To Roth or Not to Roth

Status
Not open for further replies.
Joined
Feb 25, 2013
Messages
2,044
Location
NY
I've been wondering recently about being overweight in Roth investments when it comes to retirement, which had me searching for discussion on the subject, of which I really didn't find much.

Lots of savy folks here so I'm curious to see opinions. What distribution between pre and post tax retirement accounts would you seek and when (if ever) would you start making the transition from one to the other.
 
One answer is "It depends on lots of things." But for the most part the answer is yes. If you can afford it, then max out your Roth.

The general rule of thumb is...
1. Fund your emergency fund first (6 months of expenses or so... some do a little more or less).
2. Max out matching 401k funds. If the company matches up to $3k, then put in $3k.
3. Max out Roth.
4. Max out non-matching in 401k.
5. Add to taxable account.

There are all sorts of exceptions. For example, for a person in a high tax bracket in a high tax state who is retiring in a low tax state like Florida, then I'd not do a Roth an do a traditional IRA instead.

The best place for this question is Bogleheads.org... definitely ask it there with a little more info.
 
I make retirement contributions in this priority:

1. Tax-deferred up to the level of employer-match (5% of my salary) - 2040 Target Fund
2. Annual maximum to Roth IRA at Vanguard - VTSAX
3. Annual maximum to tax-deferred

I always get through #1 and #2. I've been able to max out contributions to both accounts for a few years now, although this year has been tough, as I moved and some extra expenses.

Bogleheads is a good place for this sort of discussion.
 
Roth is a win win situation now or 40 years from today.

One problem with IRA (traditional and Roth) is the maximum contribution is sooo low.
$5500 under 50 years old
$6500 over 50 years old

IRS needs to increase this amount 2 or 3X
 
Just to clarify I wasn't asking about a Roth Ira specifically, I was referring to Roth investments inclusive of 401ks. Since Roth 401ks are out there and becoming more common, it's possible for someone to be hitting the contribution limits on a Roth Ira and Roth 401k, which could seeming mean no contributions to tax deferred accoints and limited tax deferred income to be drawn on in retirement.
 
It'll depend on your tax bracket now vs. during retirement.

If your tax burden is greater now: more to tax-deferred
If it'll be higher after retirement: more to Roth

Of my retirement savings, I put about 2/3 into tax-deferred and 1/3 into Roth.
 
Originally Posted By: Mr Nice
Roth is a win win situation now or 40 years from today.

One problem with IRA (traditional and Roth) is the maximum contribution is sooo low.
$5500 under 50 years old
$6500 over 50 years old

IRS needs to increase this amount 2 or 3X


Agreed. ALWAYS Roth. Historically the government has only increased taxes on income. Paying your tax now for tax free growth and tax free withdrawal later is a no brainer.

You can always convert funds from an existing IRA to a Roth, especially if you leave an employer....

The limit only comes into effect when you put liquid funds into the Roth. If you are doing a rollover or conversion from a non-Roth retirement account the limit does not count, however you'll still have to pay taxes on the amount transferred.
 
Last edited:
Traditional vs Roth involves a bit of crystal-ball-gazing about your future tax brackets, which is made almost impossible by the possibility of changes to the tax code.

Don't trust anyone who gives you a definite answer. Real financial advisers, like lawyers, know enough to never give a definite answer.
 
Originally Posted By: Bandito440
I make retirement contributions in this priority:

1. Tax-deferred up to the level of employer-match (5% of my salary) - 2040 Target Fund
2. Annual maximum to Roth IRA at Vanguard - VTSAX
3. Annual maximum to tax-deferred

I always get through #1 and #2. I've been able to max out contributions to both accounts for a few years now, although this year has been tough, as I moved and some extra expenses.

Bogleheads is a good place for this sort of discussion.

Just max out everything and budget your money. Don't forget to have your wife do the same.
 
One advantage of Roth IRA is it doesn't have RMDs. That can be very advantageous in retirement if you have large amount of tax deferred savings built up and it bumps you into high tax bracket.
 
Another nice benefit of a Roth is the ability to withdraw your contributions at any time without penalty. You never know when you might fall on hard times or have a devastating emergency and need as much cash as you can get your hands on.
 
Personally, I don't count on the government sticking to their side of the bargain and will eventually start taxing Roth distributions as well.

Maybe I'm just paranoid, but given that they tax Social Security payments now, keep moving the age for full retirement farther out, personal history of the PBGB shafting a family member out of their pension, not to mention failed ACA promises and other things that will earn me a time-out if I go on
wink.gif
, I'm pessimistic.
 
I just assume they'll tax it all. But it'll be better to have saved than not. So, just max out everything, as the gains from years of growth should amply cover taxes.
 
Originally Posted By: WillsYoda
One answer is "It depends on lots of things." But for the most part the answer is yes. If you can afford it, then max out your Roth.

The general rule of thumb is...
1. Fund your emergency fund first (6 months of expenses or so... some do a little more or less).
2. Max out matching 401k funds. If the company matches up to $3k, then put in $3k.
3. Max out Roth.
4. Max out non-matching in 401k.
5. Add to taxable account.

There are all sorts of exceptions.


This. In this sequence.
 
Originally Posted By: Ethan1
Traditional vs Roth involves a bit of crystal-ball-gazing about your future tax brackets, which is made almost impossible by the possibility of changes to the tax code.

Don't trust anyone who gives you a definite answer. Real financial advisers, like lawyers, know enough to never give a definite answer.


While your statement is true, if you take a peek at the US Guv's previous taxation history, it's easy to see that in the future, tax rates will NOT be decreasing!
 
Originally Posted By: Ethan1
Traditional vs Roth involves a bit of crystal-ball-gazing about your future tax brackets, which is made almost impossible by the possibility of changes to the tax code.

Don't trust anyone who gives you a definite answer. Real financial advisers, like lawyers, know enough to never give a definite answer.


Exactly. Simply not true that tax rates always go up ( although they are quite low now). Also, it's not out of the question that they try and claw back some of the tax free money. Don't chase the last nickel down the street. Some in both.
 
Clearly, I will not have high income during retirement. A Roth never made sense because of that. I'm in Florida and plan to remain. Even so, the extra funds of. Traditional IRA earn interest and will likely be taxes at a lower rate.
 
If only we could see into the future. It worries me at times for sure if I'm doing it right with my company sponsored plan. I do 50/50, traditional/roth in my 401K. Have for years. Company contributes up to the first 7.5%
 
Having a mix of funds (tax deferred, taxable, and tax free) for retirement gives a lot of flexibility for the future.
 
Status
Not open for further replies.
Back
Top