mrken30

This is an interesting article for anyone contributing to ROTH 401k or IRA. Gives a convincing argument to only invest in traditional 401k/IRA, This argument may be different for people who are having to cash out their traditional IRA in one go after moving back to the UK

Traditional IRA vs. Roth IRA - The Best Choice for Early Retirement

Owen778

In general, you are better contributing to a traditional 401k/IRA than Roth if you expect to have less income tax due in retirement than while you're working. This is the situation for nearly everyone, but there may be a few exceptions.

It is also possible to contribute to a backdoor Roth IRA, on top of traditional (or Roth) 401k contributions, but you need to make sure the process and tax-reporting is correct, otherwise there is no advantage.

tom169

I agree with this generalization.

Backdoor Roth is only worth considering once you earn too much to contribute to a Roth IRA.

For the majority of Americans they can contribute to a 401k and Roth IRA without any complexity.

robin1234

Yeah I'd agree with this. One very good reason to contribute to a Roth is that you've maxed out on the contributions to your 403b (or 401k or whatever.)

Roths are great, they are exempt from RMD at age 70. So they are a good vehicle for untouched savings, with growth exempt from tax, that can form the core of what you leave your heirs after death (but also a rainy day fund for late in life things.)

dc koop

With a Roth you do not have to start withdrawing a certain amount each year after 70-1/2 years of age for tax purposes.
If you do withdraw money it's not taxable.

mrken30

Your employer may also have a 457 plan available, once you have maxed out 403b and ROTH IRA. To be honest I don't know many people that max out 401k, ROTH IRA and HSA, let alone 457


You can also use ROTH money for education I believe and maybe first house purchase.

RedApe

Unfortunately one's ability to predict whether or not one will pay more taxes in retirement is inversely correlated with the benefit of making the decision.

When you are older you can make a good estimate of whether your taxes will be higher because of various sources of income. But if you determine that your post-retirement income is going to push you into a higher tax bracket it is generally too late to substantially push investments into a ROTH post-tax IRA.

When you are a younger worker you may think that you will never be in such a situation and thus go the Traditional 401K route, Pre-Tax. But if you do reach a situation in which you retire at a vastly higher tax bracket, then having a large fund that is tax-free (or that wouldn't contribute to the taxable income if you withdraw it) might be a wonderful option.

Ultimately it might make sense to diversify. Have both accounts and try to contribute to the ROTH up to the maximum of one's current tax bracket, and then the rest into a Traditional IRA or 401K. Then when one is of age that one needs the funds one can then navigate withdrawals from either. Remember that one is required to begin Mandatory Withdrawals at age 70 1/2 and these can come from either the pre-tax or post-tax account.

As well, if one is already charitable, or hope to be, if one withdraws from ones retirement account and immediately applies the amount to charity one can have that amount deducted from income. So it's smarter to donate to charity this way than from one's bank account.

Distributions from Traditional and Roth IRAs are the only ones that are tax free. Distributions from employer-sponsored retirement plans, including simple IRAs and simplified employee pensions (SEPs), aren’t qualified charitable distributions; nor are distributions from Keoghs, 403(b) plans, 401(k) plans, profit sharing and other plans. But.....

One can roll-over from one of those non-qualified plans to a qualified plan...to do a two step to qualify: (1) Roll over a non-qualified pension plan into a qualified IRA. That’s generally tax free (make sure that’s so). (2) The qualified IRA then makes the distributions directly to the charity.

robin1234

RedApe, some of the information in your lengthy post is just plain wrong. You might want to look at it again and reconsider it.

Pulaski

Some bits are certainly confusing - and appear to have general applicability, but I think are specific to certain circumstances, but RedApe hasn't made that clear - specifically the section about charitable contributions from different retirement savings plan types.

RedApe

Which parts and why?

For example: I took the material regarding the the charitable contributions and roll-overs almost verbatim from an IRS site.

And we all know that younger individuals have less information about their future tax brackets than those nearing retirement.

I happen to be in a profession that did not have major salary increases (i.e. wage stagnation) for almost two decades. I did, however invest in a pre-tax 401K. Thus, with social security my post-retirement income will be substantially greater than my current taxable income. If I had invested in a post-tax IRA I would have limited my post-retirement tax liability.

Pulaski

I think your sixth paragraph should be indented under the fifth, because (I think) your sixth paragraph is talking about charitable contributions funded by retirement funds, not distributions from retirement funds in general. (?)

RedApe

The roll-over from the taxable to the non-taxable IRA, as I understand it, can only be done for the purpose of transferring that money to a qualified charity (this is called a Qualified Charitable Distribution). It cannot be rolled-over otherwise without paying the tax in the transfer.

As well, by doing this you cannot claim THIS QCD as Income. If it is not "income" it cannot be used as a charitable deduction.

You can, of course, transfer your Mandatory Distribution from a taxable 401k to a charity. This can be claimed as a charitable contribution. But the RMD will be taxed as income.

So the choice is...not having the RMD/QCD count as income...or apply it as a deduction.

You cannot do both.

Anian

Did this thread really get this far without anyone predicting a change in the future tax rates? The big advantage of a ROTH is that you don't have to worry about taxes going up (they certainly won't go down), even if the cynic would say that they'll just tax a ROTH to make up the difference.

Pulaski

When so many Americans have little or no retirement savings I think that the tax issue, while an important consideration, is really only the icing on the cake. .... In other words, you need to ensure that you will have sufficient retirement income before you worry too much about how much tax you will have to pay.

mrken30

I don't think it's just Americans. I think the UK retirement situation is much worse.

Over the last 30 years , I would say income tax rates have come down on the whole. However sometimes tax rates don't really go up or down, they just get played with. Such as income tax will go down, property tax and sales tax will go up. ROTH savings are only affected by income tax.