I max out a HSA and a Roth because they are the best accts for long term tax friendly growth. I will also contribute $26k to my 403b in 2023 and I increase it annually (I'm over 50). I'll probably max that out within 2-3 years. I also contribute about $5k to a brokerage acct, just to maximize the financial flexibility I'll have in retirement.
Two ideas you overlooked: first, with a Roth, you pay taxes only on the contributions, with a traditional, you also pay taxes on the growth. It's a big deal. Second, having Roth income in retirement may mean you can avoid income taxes on Social Security. That's a pretty big deal as well. This doesn't mean a Roth is right for everyone. However, these factors should be considered.
Rex , that is one of the main reasons I chose the Roth. But one thing if I may add , is that Roth income does not count in determining your medicare premium. That in my opinion is also a huge deal.
Time is a big factor- the longer you have to compound the better Roth gets. I like to use Roth for my longest term & highest growth part of my portfolio.
Great vid especially when considering withdrawing from multiple buckets when you retire to keep your tax burden the least. When I lived in Texas (no income tax state) and didn't make much I was 100% roth. I now live in NYC (state+city tax) and make considerably more I've switched to 100% traditional. Which is best is completely situational. But the main thing is, EVERYONE SHOULD BE SAVING! I work with people who don't even contribute up to the company match.... It is absurd. They will work till they drop dead at their desks.
Two advantages of traditional that people don’t usually mention: 1) Traditional you pay your effective tax rate (I.e. average), Roth you pay your marginal (I.e. highest) tax rate. 2) Traditional reduces your AGI. Your AGI is sometimes used for for government program thresholds (e.g. stimulus payments, student loan forgiveness). Lowering your AGI may qualify you for additional government programs.
not true. retirement account withdrawals are taxed at marginal rates. where people come up with effective tax rate vs marginal rate is beyond me. traditional doesn't necessarily reduce your agi to lower your marginal tax rate, so saying it reduces your agi is actually meaningless. the purpose and benefit of contributing pre-tax is to lower your marginal rate. Even if you lower your marginal rate, that may not mean much if anything, because people also forget we have a progressive tax system. If your MAGI puts you $1 over into the higher tax bracket only that $1 is being taxed at that rate. So contributing all to a trad 401k has zero effective impact on the tax rate you are paying on your income.
@@hanwagu9967 Traditional withdrawals are taxed as ordinary income, thus taxed progressively. Therefore, one pays effective tax rates on Traditional withdrawals. If you have seen differently, please provide a link.
Great video! I think part of the psychology for people living pay check to paycheck when they make more than enough to cover the essentials is really a spending problem not a poverty problem. Therefore, I feel like if they choose to do traditional instead of 401k roth, they will just spend the extra amount on frivolous things. That's why I think the roth 401k might be better for those living pay check to pay check that are making a good amount because it helps them essentially put more money towards investing. Also, I like that the roth 401k doesn't have RMDs if you convert it to a roth ira. Also, you could take 100s of 1000s of dollars out tax free in the case of maybe wanting to purchase a home in retirement verses having to pay insane amounts of taxes on a traditional 401k if you want to take a lot of money out at one time. So the roth gives you more options in retirement for what you can do with your money without tax consequences. I do feel like contributing into a roth 401k is better in down economic times like right now because when the market goes back up and continues to climb, you pay no taxes on those gains. Therefore, I wonder if contributing to a traditional 401k when the market seems like its at an all-time-high would be good because then maybe in lower times, you could then pay the taxes and convert the pre tax (should be lower value in lower times) into after tax (so then it can grow tax free). This might only be optimal in retirement to do the conversions though because it might spike your taxable income if you convert during your working years.🤔
You are absolutely right, it depend on your current tax bracket and expected future brackets. I am in a high tax bracket so I contribute to traditional. When I retire I hope to be in a lower bracket and will do some Roth conversions each year as long as I don't bump up my tax bracket.
A year ago, I absolutely agreed with going all Roth 401k on this. However, I have changed my position. Back story: I started doing all ROTH 401K back is 2014. Now in 2022 there is several hundred thousand dollars in my 401K that is Roth. I'm very glad to have it. I recently had a bit of an Epiphany when I thought long and hard about taxes now verses a few years from now when I retire at 55. Right now, it is costing me more money to pay the tax while working at about the 24% bracket at its peak. I also have to pay Illinois 5% income tax before I contribute to the Roth part of any account. I realized, quite recently that by going traditional I "save" about 2% on federal taxes and 5% on Illinois. My income is lower by about 27K (contributions and catch up as well and will be 30K next year) which lets me stay in the 22% bracket for tax purposes. Illinois doesn't tax 401K PRE-tax contributions either, catch-up contributions included. ALSO, Illinois doesn't tax any IRA or 401K distributions, SS or pension income are also tax free, so I won't pay the 5% even when I take the money out later and do some Roth conversions when I retire in a few years. So, I "save" 7% by going pretax now while working. Each case is different. For years I asked people to prove me wrong on the Roth 401K and I ended up proving it wrong for myself based mostly on how Illinois will tax various sources of money. As I will have a pension and be at least in the 12-22% bracket indefinitely I think this is the right choice for me. I do however still backdoor Roth every year in addition to 401k contributions. -Just my 2 cents.
Great video Erin. I want to stress one point that James Bond makes about "Income Related Medicare Adjustment Amounts (IRMAA)" in a reply earlier. For single taxpayers, IRMAA starts at only $91,000 and for Married Filing Jointly it starts at $182,000. People who listen to your channel are probably good savers during their working lives and will probably have a good retirement income. Facing the RMD's or even regular voluntary withdrawals from a Traditional retirement account adds to Modified Adjusted Gross Income (MAGI) for IRMAA which results in significant increases in Medicare Part B premiums. For example, a married couple with a $182,000 MAGI in 2020 will pay additional Medicare premiums of $1,920. That is in addition to the base Medicare premium of $1,460. Withdrawals from a Roth retirement account do not count toward MAGI. Since our retirement, my wife and I have become well acquainted with our Aunt IRMAA and Aunt MAGI. 😃
Required minimum withdrawals will exceed 4% shortly after age 72. Also, it doesn't take much income until 50% or 85% of your SSI becomes taxable, raising your tax bracket. I am in the process of a back door conversion and have run a series of analysis converting my IRA between to Roth ranging from 30 years to 5 years. The lifetime tax is slightly higher with the fast conversions, but the amount of money I have at the end of life (I assumed 100) is significantly higher. Especially when compared to leaving my money in the standard IRA. My recommendation is to run the numbers, using a reasonable lifetime. I wish I had done that when I was 52, instead of now at 72.
Nice summary. Lack of RMDs is probably the biggest advantage of Roth over Traditional. RMDs affect the taxability of your social security, medicare premiums, capital gains, dividends, etc. and if you become a widower while drawing RMDs, you could very likely be paying more in effective tax than you saved. If one has $150k+ taxable income today and wants to retire early (and have many years to convert at
Each situation is unique. With that said, one thing to consider is when you contribute or convert to a Roth, you pay all the tax up front in your highest tax bracket in today’s dollars. If you defer and wait until 75 for RMDs, you pay tax very slowly over many years with only a portion paid at your top bracket if you can manage your other income and take advantage of standard deduction and lower brackets. You are also paying with future inflation adjusted dollars.
Roth principle can be pulled out without any penalty in an emergency right? That gives me peace of mind personally. I also love knowing the taxes are done for good
I did both. It is now paying benefits in retirement. I will be able to be in the ZERO tax bracket once I start withdrawing from my retirement accounts. Yes, ZERO income tax. Now that is a plan that worked out.
If you currently live and work in a state WITH state income tax and plan to retire in a state with NO state income tax (or if you plan to retire overseas) then you permanently save on those state income taxes by contributing to a traditional retirement account. With a Roth account there is NO escaping those state taxes, since the money is taxed NOW while you are living and working in the state with state income tax.
The company I worked for for my last 24 years of working offered a 401(k)(No Roth either) but we only had I think like 6 choices from which to invest in and those were all horrible.....I couldn't wait till I retired to roll it over into an IRA which then opened up the world of investing to me.
A consideration younger people may not have in mind yet, is that tax disadvantage you are leaving your heirs. Of course, this only affects those planning to leave an inheritance. As family size dwindles snd wealth increases, inheritances are getting more common and larger. Your beneficiaries only have ten years to pay taxes on the tax deferred portion of that inheritance. That can be a substantial bill when added on top of their ordinary income.
I go back and forth with this each year. I did the math on my tax projections for '23 and doing a traditional and reducing the $52,500 ($30K me/$22.5K wife, taxed at 24% fed and 5% state) off our income will reduce federal and state by ~$15K. I've always said a Roth is the best decision, but it seems doing the math that may not be the financially best decision.
There is a lot that goes into this decision. The more income you have, the more of your social security benefits get taxed. I'm doing Roth now but will have to see how things go when we get to 2026. I'm already preparing for the higher taxes.
I split mine. I contribute enough to traditional, HSA, and health insurance to dip back into the 22% bracket. The rest to Roth. And I don’t have to play the guessing game of my future tax bracket.
I’ll have a teacher pension, so I’m dumping all into Roths and HSA’s. While the pension won’t be much, it’s a nice thing, but it will be taxed, so I don’t want to pile more taxable income as I use my investments to make up the difference for living expenses…
Older I get the more I wish I had funded less in my Traditional and more in my Roth. Just over 4 years away from RMD's, looking forward to your 'back door Roth conversion' video. Thanks
Even though the tax brackets may go up in 2026, converting annually starting with 2023 could be a great start. Because of the low brackets, I was able to convert $80k/yearly instead of the $20k prior and stay in the 15% federal average rate..I reached my goal of 85% Roth and 15% Traditional and do minimal RMD's in 2-3 years. Even after January 1, 2026 you can do conversions at a reasonable bracket level, whereas a backdoor might be a bit more expensive if all done quickly. Best of luck!
As others have mentioned, I prefer the Roth option. There is value in knowing the specific costs in taxes today rather than guessing on what the taxes will be in the future. If someone started with a traditional (not knowing about the Roth option), then when a pay increase comes in a person can shift a small portion of the contribution to a Roth while decreasing the contribution to the traditional accordingly. This will better maintain the take home pay as the pay increase will absorb the increase in taxes. If done correctly slowly over time, a person will switch from a traditional to Roth without impacting take home pay. Or just rip the bandage off quickly and suck up the pain; less work. :P
See my comment above. Your notion unfortunately may cost you thousands at withdrawal time. You are probably thinking marginal tax rate comparison. However your bracket may be much lower when you statt withdrawing and live off of savings and perhaps some roth. So you may actually have some income that is never taxed in a traditional. Currently if your married you get around the first 24k of income tax free. So if you live off savings and roth for a year you can get the first 24k not ever having paid a cent of taxes on it (save for OASDI). Erin is right it's best to have a mix to get the full benefit of graded tax rates . Just saying..
@@evanleventhal Thanks for hilighting the point. The value is in knowing what is paid now and later. No need to predict future tax brackets or income. Just save and know that pulling money out of a Roth in retirement has no impact on taxes; no 'may' or 'could'. 😎 If someone finds little or no value in that, then that's fine too. We're still better off than the people who don't save.
@@evanleventhal agree 100% Many people choosing Roth will pay thousands more in taxes over their lifetime. The difference between marginal taxes now and effective tax rate in retirement is huge for some people
I've been putting money in both types for about 30 years now and still doing so. I'm still about 10-15 years away from taking distributions but I'd really like to see an in-depth analysis of how and when to take distributions from each type during retirement. I.e., is it better to let the Roth money grow tax-free as long as possible, or to take the Roth distributions early because conversely to what you discussed in this video, it requires a smaller withdrawal to end up with the same after-tax income. I'm sure there are other considerations - would love to see a video from you on that topic.
Ideally the best time time withdrawal from the traditional is right after you retire and before you start your social security benefit. This is the time when most will find themselves in the lowest tax bracket . And if you're portfolio is a significant amount some roth conversions into the next tax bracket should be considered to reduce the rmd. Especially if you file MFJ.
Sounds like you will be retiring at 65. Just take a distribution from both accounts based on your life expectancy pay what taxes you owe and enjoy your life.
One major consideration is if you have kids, or want to pass along money, ROTH goes to them tax free. Major consideration for me having both accounts and no RMD on Roth. I'm personally using Roth last, but I'd lve to see some case study videos like you mentioned.
Spot on agree with all the points u made as I work for company who advises on employer plan participants every day and the points u provided r spot on. Only thing I would add in is the consideration for what they want the Roth acct to be used for potentially. U mentioned tax bracket tweaking, or unexpected large expense they could use Roth to avoid going up in a bracket and another is for inheritance. A young person may not need the consideration but someone in 30s and 40s with kids appreciate the thought of providing the Roth acct to their children tax free 40 or 50 yrs in future so the kids don't have to pay taxes on it during their potential high earnings years. So just wealth transfer consideration for those who may want to pass on their savings. In many cases the parents don't care one bit about current tax brackets and cost to them from their pay checks they just want to build as much Roth as possible to pass on. Even though we remind them Roth conversions can be done later in life when they may be in a lower bracket and still have decades of investment compounding to occur to build it up more for their heirs...unless Congress removes it of course. Anyway great coverage of a topic that is front and center on both new employees to saving in their first 401k as well as mid career savers digging into planning for retirement.
I have always split mine 50/50 and will continue to do so. Having options is better than not having them. I.e. If I want to take out 100k extra in one year then there is no issue.
Most people don't save enough to that to matter in retirement. And you should put enough in traditional to take advantage of lower tax brackets and standard deduction
If I was 25 that's the way I would have gone, but back when I started you had no choice, a traditional IRA was all you could get, and for years it was set at 2,000.
@@fredswartley9778 and I am too. But only after I fill my lower tax brackets and standard deduction. I'm a bigger fan in paying the least amount of taxes possible. I just believe I spend my money better than the government does
Tax Free growth is so much better in the future Like for example , more likelihood you won't pay any tax on SS benefits. Or if you FIRE, could be easier to qualify for ACA subsidies. Or, what if you want to buy that car with cash? Trust me, having that tax man looking over your shoulder when you are retired with no earned income to pay taxes on withdrawls is not cool. Splitting is the best option, if you can swing it. Buys you flexibility in the future.
Great content as always! Only addition I’d make: One overlooked aspect: because your take home $ is higher using the traditional option, you should also take into account the growth available should you invest that take home pay difference.
Good point. I used that savings to fund my wife's IRA. You have to look at these retirement accounts as a monthly income source that will be replacing your job earnings. When people quit working they should just start drawing a monthly payment based on their life expectancy. If you don't need the income just give it to your church or favorite charity. As they say you can't take it with you.
One reason I think you should always do at least some Roth is that you can pull contributions out tax free before retirement. So I use it as another emergency account.
I was just watching this video again and paid a bit more attention to the numbers Traditional $66,394 vs. ROTH $61,665. Perhaps some focus need to be placed on when the money is needed more in regards to which route to go. It seems that for many their 20s thru early 50s tend to be when they are raising (supporting) their average 2.5 kids. During those years the $5k difference may mean all the difference in the world (even more so for those with family income less than $60k).
I've had both Traditional and Roth IRA's. However, I now have Roth Self Directed IRA's. In them, we hold rental properties and mineral rights acreage. Most people have never heard of Self-directed IRA's though. You can invest in so much more with them.
I'd rather pay the least amount of taxes. My goal is to give the government is little money as I can and that means thinking out the process of what combination of Roth and traditional is best
Wish I’d put my money in Roth Ira‘s instead of 403B‘s as now I am retired and will have to pay 22% taxes on withdrawals, a higher tax bracket then anticipated.
Another take on this which gets my hate for focusing solely on six-figure plus earners. The right answer there is spilt your buckets unless you can accurately predict future changes to US tax law. But what those of us who work for a living need to consider is if a traditional lowers their AGI enough to claim the Form 8880 credit on their Federal Income Tax Return. And also just how low their long-term capital gains taxes are likely to be on a non-retirement brokerage account. For some working folks who save the added flexibility of saving in a non tax advantaged retirement account is very likely worth the small tax cost.
For me personally, my 401k/IRA contributions are all Roth (and am maxing out both). My 401k match, because I get 10%, still has a high traditional balance. Currently total retirement assets are ~60% Roth 40% traditional. Not sure if this is mathematically the wisest, but I want to have the freedom to do what I want when I want in retirement without worrying about the taxes.
You're doing fine, I'm about the same but for different reasons. As you find that you have more to save yearly switch to 75%-100% Roth is what I was told.
I have both 401k and Roth, I like the Idea of tax flexibility when I have to take RMDs. I only count my 401k bucket as 80% of account value for net worth purposes.
I just started a Roth IRA at 50 after paying off my mortgage. So if I need to draw extra in a year for large expenses it won't kick me into a higher tax bracket.
I admit I spend too much time thinking/researching this. Roth contributions are MARGINAL tax rates while working and traditional will be EFFECTIVE tax withdrawals. This makes a massive difference. You should do a video on this!
@@hanwagu9967 of course they can bump you into a higher tax bracket but you are still taxed at your effective tax rate overall. Effective tax rate is your average tax rate. You can't just look at one little piece of your retirement withdrawals you have to look at the whole picture which is your effective tax rate
@@johngill2853 no, deferred is taxed at marginal rate. It is considered ordinary income. Where people get this false notion that deferred taxes are effective rate versus marginal is beyond me. you are simply wrong.
@@hanwagu9967 what? IRA withdrawals are taxed at your effective tax rate for those withdrawals they do not have a special tax rate. They are simply added to your income. It's just a line on your tax form under income. It's tax no different than if you were working for income. The whole idea of the traditional IRA is that you get to take advantage of the standard deduction and lower tax brackets in retirement. But you contributed at your marginal or highest tax rate. You do know that the effective tax rate is just your average tax rate? And marginal is just the highest tax bracket you hit but it's not how much tax you pay on all your taxable income
Doing Roth conversions after you retire, if your income is less, is also a good option. Just beware there may be Medicare premium penalties after 63, that gets a bit complicated to explain here.
As someone who is at RMD age, I can say that I am so glad that starting in 1998 I went exclusively Roth with new contributions. If I hadn't, I would have been in a higher tax bracket. You lose tax control with a traditional IRA. Most of my money is in a brokerage account, and I get to choose if I want to realize a taxable gain or not in any year. If you can't contribute to a Roth instead of a traditional, you are better off with contributing less, but not have Uncle Sam as your partner for the rest of your life. (and beyond). I found myself popping my lips with you on the outtakes. :)
this is very misleading information... theoretically you'd be better with traditional than taxable brokerage in almost all cases except very few exceptions
It's not your marginal (highest) tax bracket but your effective tax bracket when you retire. When deciding between a Roth and traditional you use your marginal tax bracket at the time of contribution and compare it to your estimated effective tax rate at retirement. The standard deduction lowers your effective tax rate in retirement and makes the traditional account very appealing to most people (even if they don't know it)
@@johngill2853 hogwash. you completely ignore both added income from social security and RMD. people seem to forget RMD all the time. One doesn't save in retirement accounts to not amass a nest egg. so presumably you would expect your retirement savings to grow at a certain percentage. moreover, you may not be able to lower your MAGI to be in a lower tax bracket now, but may be forced into a higher one in the future.
Everyone assumes taxes will go up. Recently, I’ve seen taxes go down, albeit possibly temporarily. You will likely spend less in retirement. You may move to a state with lower or zero taxes. I’ve even seen one state where they reduced retirement account withdrawal taxes from as high as 8% to 0%. If you retire overseas, a lot of countries tax your roth accounts. (Fringe case.) I’ve been putting money in traditional 401k, roth ira, hsa, and brokerage. Lot’s of buckets to manage taxes with.
There is a payback for Roth, but like compounding, it takes many years. I'll be too old to travel, enjoy active hobbies of today. Ppl forget what you don't pay in taxes today also compound as investment. Of course if one dies early....no guarantees in life.
I am all about Roth accounts. I have a couple traditional before I found out about ROTH options. Now I have Roth 401k and a ROTH IRA. I find these to be the best as I don't want to pay taxes on the growth of compound interest. I do agree any retirement account is better than none at all.
I don't care about paying taxes on my growth. I care about paying the least amount of taxes possible in total. When comparing a Roth first traditional you look at your marginal tax rate now versus your estimated effective tax rate when you retire. The standard deduction for most people will make the traditional a much better option (at least for some of their portfolio)
@@johngill2853 yeah it works out for however a person views it. As long as people are investing that is the important thing. I just don't want to be taxed at a higher rate, cause taxes always go up, on my amount and growth when I can just get it out of the way now before it becomes an even greater cost.
@@Matthew-eh3jtdo you really see the government raising taxes for anybody making under 100/200 thousand a year in any large way? They don't even think they can pay back $10,000 in debt Are you sure you understand the difference between effective tax rate and marginal tax rate? Do you realize how much the standard deduction is every year and how that impacts traditional withdrawals if you have no other income? This is huge especially with time/inflation
Can you contribute and max out both the Roth 401k and the Roth IRA in the same year? Or if you do the Roth 401k is the Roth IRA no longer available? I was thinking of going that route this year, most of my money is in traditional 401k at the moment, don't want to get stuck with RMDs controlling my taxes.
Thanks for the great video!!! Really helpful!! One question, the limit is 20.500 + 6.000 (401k / Roth) or its 20.500 total between 401k and Roth Ira? Thank you in advance
I'm not sure what tax bracket I'm going to find myself in. I have both a Roth IRA and a 401K (from my employer). I'll have to compare the two. I've been contributing to both for a very long time.
Can you max out an IRA and Max out a Roth and then convert the IRA to a Roth via backdoor conversion? When doing your analysis, remember it is not the total tax savings your trying to optimize but the post tax utility of your money. If my marginal tax rate was in the 12% bracket or less, I would do Roth for sure. At some point, you need to do the Forward looking tax plan to estimate your best place to put your IRA contributions. But, if you are a saver, don't lock up all your funds in retirement accounts. Put in enough for your retirement, but after that, utilize a taxable account. You might want to retire early or get into a nice investment and you don't want to be burdened by the 10% penalty. Plus LTCG are tax favored, 0% in 12% bracket or less. IF you retire early, you can convert IRA to roth while your income is low. Hopefully before receiving Social Security.
I use Roth I get 8% match from the full time gig and 4% from the part time one so I have taxable from the match I also max out a Roth IRA and I don’t even make 60k a year from both jobs together
Great information! A few items to add to this discussion. 1) Saving to pre-tax retirement savings today doesn’t actually save you money in the grand sense. This just deferred the tax from today until a later date. If your goal is to plan for the future and build a nest egg, pre-paying a future liability (i.e the tax) today is a form of savings. Of course, defer to Erin’s discussion on higher and lower taxes today vs. in retirement. 2) Plan now to spend more in retirement. If you enjoy pay raises and bonuses today, you’ll also enjoy those in retirement. You can take a pay cut in retirement if you need to but, if your plan is to live your best years in retirement plan to spend more each year. If your plan falls short, you’re at least not having to take a pay cut in your retirement. 3) The younger your are the better the ROTH is. Slowing paying tax over a long period of time while you’re employed is easier than in retirement when you’re on a fixed income. The longer this time period the more slowly you can spread out the tax burden. Another advantage to age is the fact that emergencies happen and you may need to access these funds - which isn’t recommended if you can help it - With a ROTH you can access any of your contribution without penalty or tax, it’s just the gains and company match that must remain in the account until retirement. Liquidity/accessibility has a value and the younger you are the more valuable this is. 4) Back-Door ROTH 401k contributions - 48% of all 401ks allow for after-tax contributions. If your 401k is one of these lucky ones you have the ability to save $66,000 if you’re under 50 or $73,500 if you’re over 50. The first $22,500 (under 50) or $30,000 (over 50) can be either pre-tax or ROTH or split but, the remaining can be saved into the after-tax 401k bucket . Thank you to a 2016 tax law change you can then roll the after-tax contribution into a ROTH thus making it a ROTH 401k contribution. Most 401ks allow for this rollover to happen inside the 401k itself making this a very easy task. If you’re saving for a home, wedding, child, car, etc. this is a great way to build up savings, just remember the gains will stay in the plan until retirement. *Look at using this option if you inherit funds and want to get those funds into a tax-free growth. Remember, you can use the funds deposited, it’s just the gains that stay. 5) ROTH Contributions are good option if you may inherit someone’s IRA in the future. If you think you may inherit an IRA in the future you may want to pre-tax your contribution tax today. If you inherit a IRA later in life you will be required to withdrawal the funds annually over a 10 year period potentially pushing your income bracket higher. If this does happen you may choose to contribute to your 401k using pre-tax to defer some of the income your forced to take from the IRA. At this point you may have no option than to save pre-tax to minimize your tax liability. 6) Medicare costs very based on your income (IRA withdrawals) - In retirement your Medicare cost ranges from $2,000 per person to $7,800 per person based on your income. IRA withdrawals count as income so, the more you take the more expensive your Medicare will be. ROTH IRA withdrawals don’t count as income so, withdrawals from a ROTH in retirement can save you thousands of dollars in Medicare costs.
There's no way you can answer that opening question for everyone. It is going to be different based on the family you are dealing with and giving blanket advice is not helpful. Don't think of these or any investment account as "better" or "worse". Think of them as tools in a box. Which tool is best for the job depends on the job.
That is a mouthful, and I stopped at time 6:14. If you own a business, have the business contribute the maximum 25% extra based on your gross wages into a traditional IRA and the business takes a business deduction for doing so. Then convert at the end of each year that traditional IRA into a ROTH IRA, pay the tax currently, allow it to grow, and you can take it out after you retire, or not at all as there's no RMD. Remember, for your other taxable incomes at retirement, the ROTH investment you own wiill not impact or bump you up into the potential higher tax bracket as it's not considered for tax purposes.
I put 15% in my employer sponsored 401k and also have a Roth thru fidelity that I max out annually. The reason I don’t put into my employer’s Roth 401k is the lack of choices in the plan. I have to invest more time this way but I like having the flexibility 😅
Gary- You can put up to 3X more funds in a Roth 401k than a Roth IRA. Those additional funds will far outweigh your lack of choices in the plan. If you can afford to do so, maxing out a Roth 401k is significantly better than maxing out a Roth IRA.
you erred about no RMD for roth 401k. You can rollover roth 401k into a roth ira and avoid RMD (currently), though. people seem to ignore employer match, which is always tax deferred. people seem to ignore impact of RMD which can either keep you in your current tax bracket or force you into a higher one. Why? because people seem to calculate things without growth when comparing what you contribute versus what should be happening in your retirement accounts. People also seem to ignore how marginal rates and progressive tax system works. Contributing to trad 401k may have zero impact on your marginal rate, even if you area able to lower your MAGI from one bracket to a lower one. Because we live under a progressive tax system, if say you earn enough to be in a higher tax bracket, not every dollar is taxed at that rate. So even if you lower your MAGI by contributing to trad 401k, that doesn't mean much since you are only lowering the amount from the higher bracket to the lower bracket. If you are $1 or even say $20,499 over into the next bracket, the reduction now won't actually save you anything vs tax free roth 401k withdrawal in the future, especially if you are in the same bracket in the future. people seem to also ignore just because you think you will have lower expenses say 80% of active working income, that means you are withdrawing that amount which is taxable and if that amount is the same bracket in the future as you are now, then you lose out with the trad 401k. you shouldn't think about it in terms of having less expenses, but how much withdrawal you need. Also consider any other sources of revenue/income (e.g. social security) and any impact retirement withdrawals will have on entitlements.
Erin, thank you for the deeper dive video, which is somewhat of a correction to an earlier video that seemed to indicate that the roth was always better. Two additional points. A roth effectively lets you put more money away since you need to earn more to put in the same dollar amount into an after-tax savings vehicle. If you go with a traditional, you could take the extra money you would have put towards taxes for the roth and invested that in an after-tax account and mathematically come out ahead. I know most people will spend the money, but it's not a straight forward as saying that roth is better because taxes will always go up. The whole discussion over what your tax rate would be is another great topic to cover. When done right a great withdrawal strategy can make or break a retirement and save tens of thousands. Live off savings and withdraw up to income limits and deferring social security etc all come into play. It's complicated but worth covering. Second item to note which you touched on is RMDs. If you think you'll have money to leave to children/ grandchildren, the roth does not require you heirs to take the money early over 10 years, which could wreak havoc on their own tax situation. Otherwise, I'm glad you added context to the discussion that wasn't there in a prior video.
Between pension and social security my spouse and I will make roughly 85% of our working income. With Roth there will be no concern at ALL for taxes. No big purchase marginal tax rate math for this guy. 😊
The key word you said is you have a pension. Those of us without a pension can take advantage of the standard deduction and lower tax brackets with at least some traditional. The standard deduction is very valuable space to take advantage of
@@johngill2853 you keep saying standard deduction like it's something you can take advantage of. you get standard deduction regardless. you keep repeating this. you have to actually look at the tax brackets to see if you will lower your MAGI sufficiently now to push yourself into a lower tax bracket, because the tax brackets are wide enough where chances are you vary well may not be able to do so, which negates your traditional 401k argument; moreover, maxing out your trad 401k and being forced RMD, you have zero options in lowering your bracket in the future. People also seem to only calculate what they contribute and ignore their employer contributions, which don't just sit there not growing.
@@hanwagu9967 the standard production is something you can definitely take advantage of. If you have no other income Maxing out your 401K? That isn't what most Americans do. You may do it but we're not giving advice to the top 10 or 20% I hope. I hope that they speak to the other 80%. General advice should be for the general population not a small subset (at least without telling that small subset( I think people take in an account all their money. I don't think anybody looks at just their part of the 401K not the whole thing. I'm sure the total balance is what everybody focuses on (and overall this country is extremely small)
At 12% or less Roth likely makes sense. At 22%+, traditional seems to makes more sense esp if you live states with state income taxes. While you pay taxes at your top bracket(s), when you start to take distributions, you are effectively paying marginal tax on that $. Everyone's financial situation is different but that's the conclusion I arrived at as a general rule.
Hi Erin, I have both a 401K and a Roth. My employer just recently started offering a Roth. I wish they would have offered it many years ago, but what are you going to do 🤷♂️ Love all the details you gave and loving your outtakes! P.S. you have some great dance moves 💃😊
Sure, you can do that. Open your own IRA (Roth or otherwise) in a regular brokerage account and do your own contributions. But the amount you can contribute to your own tax-advantaged account is much lower than in a 401k (3 or 4 times lower) due to IRS limits. Also, private accounts (usually) do not have automatic deductions from your paycheck like with a company 401k where someone else handles the details, so you have to stay on top of it (easy to forget, to see all that income in your checking account and spend it, etc.). Doing the contributions on a fixed schedule based on your paycheck frequency helps with dollar cost averaging. No company match in your own private IRA account, either, and that's a major perk of using the 401k. I get a 4% kicker for all of my 401k contributions, that's easy money. A 401k also is just simpler with less thinking involved - and not everyone is into this whole subject or wants to be bothered with it. One decision when you hire on and, Voila! it's done! Maybe it sounds as if I am suggesting the 401k route is always better, but on the flip side, in your own account, you can invest in whatever you want (which is fantastic and the biggest advantage to doing it on your own, I hate being limited to the funds available in the 401k). But investing on your own is a double-edged sword, you can pick your own investments - but they can suck and lose value if you make poor choices. Company funds - speaking very broadly - are probably safer from this perspective, as they are boring but also probably less risky, as all the other wage slaves are always feeding more retirement cash into them, too. Taking all your cash and putting it into Bitcoin or Facebook at their peaks wouldn't have been such a great idea (at least so far). It's like playing with dynamite, higher risks but possibly higher rewards. I'm not implying that is what you would do - but sometimes taking less risk by sticking with the company choices - lousy as they may seem now - works out better in the long run. Btw, this is not widely known, but you can do BOTH a 401k AND your own private Roth account at the same time - which is what I do - and that increases the total amount you can squirrel away in a Roth (or regular IRA) every year (or just give you more flexibility). Hedging your bets is wise. Lots of strategerizing is possible once you know all the rules.
Every video I see that compares Traditional vs Roth IRA/401k does not talk about taxation of social security benefits. Money taken out traditional accounts count towards taxation of social security benefits. Money taken out of Roth accounts do not count towards taxation of social security benefits. Your social security benefits are must pay taxes on up to 85% of your Social Security benefits if you file a:Federal tax return as an “individual” and your “combined income” exceeds $25,000. Joint return, and you and your spouse have “combined income” of more than $32,000. This is why I have both a Roth IRA and a Roth 401k.
It's funny that's the reason you say you have both a Roth IRA and a Roth 401k. I feel the same way as you do except I have a Roth account and a traditional account. I figured out the best combination for my situation. There are benefits to both and you should take advantage of both in a combination that makes sense for you
The government has made it virtually impossible to plan for such things as retirement due to the fact that our tax laws are so incredibly complicated and convoluted. As President Ronald Reagan once said, "The most terrifying words in the English language are 'I'm from the government and I'm here to help.'"
The math is exactly the same between a Roth and traditional if the tax rate is the same in retirement as when you are working. This is easily googled if you don't believe me The question is, is your marginal tax rate while you're working more or less then you're effective tax rate in your retirement. And then you have to factor in rmds and will they be a problem or can you work around them
@@nomadnationalist2776 you don't think you'll have any room say in the 10% or 12% tax bracket? I'm currently in 22% tax bracket but when I retire I'll take from my traditional up to the the 12% (which will most likely be 15%).
One thing is if you are younger, how well the investments increase with reinvestment and growth. after 5 years will tax difference be minimal, what about 10-30 years. i think most will even out, but less headache hopefully in future, without RMD.
You a right that if you will be in the same tax bracket you will pay the same taxes with a traditional or a Roth on your investments. BUT if you are in the 12% bracket you will pay much more in Social Security taxes. I will pay $5600 in Social Security taxes this year. If all my Retirement was in Roth I would pay ZERO!
The problem is most people don't pay the same amount of tax. Your contributions to a traditional IRA are at your marginal tax bracket and you're withdrawals are effective tax bracket. Most people don't have an effective tax bracket as high as are marginal tax bracket was when they were working
@@johngill2853 I spent most of my life in what is now the 12% bracket. So I would be much better off in a Roth. Plus I’m 70 years old and because my wife and I are saver’s we will probably leave my daughter’s family well over a million dollars when we die. They are in a much higher tax bracket than we are and due to the Secure Act will have to divest that money with 10 years and pay double to triple what my wife and I would have paid.
@@donofd9626 you have to realize that you are not most people. Actually you are extremely far away from most people. That is why I said most people don't pay the same amount of tax.
@@johngill2853 I could be very wrong but I don’t think MOST people ever get out of the 12% bracket. From what I read most people don’t have $1000 for an emergency.
Thanks for the note about using the ROTH mix to possibly keep your taxes down in retirement. I have been looking at the possibility of having a mix of both (although not 50/50). I think that having some in the Roth would allow more flexibility in retaining a reserve for later years when I might have more medical, or need to replace a car or want to take a trip. Having RMDs might reduce my ability to respond to periodic needs. I've been in the 12% bracket for many years, but I expect to move into the 22% bracket. As I'm nearing 54 years old, I have the house and cars paid off and live with a zero credit card balance at the end of each month; however, I do not expect that I will end up in the 24% bracket or if so, just barely in it during my retirement years. Please cover what does and does not affect the bottom line in retirement. If the ROTH disbursements will not affect my tax bracket, will the disbursements (ROTH or Traditional) cut my SS amounts?
Hey Erin, would/should the fact that investment returns earned in a Roth are never taxed also impact one’s decision? Or is that accounted by tax-weighted contributions between both accounts? For example, given $100,000 of traditional (pre-tax) contributions and $100,000 of investment returns assuming your tax bracket drops from 22% (accumulation years) to 20% in retirement the total tax liability of depleting the $200,000 account is $40,000. Alternatively, given $100,000 of lifetime Roth contributions $22,000 will paid in taxes (22% tax bracket) if the account also earns $100,000 the total tax liability is still only $22,000 because the investment returns in the Roth are also tax-feee (assuming a qualified distribution).
These comparisons depend on two scenarios: 1). Rates on taxable income do not increase and 2). No portion of Roth distributions is ever taxed (either growth or original contribution. I would say 2 is likely to remain true, but I have my doubts about 1. Rates are at historical lows.
It depends a lot on the taxable / non taxable split of your income in retirement. You touched on it in one of the examples in which Social Security was included. What matters is the marginal tax rate today vs the marginal tax rate in the future. If my 401k distribution includes income that is taxed in the lower bracket than I am paying today, then I am likely better off with a traditional 401k. But if I get pension and social security and other taxable income that pushes 401k distributions into the highest bracket it may be better to use ROTH. Early in savings life this calculation is difficult due to uncertainty of future income sources, but later in savings life it is more clear.
you forgot one point if...if your trad 401k has grown where RMD forces you into the same or higher tax bracket, then you are better off with Roth. Also, just because you are bumped in to the next tax bracket, doesn't mean you are paying every dollar in that tax bracket. People seem to forget we have a progressive tax system. also, if your trad 401k contributions aren't doing anything to move your MAGI into a lower bracket, it also makes roth 401k more attractive.
@@michaelswami Yes there are limits. You can contribute up to same as a traditional IRA. For 2022 the max is for people less than 50 years is $20,500 with people over get an extra $1,000. That is a whole lot more that the normal $6,500 for an IRA.
@@dcldan2521 for the 401K, the catch up contribution is 5500 this year. Right? Not 1,000. I think I heard for a married couple it was somewhere around $61,000 total.
@@michaelswami Sorry you are correct. Here are true numbers. The maximum amount you can contribute to a Roth 401(k) for 2022 is $20,500 if you're younger than age 50. This is an extra $1,000 over 2021. If you're age 50 and older, you can add an extra $6,500 per year in "catch-up" contributions, bringing the total amount to $27,000. Contributions generally need to be made by the end of the calendar year.
Roth IRAs are the one retirement related vehicle I never paid attention to, primarily due to laziness. Makes me wonder why they seem to have such a following, since most people in retirement will be at a lower income level and tax bracket. I'd rather get the tax break in my salary earnings years vs. when retired. Anyway, interesting content as usual Erin!
Very true Scott, but as you find yourself with more money coming in (like when your house pmt. goes away, or you refinance at a lower rate) it's good to have pre-taxed money in your retirement account so you can split up the withdrawal as to what works best at that time. That's what I'm being told, I will let you know how it works over the next 25 years :)
Many reasons Scott. It can differ based on situations obviously. For me: my wife and I max out roth ira and roth 401/457 plans. We make 120k. We can put more money in now since the taxes are already taken out. Our last few 5 working years we will do traditional because that will be our highest income tax years most likely. This will allow us to pull from multiple buckets in retirement, keeping our taxes down. Next I will get ss and pension and wife will get ss, which are taxable and mostly likely be 100% taxable by the time I can retire. This is our retirement plan, hope it helps.
@@kellyodell3249 Kelly, thanks, that is interesting, and clearly a bit more complicated when one is a little further out. The way I see it, I'm like two years out max., so my opportunity to use Roth is probably passed. All the best!
@@scottg2946 I think if you have the post tax money just sitting around you might consider putting it in a Roth as then you don't have to pay taxes on the earnings. It's a small tax savings, but it could be significant compounded over a few years.
Withdrawing from a roth can position you for other benefits by lowering your AGI such as property tax breaks, lower ACA premiums and not being charged more for medicare by staying below IRMMA limits. Also here in NY you don't pay state income taxes on the first $20,000 each year of IRA, 401k and pension distributions so a couple could pull $40,000 from traditional accounts and the rest from Roth and not pay any state income tax. So there are more benefits to Roth than just the direct tax advantages.
Another youtuber said something that stuck with me. When you're in retirement and depend on that retirement investment, paying that tax will suck. When you are still working its easier to pay the taxes because you aren't spending down your investment. That said, whichever you choose, try to have the same take home pay. Hence invest extra if doing pre-tax.
ALL of these retirement/tax/financial videos make the same mistake when discussing tax brackets. If you hit the 34% tax bracket it DOES NOT mean you pay 34% on all of your taxable income. You only pay 34% on the amount OVER the bend point (the point beyond the 24%/34% barrier).
