Roth or Pre-Tax?

[ronan177]

Dear all,

I have a lot of difficulty figuring out whether a Roth account is more useful for me or a pre-tax account. I have read a lot on pros and cons of both. But I still have difficulty figuring out whether I should go Roth all the way or no I should consider pre-tax accounts as well.

One of the reasons I have this much difficulty is the fact that I won't know what would be my tax bracket when I am 60 or 70 years old. How could I know? So I don't know whether it's better for me to pay the tax now on Roth and enjoy tax free returns in my Roth accounts or no actually turn my Roth accounts into pre-tax accounts and lower my tax bracket now that I am single without a house, etc. etc. Any advice or recommendations?

[MakeAStash]

Your tax rate before retirement vs. that after is the primary factor in whether traditional or Roth will yield you more after-tax money during retirement. If your tax rate now and later is the same, both traditional and Roth come out exactly equal in after-tax value (when their total is combined with your other i.e. non-retirement investments).

If you are a serious saver, you are more likely to amass enough retirement assets to be pushed into high brackets in later years, in which case Roth is probably the better option. Conversely, if you are a spender traditional is likely to be your better bet.

[BadSaver]

Additional TAxation Considerations - IRA

There's hidden taxes involved with withdrawal of IRA funds in certain circumstances.

Google Joe Cobb's article, The Tax on Your Retirement Savings.

[Zedon]

I am toying with the same problem in the 25%+9.3% state brackets, I think if I can max it out either way I would go with the Roth since it will equal more when I withdraw, but I would be paying more for it now.

I just received a raise that will allow me to invest a fair sum. I am currently trying to decide if I should put $18000 into a traditional 401k or only $12000 in roth 401k. I don't have enough to put $18000 in a Roth or I would do that.

Who knows maybe I will end up doing 50/50 to hedge me bets.

I don't know your specifics but if you are in the 15% tax bracket I would do Roth.

[autoxer]

I am toying with the same problem in the 25%+9.3% state brackets, I think if I can max it out either way I would go with the Roth since it will equal more when I withdraw, but I would be paying more for it now.

I just received a raise that will allow me to invest a fair sum. I am currently trying to decide if I should put $18000 into a traditional 401k or only $12000 in roth 401k. I don't have enough to put $18000 in a Roth or I would do that.

Who knows maybe I will end up doing 50/50 to hedge me bets.

The other factor is how much you already have saved in ROTH's & Traditional accounts. You don't want to get to retirement with all of you money in ROTH's, because you can use the traditional $$ to fill the lower tax brackets first.

Have you considered maxing the traditional 401k and also contributing to a ROTH IRA?

[jIM_Ohio]

Dear all,

I have a lot of difficulty figuring out whether a Roth account is more useful for me or a pre-tax account. I have read a lot on pros and cons of both. But I still have difficulty figuring out whether I should go Roth all the way or no I should consider pre-tax accounts as well.

One of the reasons I have this much difficulty is the fact that I won't know what would be my tax bracket when I am 60 or 70 years old. How could I know? So I don't know whether it's better for me to pay the tax now on Roth and enjoy tax free returns in my Roth accounts or no actually turn my Roth accounts into pre-tax accounts and lower my tax bracket now that I am single without a house, etc. etc. Any advice or recommendations?

Focus on what you do know.

You know that you are under no obligation to take the Roth out at age 60, 70 or 80
You do know that you pay X% in federal and Y% in state taxes now.

Do you think those rates will go down in retirement? Likely yes... because some states give favorable treatment to retirees (higher income exemptions). Expenses go away in retirement (like mortgages) so you need less money.

I make upwards of $XXX,YYY per year (6 figures), I tend to spend less than $2000 per month on myself. I know I can live on a LOT less. Remove kids from that picture, and the expenses go down even more.

All those signs point to a Roth for me with a few caveats:

1) I use a pre-tax 401k for 50% of my contributions (I use a Roth 401k for the other 50%).
2) I also add to a taxable account for added flexibility.
3) I cannot get a tax deduction on an IRA, so a Roth makes sense because of how the money comes out.


The generic advice is use all 3 account types (pre-tax, Roth, and taxable brokerage). Over time it should become obvious what the 3-5 best withdraw strategies for you become. If you only use one account type, you may not have many choices on withdrawing.

Choices save you money, choices save you tax headaches (it may not save tax dollars, but it will save you headaches).

[Zedon]

The other factor is how much you already have saved in ROTH's & Traditional accounts. You don't want to get to retirement with all of you money in ROTH's, because you can use the traditional $$ to fill the lower tax brackets first.

Have you considered maxing the traditional 401k and also contributing to a ROTH IRA?

That's the plan I'm leaning towards for now, but i doubt I will be in a lower tax bracket when i retire since I should have a pension, hence the thought of going Roth 401k.

[jIM_Ohio]

That's the plan I'm leaning towards for now, but i doubt I will be in a lower tax bracket when i retire since I should have a pension, hence the thought of going Roth 401k.

If you save enough in taxable and Roth accounts, you can likely have a HIGHER income with LOWER taxes in retirement.

If I make $100k in salary, the government taxes that at 28%
If I make $200k in retirement income, with $50k coming pre-tax, $100k coming from taxable accounts and $50k coming from a Roth, I am taxed at the level of the $50k which is 15% in current tax code.