I understand the difference between a roth and a traditional for the most part but is there a magic number where it obviously makes sence to get a roth instead?
Like under $3 million expected at 65 you should just get a traditional and over you should get a roth.
Assuming im retiring at 65 and im gonna spend every penny of it before i die
Is there a magic number where roth vs traditional makes a difference?
byu/brokensharts ininvesting
Posted by brokensharts
13 Comments
You get both. Focus on maxing out your Roth first, and then once you reach the cap, fund an ira
I saw this post a while back and I think it breaks it down pretty well. [https://ofdollarsanddata.com/roth-401k-vs-401k/](https://ofdollarsanddata.com/roth-401k-vs-401k/)
No because it’s about your income and tax rates, not the total amount you think you may end up with.
Your question means you don’t understand the tax savings. The final balance is irrelevant, it’s the tax rates.
Are you talking about a 401k or IRA?
Typically, for most people, you want to contribute to a traditional 401k enough to get your company match. Then max a Roth IRA. If you can still contribute more to retirement, keep putting more in the traditional 401k until it’s maxed.
Reason being the traditional 401k is tax deferred. So when you are retired, you won’t have an income from work. Your income would be from the funds in the 401k. So the contributions you make to your 401k reduces the amount you currently pay in taxes, and you are likely to pay less in tax on the funds once you are pulling them out in retirement.
It’s good to have some funds in a Roth IRA as well to diversify a little bit and to be able to pull some money out completely tax free. That way you can pull the max amount from the 401k within a certain tax bracket then pull out any extra you need from the Roth IRA.
Future tax rates are unknown, so who knows what kinds of lines you need to stay between. Taxes could be higher or lower in the future. You could also move to a state that has higher or lower taxes
If you live in a state with low/no income tax and know for sure you’re going to retire in a state that has higher income tax, it would make sense to tilt more toward roth. But you still want funds in a traditional account because (right now) the first $15k you pull out of the 401k each year would be completely tax free based on the standard deduction. That number for the standard deduction will go up over time
Yes. It’s based on RMDs
There are several; your specific numbers and situation, and how they apply to your tax strategy.
I’m in the 24% tax bracket. I’m maxing out my traditional 401k for painfully obvious reasons. I have access to mega backdoor Roth, so moneys that can’t enjoy pre tax status go there. When I retire, between being frugal and the Roth funds, I can keep my taxable income under the 12% tax bracket, so Roth will be valuable in saving me from tipping over into the 22% tax rate.
Any excess money I can get out of traditional while still under the 12% can be converted to Roth, enhancing that tax free revenue stream making it more efficient.
The best way for me to think about it “is my current top tax bracket higher or lower than what I expect my tax bracket to be in retirement?”
If you’re in the 24% tax bracket now, you probably want traditional 401k, unless you think you’ll have a ton of income in your retirement that puts you near or over the 24% tax bracket
The magic number would require that you know future tax rates, future rates of return on your investments, how long you will live, etc. You need to take a guess unless you have a crystal ball.
The total amount in your account doesn’t matter. Taxes are based on income. Income in retirement is based on taxable social security payments and whatever you withdraw from non-Roth investment accounts. You could have $50M sitting in accounts and pay virtually no taxes if you don’t need much income in a given year.
Edit: unless you’re old enough for RMDs to kick in, which are basically forced withdrawal from traditional 401k or IRAs
How’s one going to estimate what they will have at retirement or tax rates from today until retirement and beyond since they have no clue what happens next or how they will use distributions once retired? Speaking from personal experience. Life isn’t moving as I expected and why I wish I had started ROTH soon as it was made available knowing regardless what life brings next my distributions are 100% tax free and no minimum required. Granted this all could change.
We don’t know your age, but in reality it doesn’t really matter. From my perspective it is more about taxes. Pay now or pay (potentially much more) later. If you live in a high personal income tax state that helps make the case for a traditional 401k/IRA; especially if you plan on moving to a low/no personal income tax state in retirement.
But assuming low/no personal income tax state, it comes down to one question. Do you really think that income taxes will remain this low 20-30 years from now? Can a country almost $38 Trillion in debt continue as is without raising income taxes across the board?
It’s a good idea to have both traditional and Roth. That gives you a lot of flexibility when the time comes to withdraw.
Consider all of the traditional $$$ you’ll be able to withdraw “tax free” when you account for standard or itemized deductions on your taxes. If all of your $$$ was in a Roth, you’d never be able to take advantage of those deductions, assuming no other sources of income.