they force you into a higher bracket than you want to be in because of substantial balances in a traditional account, and also it's good to consider that a boom year in the markets could inflate trad balances so much that what you thought would be a manageable RMD gets increased due to investment gains. That said I think some level of trad funds drawn upon annually to take advantage of one's standard deduction is a great way to fully utilize one's tax situation. Good luck to you!
This is why you hedge your bets by investing in both pre and post tax strategies. I personally invest in a 401k (pre-tax) and a Roth IRA (post-tax). This is in addition to several brokerage accounts (post-tax). I’m striving for a 50/50 mix.
More on backdoor roth. If I heard you correctly, I believe you are mistaken about penalties on conversions. Taxes on gains prior to conversion, yes. Penalties for "excess" conversion, no.
Also note if you have additional IRAs funded with pre-tax funds (usually from either tax deductible contributions or a pre-tax 401k rollover) then your conversion is considered to come proportionally from all funds, not just your most recent post-tax contribution.
My wife is doing backdoor Roth, but I have a 401k rollover IRA that would make effectively all the conversion taxable. So I've been accumulating post-tax contributions in a taxable IRA. I've considered rolling that rollover IRA back into my current employer's 401k, but they requiring getting a paper check from my IRA and mailing that to the 401k. UGH! What year is this again?
I prefer Roth for knowing how much I actually have due to having paid taxes already as well as avoiding the potential issue of tax rates changing. I do think that a mixed option might be good though too as you can do some of the safer assets later on in investing in things like bonds in traditional where as upfront you want to do roth early on higher growth investments.
But you wont know how much you have. Or do you know how much thst lump sum will be worth via infation after all of those years? Please send me the powerball numbers all knowing one!!!
I agree! People think they have $1M because the IRA statement says so. But, it's really $800k because Uncle Sam didn't get his cut yet.
@@hogroamer260 I am 40. Based on my current 401k and how things should go conservatively woth inflation at 3% going forward (historically it is 2-3%) and with conservative wage increase of 2% and a market return of 9% annualy i am expected to be at a rounded 1.9 million at age 62. 62 since that is the first year you can start talking social security. With inflation factored in, at age 62 that 1.9 million is equivelant to 980,000 in 2023 value. Plus it will get taxed at whatever bracket i am in since i am sure the tsx table brackets numbers will change again someday. But for now lets say 22% which is currently where i am. That is really only worth 764,000 after tax. Now if i live 30 years from age 62 until age 92 that is roughly 25k per year if you divide the 764,000 by 30. Obviously there will be some market ebs and flows in that valuation. Might still make more. Or could be years of negative growth. Who knows. Even if it is transitioned into almost all less risky stocks. One probably still needs to at least earn and stay at levels of inflation from age 62 and on. So 2-3% earnings per yesr if possible. Then add social security which is not gauranteed and am looking at around 47 per year. Plus my dividend income portfolio which should be at least 12k per year. Looking at close to 60k per year. Is that enough? Probably not? But while i personally would not be surpised to live longer than most males due to being a long distance runner that is extremely healthy, i also wouldnt be surprised if i croaked at 72 due to being a male and most males put more stress on their hearts by nature lf being men and doing physcial things. So in that regard, i would extremely solid. And i wont invest more amounts now til retirement since i want to also live life now while i can actually move and do things. You cant be a cheap skate either. Why do i want to have millions of dollars for later when i cant move and just sit around all day? I will take my chances.
Stirring the pot (and the clicks) with this video title 🤣 Love your channel
😂 I made sure to add a question in the title, because I feel like that softened it 😂
Income tax is only a part...for anyone wanting to retire before medical kicks in traditional would count as income that is counted for insurance premium fees
I got an idea contribute to a traditional if your unsure if we see taxes going up in the pipeline then we can convert some per year to a Roth before the taxes get significantly higher (may not work out for large portfolios)
Erin, I would like to see your opinion on Roth conversions. I am 75. I have traditional IRAs (one is a SEP-IRA) because when I started saving as a self-employed individual, there was no Roth IRA. I kept my traditional IRAs because I needed the tax break then. I'm in a lower tax bracket since I retired and have paid 0 taxes for the last several years, even when RMDs started. However, I'm now having to pay some taxes because of earnings on non-tax-deferred accounts.
I see videos and articles about doing Roth conversions, but I think the tax bite would be huge in my case. I've got a few hundred K in my IRAs. I would be losing a lot of money on conversion just because it would put me into such a high tax bracket. I'm in the 10% bracket now and probably will stay there unless the brackets change.
I realize I could convert a little bit at a time, but I really don't see the advantage at this point. Is there something I'm missing?
I will do a video on it!
@@alrocky Thanks. Alternatively, I could not convert any of it and continue to pay 10%.
I've heard so many times that taxes are always likely to go up in the future. But federal income tax rates have done nothing but go down for like the last 50 years....
I do ~40% in traditional & ~60% in roth. You don't have to choose one or the other - you can do both if you're unsure.
I think most people do both. That seems to be the nearly universal recommendation, so you can manage your RMDs.
💯 💯💯
Do retirement calculators take into account inflation when you try to calculate how much and when you can retire? What's a good one to use?
yes, they do, and they allow for you to change to whatever inflation % you want.
As someone who likes the idea of FIRE, the ROTH is the better choice as the person who wants this will always live below their means thus be in a lower tax bracket after retirement. Most people cannot retire and pull enough from retirement to maintain their normal income because they did not invest enough. In these scenarios the ROTH is the better choice. The only reason why traditional would be better is someone making just below the income threshold for contributions. This would also require them to still live within their means for most of their life and not make above that level or have to re-evaluate each year if they make more than the threshold. Any matching contributions from employers are the obvious first choice in any situation, free money! Pretty simple!
The amount of income needed in retirement for the same lifestyle as before is WAY less assuming you have paid off your debts. We are literally living on less than 50% of our pre-retirement income and vacationing 12-15 weeks per year! Virtually no taxes, no mortgage, no contributions, able to get way more value for a dollar. We were actually shocked by how much money we could stop spending, but do more. Just traveling off-peak is a huge advantage. You have time to seek value, and it is a LOT cheaper that way.
I generally very much favor the ROTH for the "meat" of my retirement savings but there are some advantages to having "some" balances in tax deferred accounts. For example, if you're in a high deductible health plan then also funding an HSA to whatever degree you can is a GREAT way to get some up-front tax deductions on contributions, if the HSA is fee free and allows investment of balances (for example, Fidelity where I have mine) then you can even treat it like a traditional IRA but that doesn't have required minimum distributions, because once you turn 65 you can use HSA money for anything you wish, you just have to pay taxes on those amounts like you would from a traditional IRA withdraw. That said if you use it for medical expenses then even those withdraws are fully tax free.
Tax deferred accounts can be very handy for taking advantage of your standard deduction when withdrawing in retirement, basically making the contribution tax free at the time of investment and if the withdraw is kept below your standard deduction tax free when withdrawn. You just have to watch out for RMDs if you use a Traditional IRA or 401(k) for a portion of your retirement investing.
That said, personally I like 401(k) at LEAST to the company match (ROTH 401(k) option if your employer allows it), then ROTH IRA and HSA to the max that I can contribute, THEN if I have more leftover I still want to save then more into the 401(k). Your mileage may vary but I think that's a pretty solid plan. Good luck to you!
Another common argument not mentioned was that having your retirement funds in a Roth account could lead to a scenario where you social security income doesn't cross the threshold where fifty or eight-five percent of it is considered taxable income. The key factor being that all other sources of taxes also don't push the number over either with the most common oversight being individuals with a non-SSI government pension that will be taxable.
Those with pensions should seriously consider Roth.
I've always been low income so the Traditional Account is best. We needed the $ to live on. Low income people do not pay as much taxes in retirement. Some pay none at all.
Same here. We tried saving in the Roth, but we really weren’t able to save as much with after tax dollars. Once realized our tax situation was a wash between the two we ramped up on the 401k contributions.
@@Queenk0526 Yeah it can take a bit when you first start to realize that. Happy Monday to you
I agree with the article for most Americans. Most Americans will be in a lower tax bracket in retirement and need the tax savings now, so should go traditional.
If the tax savings allows them to invest and they can afford to, _then_ a Roth may be the way to go.