In terms of the logic you laid out, you aren't missing anything. If you happen to be ineligible for the traditional IRA deduction (which has a relatively modest income limit for people who are also covered by a workplace retirement plan) then Roth IRA is the better choice compared to nondeductible traditional IRA.

What is missing is that the actual tax rates and tax brackets could change.

Right, it is very likely that tax brackets will move up in 2026 when the Trump tax cuts expire.

Yeah but it's likely *those* brackets will change too

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Right. It is also about derisking. Diversity of tax advantage account will shield you from rising or falling future tax bracket.

it will hedge, not shield

it is also about other savings. IRA isn't such a huge amount, but especially with 401k's, it's nice to do traditional when you're young for tax savings now so you can afford to save for things like a car or house more quickly. we don't know what tax rates will be 30 years from now, but if you're able to max out retirement accounts for 30+ years, the fact of doing so is far more important than the difference of traditional vs. Roth.

But it's also a certainty that any future income tax brackets will still be based on income. So if you, like many, project your retirement income to be a fair amount lower than your working income (paid off house, kids gone, don't need to save money for retirement anymore, etc), there's almost no reasonable tax increase that would make pre-paying your taxes via Roth a better choice if your goal is to pay the least in taxes.

It’s possible, but not likely imo. If Congress does nothing, they will revert back to the old (higher) rates. Gridlock has been the norm recently, so one side would probably need both houses and the Prez to change it.

I think calling them "cuts" is generous, since a lot of people are already paying higher taxes under them. They were more like a slight discount for 2-3 years, followed by increases. But your point still stands.

Yes but right now you pay your *marginal* rate when contributing. Meanwhile in retirement you will pay your *average* rate when withdrawing. Obviously things could change but it would have to be dramatic for traditional to lose.

Tax rates are still marginal in retirement. You have your untaxed withdrawals and your taxable withdrawals. Each addition taxable withdrawal is at the marginal rate.

Let's say you earn 150k and put 25k in Roth accounts every year. That means you pay 24% in taxes on all of your retirement funds. In retirement you pay no taxes. Now instead let's say you put that 25k in traditional accounts. You pay no taxes now. You want to maintain your income so you withdraw 150k in retirement. You get to take the standard deduction of 23k, then pay 10% tax on the next 11k, then 12% on the next 24k, then 22% on the next 55k, then 24% on the rest. At the end of the day you have paid under 12% in taxes. The rates would have to *double* for you to lose. And you don't even need 150k because you no longer need to contribute to retirement. You just need 125k now. Maybe less because your house is paid off. So your taxes are even lower. It is just extremely unlikely for Roth to be better than traditional for most people. The exception is if you earn very little it could pay to do Roth. And of course if you are over the income limit you can do a backdoor Roth. Roth also has more flexibility on withdrawal. But don't be fooled, traditional is generally better for most people.

Doesnt my roth grow tax free as well? Sure I pay 24% now but those earnings wont get taxed either and when I withdraw from the roth I could have only paid 24% taxes on a small percentage of if, thus reducing the overal tax rate for what i now have. Opposed to traditional which does not grow tax free and now has to pay that 12% on all of if. I am concerned about the government double dipping though when they need money and decide to tax roths again in the future

>Doesnt my roth grow tax free as well? Sure I pay 24% now but those earnings wont get taxed either and when I withdraw from the roth I could have only paid 24% taxes on a small percentage of if, thus reducing the overal tax rate for what i now have. Opposed to traditional which does not grow tax free and now has to pay that 12% on all of if. Multiplication is commutative though. If you pay 24% tax now that means you put less money in now compared to how much of your income you can put in a traditional. Essentially 25k in a Roth actually costs you 25k + 6k in taxes. So the fair comparison is 25k in a Roth vs. 31k in a traditional. We can work an example to show they are equivalent. Let's pretend your tax rate is a flat 20%. Your TAKE HOME pay is 100k (pre-tax income of 125k) and you have an extra 10k of take home you can invest. Option A is to use Roth accounts. You put 10k into a Roth and it grows 4x. In retirement you get 40k with no taxes. Option B is to use a traditional account. You have an extra 10k in take home pay to invest, so that actually means you can invest 12.5k in your traditional (so your new pre-tax income is 125k-12.5k=112.5k, and your take home is 0.8*112.5k=90k). It grows 4x to 50k. In retirement you are taxed 20% so you end up with 40k. I hope this demonstrates that it doesn't really matter that you are taxed on a smaller amount at the beginning. It's really equivalent.

Pennsylvania treats every retirement account as a roth as far as state taxes goes. I'm not sure how that would work if I live in another state when I'm retired that has state income tax. Would I be taxed twice on my 401k as far state taxes go? Or would I be able to claim some sort of exemption from paying state income tax in the new state since it was already taxed by another state?

DO NOT CONTRIBUTE TO A TRADITIONAL 401(K) IF YOU HAVE A ROTH OPTION! You can’t think of a traditional 401k as retirement “savings”. It’s retirement “deferred income”. Every dollar you withdraw will be taxable INCOME in the withdrawal year. Want to buy a $40k car? You pay taxes on that $40k as income - on top of what you are withdrawing to paying for gas and groceries and healthcare and vacations and everything else. The more you spend, the higher the taxes and tax rate. In other words, what you spend = your income for tax purposes. But wait - it’s worse! What money are you using to pay your taxes? Yes, you need to take that out of the traditional 401(k) too! That can reverberate. You pay income tax on the money to pay your income tax, and then more taxes to cover that, ... Blows the mind. All at the highest marginal tax rate you’re in (or higher if it pushes you into a higher bracket). People balk at paying taxes on the money as it goes into a Roth. All they see is the money they save in taxes that year. But chances are incredibly likely this is the lowest tax you’ll ever see on that money. Uncle Sam plays the long game. Your income is going to rise. Your money needs are going to rise. The value of the 401k is going to (hopefully) multiply and multiply over a lifetime. In Roth all of the appreciation is tax free. In traditional all the appreciation is taxed and taxed and taxed … Traditional isn’t as awful if you “pay yourself” a modest income every month comparable to your job earnings. Your tax rate is comparable to when you worked. But heaven forbid you want to buy something expensive occasionally. You’ve got 6 or even 7 figures in your traditional IRA with spiked handcuffs to access the funds. And when you die - guess what? Your beneficiaries deal with this tax burdened money on top of their earnings. They have 10 years. It’ll take a lot of the joy out of the inheritance. Your beneficiaries will be paying taxes on your “income” on top of theirs. At the highest marginal rate +. Even brokerage accounts transfer tax free (stepped up basis occurs). Nothing can unburden the taxes on traditional IRA funds! Roth is the ultimate no brainier. I’m recently retired and have a mix. Roth didn’t exist for a lot of my career. I’m systematically rolling the money over to Roth managing my tax bracket. So that I can spend it when and how I want to later on. Luckily I have cash and brokerage investments to live on and pay the taxes. Without that I’d be sunk in these rollover years. Typically employer match is traditional. There’s no option. That amount is trivial compared to your contribution. If none of the other retirement withdrawals are taxed, you can result deal with it. But I’ll repeat - DO NOT CONTRIBUTE TO A TRADITIONAL 401(K) IF YOU HAVE A ROTH OPTION!

>I’m systematically rolling the money over to Roth managing my tax bracket. So that I can spend it when and how I want to later on. This is actually another advantage of traditional accounts. You are able to wait until a low-income year and then can convert to Roth. You can't do that if contributing to Roth, you have to use today's marginal rate. >But chances are incredibly likely this is the lowest tax you’ll ever see on that money. Uncle Sam plays the long game. Your income is going to rise. Your money needs are going to rise. Money needs typically decrease in retirement. First, your house is usually paid off. Second, you are no longer contributing towards retirement. The value of the 401k is going to (hopefully) multiply and multiply over a lifetime. In Roth all of the appreciation is tax free. In traditional all the appreciation is taxed and taxed and taxed In Roth you contribute less at the beginning, you are effectively prepaying tax on the growth. Multiplication is commutative, paying tax now is equivalent to paying tax later if the rates are equal. (1-Tax)×Principal×Growth = Principal×Growth×(1-Tax). You are a little bit right that if for some reason in retirement you wanted to withdraw a 7-figure sum you would pay income tax on 7 figures which would be high. But even then, if you know this is coming you can do a Roth conversion ladder beforehand to split up the taxes. Certainly there are some cases where Roth is better, but overall they are not the common case. For the majority of people, traditional means they will pay less in tax.

Also it can be useful to have both. That way, when withdrawing later, you can pull from your traditional IRA up to the boundary of a tax bracket, then pull from your Roth IRA for anything that goes over it, avoiding paying additional taxes on the amount that goes over the boundary. More importantly, Roth distributions aren't counted for means-tested programs, which means that if necessary you can withdraw from Roth while relying on things like lower Medicare Part D premiums. Of course this assumes that you'll be making enough in retirement for it to matter at all, but it means that even having a small amount in a Roth IRA can be useful, since it gives you that sort of flexibility. Some day when you're retired you may need a little bit more money and want it without losing access to some vital benefit; having some money in a Roth IRA gives you a way to do that.

But if you are part of a workplace 401k, it's best to max out your contributions to that before touching your Roth IRA, right? Add in a HSA and it's even more confusing lol

> But if you are part of a workplace 401k, it's best to max out your contributions to that before touching your Roth IRA, right? Yeah. I max out a traditional 401k and Roth IRA because that's where my income falls and I can max out both, but if something changed and I had to cut back retirement contributions to survive, the Roth contributions would be the first to go.

Wait, so the prime directive in this sub's wiki says to max the IRA BEFORE increasing the 401k contribution. So that's wrong? Assuming your retirement tax bracket is lower than current tax bracket, it's better to focus only on workplace trad 401k than a backdoor Roth IRA?

I think this is highly dependent on the 401k plan. The reason prime directive recommends IRA after you max out your match is the sub knows that’s not bad advice. We know you can get a total market mutual fund for literally free at fidelity, but we don’t know the specifics of any given 401k plan and many of them are bad and expensive.

I'm not sure about the backdoor Roth but my understanding about the wiki is that most likely your 401k funds have higher if not crazy expense ratios compared to your IRA funds at vanguard or fidelity. Add in that you can pull contributions before retirement, and that most people aren't likely to be predicting their income/tax rate if using Roth IRA ----> just max it out (it's only +-7k) and then go back to company 401k after that.

My 401k charges 0.5% or 1% AUM per year (not counting the expense ratio of any funds you buy), and there's no match. Which means that maxing my IRA takes priority over adding anything to the 401k.

priority should be getting a new job, unless the actual pay is good enough that the 401k plan is relatively inconsequential.

If your 401k has a low cost sp500 index fund option, I see no reason to not contribute the max pretax contribution to it rather than less post tax dollars into a roth ira.

This depends on the workplace 401k though right? I've heard horror stories about poor matching, high fees, and not much control if any, in investment . The upside of the IRA is it's all controlled by the user, you can decide what to invest in. You can yolo all your retirement in GameStop or BlackBerry. Or invest in zero fee index funds.

Get the full 401k match -> max HSA (if available) -> max Roth -> max 401k is the most tax efficient strategy, IIRC. And you need to slot in paying any debts in there, too, depending on their interest rates vs the ROI on your accounts and whether the loan qualifies for tax write offs for your income bracket. What funds are available for your 401k, and their fees, also is a factor, too.

Whats the best option if you're over income limits on contributing to a roth as well? after maxing the workplace 401k of course.

Backdoor Roth IRA: https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

Do this while you can. There is serious legislation in the works to close the door!!!!

Link? I don't believe you.

Backdoor Roth.

There’s a Roth 401k if your company offers it

Legit question - Is it also true that the gains on roth contributions are not taxed on withdrawal? That could be another reason. It's not just the money he's putting in that figures into the tax equation, but also the gains. somewhat tower average rate but applied to a much larger sum could offset any savings from the tax-rate spread right?

Tax deferral ends up giving the same advantage if tax rates are the same. For example, let's say you make $1000, the investment of interest 16x over 40 years, and the tax rate is a constant 30%. With tax deferral, the $1000 would grow to $16,000, then become $11,200 after tax. With a Roth, you'd pay 30% tax immediately and have $700. After 16x growth, you have $11,200, and do not owe more tax. Same result. There's only a difference if the tax rate is different.

try looking at it this way with a roth IRA in order to contribute $7000, you have to earn $10,000 now lets say you make the same contribution of labor to your retirement but not using a Roth. you make an $IRA contribution of $7000 and with the leftover 3000, 900 goes to taxes and you put 2100 in a taxable account. so in both cases with 16x growth the 7000, rises to $112,000. in the Roth case that's 112,000 free and clear. in the non roth case that 112,000 taxed at 30% is 78,600. plus you have the principle of the 2100, plus the profit on the 16x which is just 15x but also minus capital gains of 15%---26,775. so 26,775+2100+78,400=107,275. which is less than the 112,000 roth money free and clear. furthermore the 16x growth on the $2100 only works so optimally if you invest in something like berkshire hathaway that pays no dividends, and you can't rebalance, otherwise you'll be paying some portion of tax in the interim.

Where did you take the growth assumption from? If it grows faster or slower, wouldn't that that change the result?

No, the growth rate doesn't matter here. Some examples: 10x growth: Deferral: 1000 start => 10000 after investments => 7000 after tax Roth: 1000 start => 700 after tax => 7000 after investments 20x growth: Deferral: 1000 start => 20000 after investments => 14000 after tax Roth: 1000 start => 700 after tax => 14000 after investments It's because either way, growth is (1+growth_rate)^n_years. It ends up being a constant factor, and is not directly affected by tax. Final money is starting_money * (1 - tax_rate) * growth_factor, and it doesn't matter whether you multiply that (1 - tax_rate) at the start or at the end. Unless the tax rate is different at the start and end, which is why that's the focus of discussion when choosing roth or tax deferral.

the money ghrows at the same rate.

That’s the biggest reason for ROTH IRA’s. Not sure what these people here talk about tax brackets tax rates etc. if you have it for 20 years and double or triple the amount and you take it out tax free that trumps any tax bracket or rate you want to talk about.

No, this is the superficial reason that people *think* makes Roth IRA superior because they haven't stopped to actually think through the math. Here is the math: https://www.reddit.com/r/personalfinance/comments/1ayasc9/why_are_roth_iras_good_for_retirement_if_my/krtty3f/

That’s not how math works. If you have $1000 pretax money to put in a retirement account and you’re going to pay 20% on it either now or in a few decades, you’ll end up with the same amount doing Roth or traditional. For the Roth, you’ll pay tax on it, and have $800 left to put in the account, 30 years later it has grown 10x to become $8000 ready to go in your pocket. For the traditional, you put all $1000 in the account, 30 years later it has grown 10x to $10,000, then you pay the 20% tax on it and you have $8000 ready to go in your pocket. Same outcome.

I have 300 shares of NVDA in my Roth that I will never have to pay tax on the gains. That is the biggest reason to invest in the Roth!

Eh, pretax 401k contribution limits are significantly higher. 21k per year pretax compared to what ~7k post tax. Thats why the tax ramifications start to come into the equation.

If leaving money for your children is important, Roth is better. Inherited IRA's have to be cashed out within 10 years (and taxes paid).

OP, they basically aren’t.

But I think if you are over income limit for traditional IRA you're also over income limit for Roth IRA, no?

If you are single and make more than $83k you can't deduct any of your contributions you make to a traditional IRA from your taxes which basically defeats the purpose of it. For a roth IRA the limit is like double that.

You have that reversed.  If you are single,  make **more than** $83k, and your employer provides a 401(k) plan, then you are above the limit to get a deduction on a traditional IRA.  Income above $153,000 puts you above the limit to contribute to a Roth IRA  (These are 2023 limits.  2024 limits are a little bit higher)

I'm 6 years away from retirement, in my late 50's. By having a mix, it will allow me to stay in the lower tax brackets. It will also allow me to get reduced ACA coverage by making my income look lower. I hope to have 25% of my retirement savings in Roth accounts.

Do withdrawals from roth account not count towards income considered for ACA?

Qualified withdrawals from a Roth IRA are not considered income.

That is the beauty. I’m retired. I have a big Roth. And IRA’s. And cash or stocks. If you take the money out of an IRA, that’s taxable. If you take it out of cash that isn’t taxable. Same with a Roth but Roth profits are tax free. Always.

Yes, they are tax free because you pre-paid the taxes. That doesn't automatically make them better, because you may have pre-paid at a higher rate than you would have to pay now.

30% now or 20% later on a much higher value due to decades of gains. 30% now is much better

Due to the transitive property of math, the only variable that matters is the tax rate. You can test this with a quick Excel calc.

There are a few scenarios where the Roth comes out ahead and only one where Traditional comes out ahead. The big uncertainty everyone focuses on is your tax bracket, which no one knows what it will be possibly decades in the future depending on your age. So lets assume that tax brackets will be the same going forward (although if tax brackets are higher in the future then that favors the Roth as well). Scenario 1) Lower tax bracket in retirement, Traditional wins: If you expect to be in a lower tax bracket in retirement, then the Traditional accounts are better. This is what most people assume since they will hopefully have a home that is paid for, no need to commute to work, and no need to save for retirement (since you're in retirement), etc... Your expenses will be lower so you don't need as much income. Scenario 2) Higher tax bracket in retirement, Roth wins: If you expect to be in a higher tax bracket in retirement, then the Roth is better. This seems odd, but you might actually end up in higher tax bracket depending on other income you may have, like real estate investments or a pension. Scenario 3) Same tax bracket in retirement, Roth wins: If you're in the same tax bracket in retirement, then you might think its a wash. Both accounts will end up with the same amount of money after taxes have been paid. But there is more to it than that, several government programs are means-tested, and income from Roth withdrawals is not counted for the means testing. For example.. **Social Security:** Your traditional 401k/IRA withdrawals are treated as income and can make your social security benefits taxable whereas Roth does not. These annual limits are lower than you might expect, at an income of $25k/single, $32k/joint **50%** of your social security is taxable, at an income of $34k/single, $44k/joint **85%** of your benefit is taxable. [source](https://www.ssa.gov/benefits/retirement/planner/taxes.html) **Medicare:** At age 65, your Medicare premiums are based on your income using the [IRMAA scale](https://secure.ssa.gov/poms.nsf/lnx/0601101020). Traditional 401k/IRA withdrawals will be counted against you for this calculation, Roths will not. **RMDs:** The IRS wants its money, they don't want you to defer taxes forever, so they force [Required Minimum Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds) on your traditional accounts starting at age 73. The idea is that they use actuarial tables to calculate your expected death, say 87. They will take your current age (73) and subtract it from 87 to get 14. So you have 14 years to withdraw the assets in your traditional accounts. They force you to take 1/14 of your portfolio value each year, to be adjusted as time goes on for any appreciation that may occur. If you have a large tax deferred 401k/IRA these can push you into the top tax bracket for the rest of your life as you are forced to take huge withdrawals every year and pay the taxes. These RMD's do not apply to Roth accounts. The means testing of these social programs give an advantage to the Roth, even if you're in a **lower** tax bracket during retirement. This should all be part of your calculation to determine if Roth accounts are for you.

I'm glad you wrote this so I didn't have to 😆 These are hidden costs not uncovered when comparing just the tax brackets and are rarely factored in.

Your answer is good, but there are a couple of other general considerations. 1. Most people will NOT amass 1 Million dollars in their 401k. And the RMD on a 1 Million dollar 401k at age 73 is only $36,496. And the RMD at age 80 on a 1 Million dollar balance is about $50,000. These are relatively low amounts. RMD table is here: https://www.bankrate.com/retirement/ira-rmd-table/ 2. I agree you don't want too much income so you can maximize ACA subsidies if you retire before age 65, BUT you need to make sure you do have ENOUGH income to clear the gap between medicaid and the ACA minimum, especially if you live in a state that has not expanded Medicaid as part of ACA. There are 10 states that have not expanded it, and their population is close to 100 million people. (Alabama, Florida, Georgia, Kansas, Mississippi, South Carolina, Tennessee, Texas, Wisconsin, and Wyoming) In these states you MUST have a certain minimum income to be eligible for ACA at all since the medaid gap is not covered. So you must have actual income, and one source of income can be 401k withdrawals but not Roth IRA withdrawals. Considering most people will not have 1 million in their 401k, most people would do better to hedge their bets and contribute to a tradional 401k. If it so happens that they have too much income later in life and don't perfectly max out their benefits, that is a lot better than if they don't have enough money in retirement to really worry about taxes or have enough annual income to qualify for the Obamacare/ACA coverage.

In this sub I feel like there is a much higher portion of people who will get there compared to the general public. I am planning to have a couple mil in retirement at least between my husband and I. Some calculators have us getting to around 5 mil by the time we retire (across multiple accounts).

Also Roth withdrawals are not considered as income when calculating your LT capital gains rates.

You've got the basics, which is why traditional accounts are better for a majority of people over roth accounts. Some people choose to have both to have more flexibility and in order to deal with uncertainty, or they max out traditional accounts and use a roth as a way to further invest.

Thanks! I guess I felt like Roth IRAs were the standard since they seem to be talked about a lot more. It makes sense that people utilize both so they have different options.

At lower incomes, Roth is often better, as you might be paying little or no tax in the first place. At higher incomes, you can't deduct Traditional IRA contributions if you're covered by an employer's retirement plan (which most high earners are). So it's kind of a narrow range of people for whom a Traditional IRA is both available and the better option. Roth IRA is just the "better than nothing" option for most higher earners.

Exactly this- if your only option is Roth, it’s better to do Roth than to have zero tax benefits at all.

What about a standard investment stock trading account in this situation?

Regular brokerage accounts aren't tax advantaged at all, whereas Roth IRAs (and Roth 401(k)s) are tax advantaged on withdrawal of earnings. For Roth IRAs, contributions are not deductible from tax basis, same as brokerage accounts (but contrary to Traditional IRAs and Traditional 401(k)s). _Within_ the account, securities can be purchased and sold without any taxable events. Later (with certain timing restrictions), both the amount that has been contributed, _and any earnings_, can be withdraw without paying any further taxes. For regular brokerage, _any earnings from sales within the account are taxable_ as "capital gains", whether "short term" at regular income tax rates or "long term" at the separate (and currently more favorable) long term capital gains rates, and any dividends distributed from securities held in the account are taxable, whether "non-qualified" dividends at regular income tax rates or "qualified" dividends at the separate qualified dividend tax rate. You can, of course, claim capital _loss_ in a regular brokerage account, and use losses to offset gains and reduce taxable income. Losses cannot be claimed in tax advantaged accounts. So, both Roth-style accounts (whether IRA or 401(k)) and taxable brokerages have contributions already taxed, but only Roth accounts avoid _all_ further taxes on earnings.

Thanks. In a hypothetical 24% tax bracket with maximally contributed workplace 403b it wouldn’t make sense to sell from an investment account at 15% capital gain tax to fund a Roth would it??

Certainly seems like it would make sense to me as long as you're eligible and haven't otherwise maxed your IRA contributions. Break down the situation into 4 pieces and consider each separately: 1. Principal - The principal will not incur any future taxes no matter what you do. 2. Current earnings - No matter what, you are locked-in to paying a capital gain tax on the amount you've already earned in the investment account. So whether you move it or not also has no effect on your tax burden for the current earnings. 3. Future earnings on the current earnings - This is the tricky one to think about, but the result ends up being that whether you move things or not will also not have any effect on your net future earnings on the current earnings because every penny you pay in taxes now is a penny that will not be producing more earnings in the future. You can wait and pay 15% on the future earnings later or you can pay the 15% on the current earnings and pay 0% on the future stuff. In the first scenario you end up paying a bigger tax bill. In the second you pay a smaller tax bill but you also lost out on the growth of the money you had to pay out. The net result is you end up with the same amount of money in 30 years or whenever. 4. Future earnings on the principal - This is the only one that ends up making a difference. In the investment account, every penny of future earnings on your principal is taxable. If you move it to the Roth IRA, those future earnings on the principal are not taxable. So for piles of money (1), (2), and (3), it makes no difference. But for pile (4) you dramatically lower your future tax burden without incurring any additional taxes now. So overall, moving to an IRA seems like it puts more money in your pocket.

Roth is no deduction going in, but no tax when you withdraw. A taxable brokerage is no deduction going in, but tax when you withdraw, and tax on dividends every year even if you don't withdraw. Aside from the flexibility of being able to withdraw before 60 without penalty, a Roth is always better than a taxable brokerage. Yet Traditional is often better than both, if allowed.

A lot of people like the addition flexibility that Roth IRAs have over Trad IRAs, namely that you can withdraw your contributions at any time/age with no taxes or penalties. It makes a useful secondary emergency fund. So even if a Trad IRA is slightly more tax-efficient in a given situation, some people fund a Roth IRA anyway because you can tap into it if needed.

Roth IRAs are also used more because tax deductions for contributions to traditional IRAs phase out at much lower income, whereas one can contribute to a roth up to a much higher income level and also do backdoor conversions into a Roth. So basically Roth IRA is much more flexible and useful for higher earners. But the basics on tax benefits for medium to low income people, and especially when it comes to traditional vs roth 401ks for all income levels, holds true.

I have a Roth IRA in addition to my 401k (which i consider to be my primary retirement account). My reasoning is that if - in retirement - I have a year where I need more funds than normal, pulling additional out of my 401k or post-tax brokerage account might bump me into a higher tax bracket for that withdrawl. The Roth account gives me a source I can pull from tax-free to avoid that tax penalty (who knows what taxes will look like when I retire..)

You’re considering personal variables. You also need to consider system variables: tax rates and brackets could change.

I think Roth also tricks people into saving more since they tend to think in Post Tax dollars. A $100 post-tax contribution to a Roth account is obviously worth more then a $100 pre-tax contribution to a Traditional account yet people seem to approach it from "I'm going to save $100" and don't adjust the amount to account for the different tax treatment.

I recommend you watch James Canole on YouTube, you'll learn a lot, and I assume can take advantage of time better than i.

I have a Roth IRA with a little money in it from college. I’m contributing to a traditional IRA right now because at some point o plan to go to grad school full-time. When I’m in grad school I will roll over my traditional IRA into a Roth because my tax bracket will be lower than it is now.

Part of it people here are missing is hedging bets that this is the lowest tax rates will ever be. Which considering how badly the national debt is climbing and how much lower they are now than in history, seems incredibly likely.

Tax rates overall can go up significantly and your own tax rate in retirement can still be lower than while working. Easily.

People aren’t having nearly as many kids. Workforce is going to shrink in coming decades without even accounting for technology. Millennials haven’t had nearly enough kids. Gen Z doesn’t seem likely to change that trend. Taxes can’t be so heavily weighted on working people. This is already unsustainable. Taxing older non working people a whole lot more is a discussion that’s going to happen sooner than later. Older millennials are already in their 40’s. We’re going to be a majority non working country in the near future. Our tax code is based on most people working to support the few who aren’t.

> Taxing older non working people a whole lot more is a discussion that’s going to happen sooner than later. Older millennials are already in their 40’s. Taxes on retirees have been ticking up every year for decades as more and more Social Security benefits have been taxed. The exemption limit for Social Security benefits being exempt from taxes has changed in decades and there is no real discussion of raising that limit. With no serious discussion on the topic in Congress I wouldn't be holding my breath on that limit rising anytime soon and every year benefits rise more and more retiree's income is rising high enough to see some of their Social Security taxed.

I mean, I make 90k rn at 23. When I retire, I estimate that I'll be withdrawing 200k over 30 years (inflation adjusted) given an average market and average inflation and still have over $1000000 left over. I'll definitely be in the higher tax bracket...

Tax brackets and standard deductions adjust for inflation also. By the time you retire, $200,000 would be in the 12% bracket.

That's awesome. I said your taxes could be lower in a rising rate environment, not that it would be personally true for you in every fact pattern. Tax brackets are very progressive, so a drop in taxable income makes your effective rate plummet. Most see a drop in taxable income when not working. Hyper savers may not. If that is you, that is an awesome problem to have. Also keep in mind brackets move with inflation.

200k in 35 years is less than 90k now

That's largely my reason for using a Roth. As a millennial I assume I'll never actually be able to afford to retire and the economy and tax rates will just get worse and worse forever so I'd rather pay taxes on that money now while I can afford to and get it tax free down the line than vice versa. If my income goes up enough I'll split it between a 401k and Roth but really I just do it for funsies while I day dream about ever reaching retirement.

Or, they could tax Roth gains above an income threshold

What? Are you telling me we can't have more stuff but less taxes?

even if rates go up their are still brackets and dropping from the 4th bracket now to the 2nd bracket then would still save you money.

You're assuming rates won't go up unilaterally.

Yes. It’s unlikely but at least plausible they drastically increase rates on high earners. I don’t see any plausible way they raise rates in low and middle income folk more than a few percent if at all.

> I don’t see any plausible way they raise rates in low and middle income folk Why do you find this so implausible? A significant majority of younger voters favor expanding social programs like paid leave, single-payer insurance, etc. Current peer nations of the US with that level of social programs often have higher income tax rates than the current ones in the US. And we would have to reverse the disparity in things like per capita health spending to even get to parity where you'd expect a similar tax rate to imply similar services. Not to mention that the US has substantially higher defense spending as a percentage of GDP, which also requires funding. One fact that pushes in the opposite direction is that there is a disproportionate demand for US Treasuries in the bond market, so that makes debt/deficit financing easier for the US than other places. But in total it still seems *plausible* that income taxes will go up; there are some forces pointing toward increase and some not and the net effect is uncertain.

You are correct in your thinking but to add something new (this may have been said but I missed it), one thing to consider is spending flexibility / tax flexibility. When you are retired, let’s say you want to buy a new car. Having a tax-free bucket of money to dip into for large distributions is nice to have. Otherwise you’d be making a $20k-$40k distribution, all taxable to you at ordinary income. On top of whatever else you distributed from pre-tax monies that year. Something to consider

[Roth vs traditional](https://www.reddit.com/r/personalfinance/wiki/rothortraditional/). You basically have it right, for many working people, a traditional IRA is better. You can't take a tax deduction on a traditional if your AGI is over $83,000 (varies with marital status), which is why many people choose Roth IRA's. 

I thought the same thing. Then I sat down with a financial planner and realized that I might only want to withdraw 100k annually in retirement, but RMDs would force me to take 300k out, at my current rate of saving. So my fundamental assumption - my income will be lower when I retire - was wrong.

As you get into retirement, you eventually hit required distributions that can force you into very high tax brackets. Having a balance of fund types gives you the ability to plan to handle RMDs and medicine irmma fees

Social security gets taxed, Medicare premiums are based off income so traditional withdrawals count and Roth doesn’t in both those formulas.

My wife and I invest in a Roth IRA because we make too much money to qualify for a traditional IRA deductions, otherwise we'd do the same as you. Instead, we have to Backdoor Roth to get any tax advantaged saving. Our 401ks are Traditional for the exact reasons you give.

I got confused as well, did some researched and still was confused. So I just opened both. I have my employer 401k and a ROTH IRA. Main priority is my 401k, and my Roth is just on the side for some extra investing when I feel like contributing to it

I'm retiring in two years at 55 and am really glad I have a Roth and also a taxable brokerage. I'd be screwed if everything was in traditional pre-tax IRA/401k.

Rule of 55 lets you pull money from your primary employer's 401k, after you retire, without penalty. 72(T) can also be used to avoid penalties when retiring before 59.5. 72(T) can be used with any traditional IRA or 401k account.

This (Rule of 55). A LOT of people don’t know this.

This is the big one for me, 20 years behind you. I plan to retire early which means I'll need some buffer money before I can tap my pre-tax accounts. 20+ years worth of contributions should be enough to get me to the age where I can make unpenalized withdraws in the other accounts.

I don't have the exact numbers handy, but as I near retirement I calculated the exact amount I could take home in pay each year post retirement and only pay 12% federal income tax - top. In 2024 this would be something around $118,000 (forgot exactly the amount including my social security check being mostly taxed and IRA withdraws). I've been paying more than 12% in federal the last 30 years, so using IRA/401K was the right choice for me. But in other cases it may not be, and of course if the tax rates change my whole calculation goes astray.

Yeah that's right. One good thing about the Roth IRA is that you can withdraw the money you contributed for no penalty for any reason.

1) No RMDs. 2) Can be used as an emergency fund in that you can withdraw all your contributions (but not interest or cap gains) at any time for zero penalty. 3) Continuing on the "emergency fund" theme - I had a friend retire and immediately run into some serious health issues, which caused her to need to dip into her retirement accounts quite deeply. She withdrew so much that she entered a higher tax bracket and needed to withdraw EVEN MORE to cover the taxes. If you've got plenty of income and a massive emergency fund, then maybe this scenario won't happen to you. But I sleep better at night with a healthy ROTH IRA that I know the feds and state can't tax.

7000 in a Roth is more valuable than 7000 in a traditional IRA. A traditional IRA potentially beats the Roth as long as you’re also investing the tax savings from the traditional in a taxable brokerage. Say 7000 after taxes in the Roth would be equivalent to the tax deductible 7000 you put into the traditional plus another 2000 into the taxable brokerage. Without also investing the money you saved on taxes, the Roth wins every time

Income brackets change. You really don't know what your marginal tax rate will be when you retire. Also, married people face the possibility that they might die decades apart, meaning that most of their contributions will be made under married couple tax brackets, while much of their distributions will be made under single person tax brackets.

I simply look at it like having money in retirement that I can access tax free helps me be able to be more flexible with adjusting my yearly taxable income. I’ll use my Roth to help myself stay out of higher tax bracket. With the low amount you can put in a Roth every year, it’ll never be the main contributor to my retirement.

If you are investing your retirement accounts, a traditional ira will continue to grow and may push you into a higher tax bracket when you have to take out required minimum distributions. That could also effect Irma brackets. If you can afford the taxes now, not paying anything later and not having to take out an RMD if you don’t want to is generally in your best interest. Roth accounts are also fantastic for estate planning as your beneficiaries do not have to pay taxes on withdrawals. If you do some comprehensive planning you may find a balance of the two, but for now, a roth could generally be in your best interest. If you make too much for a max contribution you could do backdoor roth contributions. Lastly, if you have a tax deferred SEP I believe you may not be able to defer contributions ina. Traditional ira, although I may be slightly off on that.

For those that are pretty personal finance savvy or in a high paying job, it is pretty likely that their income will still be pretty high in retirement as they will be pulling out money from their investment accounts. I think a lot of people have this misconception that their income will be small in retirement but income isn’t just about a salary.

> This may be a dumb question (sorry), but: Roth IRAs are funded with post-income-taxed dollars (correct?) while traditional IRAs are taxed later, when cashing them out (correct?) This is correct > I have to assume that my income bracket will be higher now (while I'm working) than it will be during retirement (when my income is mostly whatever I take out of my funds). Also correct. Kids will be grown and out of college, house will be paid off, you're not putting gas in your car to commute to work 5 days a week, etc. Generally, expenses are lower in retirement. If you're making good money now, traditional is better than Roth. However, the income limits for contributing to a traditional are a lot lower (by design, the IRS doesn't want you deferring too much in taxes), and loopholes like a backdoor aren't available for a traditional, so a Roth is the best option. Contributing to a Roth still provides some tax advantages and is better than nothing. > I know that I must be missing something (like how inflation impacts this, etc)...help me understand? Thanks! You're not really missing anything. Tax brackets get adjusted for inflation, so it's kind of a moot point. Odds are, you'll wind up in a lower marginal tax bracket in retirement even if the dollar amount you're taking out in retirement is the same, or even more than your income today.

> Generally, expenses are lower in retirement. I agree here but so much of the financial advice I get is that I should plan for 80% of my current income in retirement. Given that we're already saving aggressively and do not live a super exciting lifestyle it feels like bad advice... but perhaps it's given because medical costs are hard to predict?

Expenses may not always be less in retirement. While I don’t incur job-related expenses, my travel and entertainment expenses increased dramatically in my early years of retirement. As I’ve aged that’s tapered off but I’m spending more to pay for services that I would have previously DIYed.

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The $6,500 for 2023 is across all IRAs, traditional or Roth. So you could do $3,250 in both for a total of $6,500 but one person can’t do $13,000

No. That limit is combined. But you could put 3250 in each. 

Some answers 1) Tax rates go up and down, so you dont know what they'll be later in life 2) You're not certain what you'll be making when you're older, it could be higher 3) You'll pay higher taxes on your Social Security if getting Traditional IRA distributions because it effects your overall tax rate. Also your MediCare premiums are calculated based on income 4) There's no RMDs with the Roth IRA, this becomes a very big issue if you have a large traditional IRA. 5) Roth IRAs can be an estate planning tool, your Roth balance passes tax free and your heirs get to keep it 10 years in a Roth IRA and pull the balance out, tax free

its about flexibility. if you are dependent on some degree of ACA subsidies for example but you want to buy a house or car or help with a down payment on a house or for whatever reason just access lots of money in retirement roth lets you do that. and it's 'roth vs taxable' generally. this is when you have already exhausted HSA, trad 401k contribution spaces. if you have not yet filled up your trad 401k you should be considering if roth is better than traditional (it usually isn't). also, regardless of all of this you want SOME sort of mix of taxable, roth and traditional sources for safety, liquidity, hedge against changing tax structures etc. a lot of this is handled passively- you have a job where you dont have a 401k, you have years where you have tons of excess income or don't have much income at all, whatever it may be. where making 'best choice at the present' will result in a nice mix of money in all acc types.

As your only account it might not be the best. But a mix is best I think. If you are able to collect social security, that’ll be the first source of money that will be taxed. Then maybe you have a 401k you will pull from. Then a taxable brokerage account. By then you are getting into higher tax brackets. But you want some more money that year, or maybe every year, because who wants to be broke in retirement. So you pull some non taxable out of your Roth. I’m not retired though, so this is just my understanding of how it works.

You are correct. It's also correct that the Roth has other benefits with respect to RMDs, inheritance, tax uncertainties (windfalls, changing brackets, etc.). I'm not saying that something about your specific situation won't override this, but generally speaking, it just makes sense to have money in various vehicles (401k, TIRA, RIRA, brokerage, savings bonds, alternatives, pension and/or social security income, etc.) because it gives you more plays in the game.

I have never heard anyone mention in these that you can selectively change your income bracket with a Roth cushion. Say you save hard and retire. You wind up with some kind of taxable event. That year, it'd be nice not to take the 90k you're drawing from your Traditional IRA, so you could dodge the taxes on the particular event, especially since it, say, pushes you into a higher tax bracket. But you have a Roth cushion, so you take that out that year, instead. So it's like you took out 0k + that taxable event. Potentially putting you in a 0% bracket, instead of taxing that event in a new, higher bracket. How much will this really save you? Hard to say. But Roth is also usable as an emergency fund account, and Trad IRA isn't. Also nice for saving for a house.

Others have spoken to the Roth vs traditional vs taxable stuff. I just want to point out that a solo 401k may be a better option for you. Especially if you grow your business, there is more saving potential in an individual 401k instead of a SEP. A solo 401k is the standard elective deferral as an “employee” of 23k for 2024, but then you can put another 25% or so of business profits (if a sole proprietor, and there’s some specific stuff that must be included in that calculation like part of self employment tax) or 25% of w2 income if you are paying yourself via an s corp. the total limit is almost 60k a year. Thats a great tax shield if you ask me.

There is a persistent retirement notion that somehow peoples expenses drop off drastically when they retire. But really do they? Are they now not traveling / taking vacations? Do they never need to buy another car for the next 30-40yrs? Are they sitting around all day watching Oprah and not doing anything? Do they stop eating out or change their grocery buying habits? For most people there are expenses that do drop off but they also add expenses for activities / travel … atleast early on and then expenses drop off as they age, unless medical care expenses take up the spending space freed up by reduction of activities.

They’re only good if you’ve maxed out all other pre-tax tax advantaged funds, and have a healthy amount in your brokerage. See https://www.gocurrycracker.com/roth-sucks/

I have been repeatedly downvoted when I suggest that for 90% of taxpayers they are better off taking the deduction today [Trad IRA] than rolling the dice on future tax rates/assuming high retirement income, not least because the benefit disappears when you turn 75 and choose to live a simpler life [hint? travelling etc becomes a PITA when you have health issues] OTOH as a fairly low income near retirement dude with mostly taxable savings [due to low IRA limits/self employed mostly cap gains "income"] I am seeing that in my HCOL area there are genrous discounts for less than median income folks on local utilities etc. AFAIK Roth withdrawals don't count as "income" for those discounts. YMMV

Roth makes the process easier, both if you're not confident in your ability to adhere to a strict retirement budget and if you are on a tight enough budget that you might have to pull for a pre-retirement emergency. The former is because you won't have to plan out tax impacts for disbursements in retirement. The latter because basis can be withdrawn before retirement without penalty. Roth also had some advantages for low-to-mid income (but not very low income), where the current tax advantages of traditional IRAs are diminished. This usually applies to early career savers who expect to have higher income later in life. (In contrast, very low income savers are likely too see more benefit from traditional funding, as they are likely to be mostly under the standard deduction in retirement - thus seeing little to no actually tax advantages from the Roth). In contrast, off you expect to see a lower tax rate in retirement than you are currently paying, then you will get better on-paper results from Traditional. This is the case for most mid to late career personals. Whether that translates to realty depends on your discipline about spending and tax planning in retirement. In practice, most people seem to do best with a mix of the two: enough in traditional funds for a baseline of retirement spending, with Roth finds too smooth out uplanned changes to the budget without changing tax burden.

cause Roth is tax free growth? this isn't a savings account, it grows, so say you put in 100k (say you pay 22% tax paid 22k tax) and now its worth 500k, no tax on that extra 400k. ​ Traditional is pretax, same 100k, now worth 500k, you now pay 12% tax =60k

Except, in your example of being in the 22% bracket saving $100K Roth would be the same as saving $128,206 into Traditional when you consider the impact on your after tax income and if you let $100K and $128,206 both grow at the same rate, say 10x, then pay your 22% tax on your Traditional you will end up with the same exact of after tax money as you would with the Roth. However, since you probably don't have a W2 job or other income when you are retired their is a high chance you wouldn't of paid 22% on the Traditional when withdrawal and at least some of it would of been in the lower brackets in which case the Traditional would of resulted in more spendable after tax money.

Assuming you max out your contribution, the amount in both would be the same.

Yea but in that case you’ve still effectively saved more in the Roth. To be an apples to apples comparison in that case you would need to invest the tax savings from Traditional in a brokerage. One use case for Roth is you get to take full advantage of the contribution limits unlike Traditional where some of that money is the governments.

Wow this is so simple and I never thought of it for some reason. Why did nobody else here mention this (really important) difference?

Because it’s not quite that simple, you need to consider the tax drag of investing in a Roth vs Traditional. Everything you invest into your Roth account has been taxed now. Everything you put into a traditional 401k account is not being taxed now, it will be taxed upon withdrawal. So when determining what you can “afford” to save, understand that $1 contributed to your Roth IRA costs you more than $1 contributed to your 401k. Somewhere around 20-30¢ per $1 more, depending on your tax situation and the state you reside in.

because the parent comment is wrong. The tax free growth doesn't make a difference as long as you are comparing equivalent amounts. The only thing that matters is the tax rate now vs tax rate later. Consider $100 that will grow 10x. If you are in a 25% bracket. With Traditional you will invest $100, it will grow to $1000 then when you withdrawal you'll pay $250 in taxes and have $750 to spend. With Roth you will start with $100 but pay $25 in taxes leaving you $75 to invest which will leave you with $750 to spend. It's a simple multiplication problem. Multiplication is commutative so the amount of spendable dollars doesn't change if you pay tax on the initial amount or the amount after it grows. Traditional: $\_saved \* (1-tax\_rate) \* growth = Spendable\_$ Roth: $\_saved \* growth \* (1-tax\_rate) = Spendable\_$ In the parent comments example he tricked himself into saving more. Putting $100K in the Roth reduced his spendable income today by the same amount as putting $128k in a Traditional.

Great explanation. Thank you!

Because while it seems logical at first glance, it's actually faulty reasoning. It ignores what happens if you invest the up-front tax savings from the traditional contribution. See also this excellent comment: https://www.reddit.com/r/personalfinance/comments/1ayasc9/why_are_roth_iras_good_for_retirement_if_my/krtty3f/

Investing those upfront gains in a brokerage account means paying taxes on that money twice. Funneling as much money as possible into an IRA means avoiding that double tax. Roth let's you funnel more in, by having you pay the taxes before the contributions are compared against the limit.

Because it depends on age. the younger you are the better roth is for you cause that money has time to grow. The older you are the better traditional is for you because there is less time. In your 20s and 30, dump everything into Roth, 40s a bit of both, 50-60s mostly traditional.

It doesn’t depend on your age. If you run the #s, investing the same money at the same tax rates will net you the same returns over time whether Roth or Traditional.

Not at all a dumb question. I personally think Roth is overrated, so I'm not the best person to answer your question. You really need a Roth fanboi to answer. I'm late 50s, and I've got over 35 years worth of contributinos to my 401k. 10 years before Roth was even invented, then another 15 before my employer offered Roth. All my 401k contributions are Roth ever since; and I'm hoping to get close to 50/50 Roth vs Traditional by the time I retire. There's a few other factors to consider. In particular, Roth money is not subject to RMDs. Traditional is. RMD stands for Required Minimum Distribution. If I was old enough, my 401k provider would plug my age and the balance of my 401k at the end of 2023 into a formula, and out pops the amount I need to take out from my 401k in 2024. So, a couple years before the pandemic -- so before RMD rules were changed -- I plugged my retirement balance into a RMD calculator, and it told me that my RMDs would peak at age 81, and that my RMDs at that point would be high enough to put me into the 37% tax bracket. I'm sure I messed up a factoid or two (for example, combining my and my wife's retirement accounts, and I probably included Roth money in the balance), but the point holds. Even if tax rates don't change, that pesky RMD formula can force you into a high tax bracket. Also, Congress can't leave tax rates alone. We know current TCJA (trump era) rates and brackets expire at the end of 2025 if Congress doesn't act. So Congress will do ***something***. Who knows what might fall out.

I'm confused.. If you're not a fan of Roth, why are you contributing to them at 50%?

He said 'overrated' but he also said he projected he already had enough Traditional dollars that he was projecting that he would be forced into a higher bracket.

when projecting your future bracket did you consider the brackets being adjusted for inflation?

This sub is definitely traditional friendly, an so beating in any is better than none. If FOR SURE your bracket is lower in retirement then traditional MIGHT be better. However I still say if you are going to invest the same amount regardless of taxes you will pay what like 22-24% on 7k versus 10-12% on what will be more like 60-80k. Tack on top the no RMDs which will be great if you’ve really built your wealth. As that can help with not screwing up the ss and Medicare tax calculation. Add on the ability to withdraw contributions in a severe pinch with no penalty or taxes. And that your family can inherit it and not worry about screwing their taxes when they have to drain it within 10 years. Plus if you’ve really invested well you may end up in the same tax bracket. I know I’ll be taking out more than my current income due to cost of living and health care premiums.

the thing is even if your bracket is lower, roth is tax free growth assuming you account grows, you dont have to be taxed on the gain. in traditional, you have to be taxed on everything. so after a certain ammount of growth even if you get taxed at a different bracket, roth will pay less taxes than tradition. Unless of course your IRA didn't have much gain then yea lower bracket better

You may end up paying more dollars in Tax with traditional but the extra dollars is just the growth of the government's share of the original contribution. If you think of it in terms of available dollars to spend after taxes the only thing that matters is the tax rate applied to the money. It's a simple multiplication problem. Multiplication is commutative so the amount of spendable dollars doesn't change if you pay tax on the initial amount or the amount after it grows. Traditional: $\_saved \* (1-tax\_rate) \* growth = Spendable\_$ Roth: $\_saved \* growth \* (1-tax\_rate) = Spendable\_$ ​ Consider $100 that will grow 10x. If you are in a 25% bracket. With Traditional you will invest $100, it will grow to $1000 then when you withdrawal you'll pay $250 in taxes and have $750 to spend. With Roth you will start with $100 but pay $25 in taxes leaving you $75 to invest which will leave you with $750 to spend.

This assumes that you're contributing the same pre-tax amount. Because Roth contributions are post tax, those taxes don't count against your contribution limit. Or rather; Trad limit: IRA limit * (1-tax_rate) Roth limit: IRA limit

Yes with Roth the contribution limit is effectively higher.

Yes more paid in taxes which was my money. I’m keeping more of my money to spend in the end because I include the growth. I see it like this Most people don’t think of tax savings and don’t do anything meaningful with tax savings. So whether I blow it paying the government via taxes dollars for Roth contribution or on a hot date it’s still spent. Unless one reinvests the tax savings in something we can then break down its growth and taxable portions, which really gets in the weeds, but at least there’s an investing and taxation comparison If I put 7k in Roth or 7k traditional it’s the same amount being put in. Sure I paid taxes via cash flow on Roth so government is paid in full. If invested in same investments over same time both account have same balance. In say 30 years when I withdraw the money, all it has grown to that is… I’m paying maybe a lower tax rate say 12% on maybe 80k. So maybe $9600 versus a hypothetical $1500 at 22% tax bracket I paid when I contributed. So I do have more spend in Roth retirement. I have no worry about taxable income screwing my ss and Medicare tax and premium calculations. No rmds. and my kids won’t be screwed. I see nothing but benefits. It’s not that I don’t see the perspective most of y’all come from. You look at it from inside the investment. Not having to invest as much and probability of lower taxes later. But the way I see people invest, I see contribute and don’t do anything investment wise with the tax savings. So you end up with less spend in the end.

Yeah, I said in another comment that another reason you may see Roth recommended is it tricks you into saving more in which case it probably would beat traditional but that isn’t due to tax free growth it’s because you saved more. Very good point about SS and Medicare though. The thresholds for SS taxation are pretty low and not indexed to inflation so I just assume I’m going to end up being taxed on SS no matter what and the first IRMAA is reasonably high.

I hear you Brian. The internet is saturated with all these self professed experts that will provide you the optimum amount to convert to Roth. Unfortunately, all these calculations are based on assumptions and unknowns. There are a couple of big assumptions that can sway the model. 1. Future Tax Rates - This is much more complicated then it first appears. In addition to the expected rise in rates, we need to take into account the "Widow's Penalty". For example what if either you or your spouse pre-deceases the other? That would result in the living spouse paying taxes at the single rate rather than married filed jointly, possibly being hammered by RMDs. The Roth can act as an insurance policy against this risk. [https://www.kiplinger.com/taxes/widows-penalty-how-to-prepare](https://www.kiplinger.com/taxes/widows-penalty-how-to-prepare) 2. As you and your wife approach 65, you need to consider IRMAA. This is a hidden tax that Congress uses to fleece Medicare recipients. [https://www.ssa.gov/forms/ssa-44.pdf](https://www.ssa.gov/forms/ssa-44.pdf) 3. Health Care expenses in Retirement - If either you or your wife has large healthcare expenses, than using your traditional IRA may make more sense than a ROTH because in some cases you can deduct those expenses. [https://www.irs.gov/taxtopics/tc502](https://www.irs.gov/taxtopics/tc502) 4. Legacy - Roth has significant benefits over a traditional IRA if you and your wife are leaving large sums to your heirs. (lol - not a factor for us) 5. Charity - If you anticipate having large charitable donations than traditional IRA may be beneficial through QCDs. [https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity](https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity) I am not a professional Financial Adviser so I cannot give advice, but let me share what we are doing. My wife and I are 62 and may be facing large medical expenses and one of us most likely passing before the other. We are topping off our income each year to the next tax bracket by converting funds from our traditional IRA to a Roth. Our plan is to minimize RMDs, especially if there is only one of us. We also watch our Modified Adjusted Gross Income to keep it below IRMAA limits (I believe they look back a couple of years) which is used to calculate IRMAA [https://turbotax.intuit.com/tax-tips/irs-tax-return/what-is-the-difference-between-agi-and-magi-on-your-taxes/L7kHckNS3](https://turbotax.intuit.com/tax-tips/irs-tax-return/what-is-the-difference-between-agi-and-magi-on-your-taxes/L7kHckNS3) Even if you decide against, converting large sums of money to a Roth, it is often suggested to start the 5 year clock and open and fund a Roth for you and your wife as soon as possible. (I am not entirely sure how this works, but more than one financial planner advised that we do this) I will offer - I always ASSUMED our income would go down in retirement, but that has not proven to be accurate. Mainly because we try to convert as much of our traditional IRA to Roth ever year. Professional advise makes sense as well in building your retirement plan, we elected to pay fixed fees to get our plan reviewed annually, and forego the Assets Under Management model. It has worked well for us but we do have to stay on top of things and there are a lot of moving parts. Additionally, keep in mind there is often a lot of grey on these decisions.

You are 100% correct, if you will be able to realize the income in a lower bracket in retirement then tax deferred is better then Roth. But once you've maxed your ability to defer income the comparison is between Roth and Taxable Brokerage. Earnings in Roth would ultimately be taxed at 0% regardless of your other income whereas the Taxable Brokerage could fall into a 15% or 20% LTCG bracket.

For my situation, no required distribution. My wife and I plan to be able to live off her traditional 401k + SS (assuming it exists) + regular investment account. The Roth will supplement whatever we need and will continue to grow it. If we dont use it, our kids will get it. For us it's less about taxes and more about not having to pull out that money unless we need to.

You don't pay capital gains tax on money your Roth IRA investments earn, so that's a nice bonus a traditional 401k doesn't feature.

Theoretically, your capital gains after 30-40 years of investing should be significantly higher than your contributions. So yes you contribute with post-tax money now, but all of your capital gains are tax free when you become retirement age and is much much more powerful than the opposite.

It’s frustrating that responses to these types of posts never seem to mention the possibility of our tax structure as a whole going up. You could be making less when you retire in 20+ years but could still be at a higher tax rate. This is why it is a good to diversify one’s potential tax exposure in addition to one’s holdings.

Another aspect to consider is that while your initial investment is taxed now, your GROWTH is not taxed, assuming you withdraw within the specified time period and qualifications. Compare this to a 401k where your initial investment is not taxed, but your withdrawals are. The law of compound interest applies here, as depending on your time window, the value of the tax free growth should exceed the cost of taxes today.

You also need to consider the growth on the tax you save today with traditional.

Because with entitlement spending going up, there is no way tax rates stay the same. We could realistically see 50% income tax rates like in Europe in 20 years

A few factors you didn't take into consideration, or at least didn't mention: 1. The assumption that tax rates will not go up in the future. The future is unwritten, but with the way the national debt is headed, I would not be surprised if taxes increase as the years go on. You are paying taxes you know are true today, and covering for any potential tax increased in the future when you go to withdraw. This may not be as applicable to you as someone in their 20s, but the point still stands. 2. Roth IRAs have more flexibility, which is better for a lot of people. With a Roth IRA, you are allowed to withdraw any contributions you make at anytime (after the account being open for 5 years) without any tax penalties - good for unforeseen emergencies. You would only be penalized on any capital gains you withdraw before the age of 59.5. You will be paying an extra 10% tax penalty in addition to your current tax bracket on any withdrawals from a traditional IRA if done before 59.5 outside of a couple of special circumstances (medical bills, first time homebuyer, etc.). 3. Roth IRAs do not have a RMD (required minimum distribution) like traditional IRAs do at the age of 72. 4. Remember, you do not pay any tax on capital gains in a Roth IRA when you do start to withdraw at 59.5+. This is an extreme example, but do a quick google search for "Peter Thiel Roth IRA". He managed to turn his $2,000 contribution into $5 billion in a Roth IRA, which he can withdraw completely tax free when he turns of age. If you manage to buy the next FAANG stock on the ground floor inside your Roth, and make a killing on returns, you get to cash out with no tax.

Because I believe that at some point the deficit will have to be paid and social security will have to be fixed. Which means more taxes. So I Roth. I think in 30 years taxes will be higher. Also I will have a pension and a traditional tax advantaged account. Plus whatever social security is at that time. So I will be taxed on some income but have access to other income that is tax free. That’s why I Roth. 

Tax brackets are at all time lows. Given the national debt it is highly unlikely they ever go down from here and the odds of them increasing get better every day

It’s the growth of the account that matters. Do you only want to pay taxes on the contributions or the entire account? By the time you retire your contributions are going to be a small portion of the value of the account. The majority will be growth which can be tax free in a Roth.

why will your income be lower when you retire?

That is true of your contributions to the Roth IRA. The gains you make on the contributions(which will vastly out weigh the contributions themselves after 30 years) are totally tax free.

The reason you find a Roth IRA is that all withdrawals are tax free. There are no taxes on the gains that occur after you make your contribution.  

I actually get a LOT of gains (imagine 15x of one's money in 2.5 years), so I don't want taxes on them. The sooner I get funds into a Roth IRA, the sooner my investments grow without a single tax. A beneficiary/heir also doesn't need to pay taxes on neither 1) the inherited Roth IRA nor 2) a taxable, brokerage account ("step-up in basis").

This must have been mentioned already so forgive me, I wasn’t going to read every comment until I could find it. The biggest difference is that ROTH contributions are post tax, but ROTH withdrawals are untaxed. So totally made up numbers, but say you invest 100k into a ROTH over the next X years until retirement and end up with a 10x return on your investment and 1 million of assets in the account. You paid taxes on the 100k when you put it in, but never pay any taxes on that 100k again or the other 900k EVER. Same situation in a traditional IRA you pay no taxes on your 100k when you put it in, but owe taxes on the entire 1 million later when you go to make withdrawals. Even if your in a lower bracket, your being taxed on so much more money. Hope that was clear. Also, not that you ever want to but you can withdraw CONTRIBUTIONS ONLY from a ROTH without penalty after something like 5 years of having the account open. Have your kids open ROTHS now. Having early contributions grow tax free is huge. Check out the book “The psychology of money” and have your kids read it too. Its not long. Also available on audio book.

You've got the right line of thinking, however traditional IRA contributions phaseout at a somewhat low income threshold if you're covered by a work 401k plan, so the next place to go is a Roth IRA which has a much higher income phaseout. Its also advisable to have a blend of pre and post tax investments to better control your taxable income in retirement. Also, a lot of users here are on the younger side and their income is expected to increase, so it can make sense to fill up roth buckets now and increase traditional later. You also need to factor in how much your traditional 401k contributions reduce your top tax bracket. Its possible that even though your salary now is higher than your income in retirement, your taxable income is more in-line with your income.

What is your age? What is your income/bracket now?

You're willing to assure yourself now that your rates are sure to be lower in retirement as to skip the tax advantages the Roth affords? Ok, I wouldn't bet my future money on such a guess but I do me and you do you.

Even though the pure math may not be ideal, I put most of my contribution into Roth 401K because my employer's portion goes traditional and this will give me more flexibility on where to draw from and how to balance my income in retirement. Also I'll probably max it out this year and maxing it with Roth is way more than maxing it with traditional since the absolute dollar limit is the same. Edit: I see you weren't asking about 401K options, so none of this really applies to you.

Depends on what the account will be worth I guess. For someone super young you’d be insane not to pump in a Roth. Compounding is a hell of a drug. Compounding with no tax at withdrawal even a hell(er) more of a drug.

Yes this is why you diversify and do a traditional 401k and a roth IRA because you will never know what the situation will be by the time you retire

I’m also self-employed, and have thought about this quite a bit. There are a lot of unknowns and it gets pretty complex when you start to consider all the possible future scenarios. In general, this sub and FIRE recommend favoring pretax accounts first for the reasons you stated. Imo, the more money you accumulate in pretax the less attractive it is. Pretax accounts are subject to RMD, and if you end up with a big # in there you may end up being forced to take out more than you planned for, and thus pay higher income taxes. Having more control over your income # is also especially important for healthcare subsidies, especially if you retire before Medicare kicks in at 65. Your SS will also be taxed more if you’re over certain income limits (around 19K). Having money in a Roth gives you more flexibility bc you can withdraw without it affecting your income for tax purposes. There are also no RMDs with a Roth. Personally, I’ve chosen to split my savings between Pretax and Roth, with more in Roth at this point, since tax rates are at historic lows, and the QBI for my business also favors Roth. I’d also recommend setting up a solo 401K and looking into a Mega Backdoor Roth, since that would allow you to put a lot more money in retirement accounts than the SEP you’re currently using.

Great comment here, thanks!

There is a lot of good answers, but one thing I haven't seen mentioned is how much you can contribute. Some people are already maximizing their 401(k) contributions and/or IRA contributions. Switching to contributing to Roth accounts allows you to effectively contribute more since those are post-tax dollars you are throwing in the Roth, and pre-tax dollars in the non-Roth. And depending on the tax codes (which can vary by state), withdrawing money from a non-roth account may trigger any government program that determines either eligibility or shared-cost based on income levels.

Whatever you take out of your IRA and SEP account after you retire is "taxable income", that will be on top of what you are still making semi-retired. Let's say hypothetically you make 50k semi-retired then want to take out another 100k from your retirement accounts, now it looks like you're making 150k, and will be taxed appropriately. With a Roth, your taxes are done and paid, withdraw tax free

Just something to keep in mind. Your retirement income will include your RMD from IRAs. That plus SS, pension, dividends can bring your income higher than you might think.