I am 45 and my wife is 43. We got a late start on saving for retirement and only started saving after buying our first home in 2021. We currently have 220K invested mostly in VOO between both of our ROTH IRAs, a taxable account, and her 457B which is also ROTH. She works for our city which will give her an estimated pension of at least 65K a year with a yearly COLA in retirement, likely a bit more depending on future raises/promotions. We will both receive social security which will combine to approximately 60K a year. This would bring our total taxable retirement income before drawing on any investment accounts to 125k a year minimum.
Recently my small business has grown quite a bit and I have more money to invest in the coming years. I plan to open a solo 401k to allow for more tax advantaged investing and I am debating whether to make the contributions ROTH or traditional. I know that generally it is recommended to invest in traditional IRA because your taxable income will be less in retirement in most cases. My though process however is that with the pension and social security any additional income will already be in the 22%+ tax bracket in retirement. So it makes more sense in our scenario to invest in ROTH because the lowest tax brackets are already accounted for.
Does this make sense? Thanks for any advice.
Please check my thought process on ROTH vs traditional with a pension.
byu/Darth_Duane inpersonalfinance
Posted by Darth_Duane
8 Comments
Yes, that makes a lot of sense.
Roth is never a bad choice. Often traditional might be better, but with a substantial pension that changes, as you realized. It’s probably not a huge difference either way, and in your case avoiding RMDs also has advantages for Roth.
Because it bugs me: Roth, not ROTH. It’s not an acronym, it’s the name of the senator who wrote the legislation to create them.
Roth or traditional: https://reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/
Having so much pension income would indeed make Roth more attractive. With Roth having other benefits, such as not being beholden to RMDs and being able to pull out contributions without penalty for an early retirement (though this is moot on a 457 IIRC), your thinking makes a lot of sense.
Retired you will be very happy not to have a huge tax bill hanging over your head if you choose the Roth route.
If you’re in the 24% bracket now and will likely be in the 24% bracket in retirement, then I agree it’s not a bad plan to do Roth as much as you can. But if your income increases and you move into the 32% bracket while working, I think you should shift towards Traditional.
We’ve got much higher pension and are screwed by taxes now as well. Great problem to have. I sort of toss some at each and whatever. One thing to consider might be whether you are moving to a higher or lower tax state in retirement. If you are in TX now and plan to move to CA, Roth. If you are going the other way, traditional.
You should choose Roth for any scenario. You’ve already paid taxes when you put money in the Roth. The earnings are tax-free. Also when you do your income estimations don’t forget that your wife’s ss income will be reduced based on pension earnings once you reach certain thresholds.
Are you an S-Corp or Schedule C? For Schedule C, traditional employee contributions can effectively have a marginal rate on contribution of 20% when they lower QBI income dollar for dollar. This can sometimes tilt in favor of Roth employee elective deferral contributions.