Help me decide between traditional 401k vs Roth 401k

Brindle77

Brindle77

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I'm 47, married, and filing jointly in the 22% tax bracket. My retirement savings are just over seven figures.

My employer provides a 401(k) plan with matching contributions, which are always tax-deferred.

Right now, my retirement portfolio is divided like this: 43% is tax-deferred, 19% is in Roth accounts (tax-free), and 38% is in taxable accounts.

I'm maxing out contributions to my Roth IRA, my spouse's Roth IRA, my HSA, and my 401(k). For the 401(k), I split my contributions about 50/50 between the tax-deferred option and the Roth (tax-free) option.

I'd definitely appreciate the short-term tax savings of going fully tax-deferred on the 401(k), but I can't shake the feeling that taxes will go up in the future. Because of that, I'm focusing on building up my tax-free (Roth) bucket since it's currently the smallest.

One strategy I’ve heard is to go all-in on tax-deferred for now, then during early retirement, live off taxable accounts while converting as much as possible from tax-deferred to Roth when I'm in a lower tax bracket. Is that the typical advice? What approach are you taking?

Thanks for your input!
 
I’m also in the 22% tax bracket and have wrestled with this decision myself. Right now, the biggest factor for me is the American Opportunity Tax Credit (AOTC) for my daughter’s college expenses. I want to contribute as much as I can to my Roth 401(k) (currently at 30% Roth, 70% tax-deferred), but I make sure to manage it so I can still qualify for the education credit by keeping my AGI under $160K.

Another consideration for me is that I expect my retirement tax rate to be no lower than the top of the 12% or 15% brackets (I plan to retire in two years). A portion of those lower brackets will likely get used up by Roth conversions in the future. So, for me, it feels like a toss-up: pay 22% now or face 22%/25% later, though I’d probably have slightly lower state taxes in retirement.
 
I’m currently in the 22% tax bracket, and I’ve decided to max out my Roth contributions until the end of next year, before the bracket goes up to 25%. After that, I plan to switch everything to Traditional. I expect my tax rate in retirement will be similar, just at the higher end. Since I live in a state with no income tax, I’m not sure how that will change when I retire elsewhere.

One big difference is that my Roth and deferred accounts are nearly the opposite of yours—I’ve already accumulated quite a bit in Roth. So, focusing more on Roth doesn’t make as much sense for me, but it might be a better strategy for you.
 
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Things to keep in mind:

  1. Total amount in tax-deferred accounts: The balance between taxable, tax-deferred, and Roth accounts isn’t as important for this decision.
  2. Pension: If you have a pension, it might make more sense to put more into Roth, as the pension income can push you into a higher tax bracket.
  3. Retirement age: Your retirement age impacts how long you can do Roth conversions before required minimum distributions (RMDs) kick in and before you need to start paying for health insurance.
  4. Health insurance: Consider how you'll cover health insurance if you retire before you’re eligible for Medicare.
The key factor in this decision should be how your future tax rate compares to your current tax rate. If you expect your tax rate to be lower in retirement, there’s less reason to focus on Roth contributions now.

Even if tax brackets go up in the future, what matters most is your tax rate. Many couples, even wealthy ones, end up in the 12% or 15% tax bracket in retirement. So, it often doesn’t make sense to convert at 22% now if you can wait and convert at 12% or 15% later.
 
The decision between Traditional and Roth depends on the tax rate you save now compared to the one you expect to pay when you withdraw the funds later.

You can start by using a simple method to estimate your future marginal tax rate. While there are more complex approaches, let’s begin with a basic one. What range of possible outcomes do you get from that?
 
Zibra_4 said:
Things to keep in mind:

  1. Total amount in tax-deferred accounts: The balance between taxable, tax-deferred, and Roth accounts isn’t as important for this decision.
  2. Pension: If you have a pension, it might make more sense to put more into Roth, as the pension income can push you into a higher tax bracket.
  3. Retirement age: Your retirement age impacts how long you can do Roth conversions before required minimum distributions (RMDs) kick in and before you need to start paying for health insurance.
  4. Health insurance: Consider how you'll cover health insurance if you retire before you’re eligible for Medicare.
The key factor in this decision should be how your future tax rate compares to your current tax rate. If you expect your tax rate to be lower in retirement, there’s less reason to focus on Roth contributions now.

Even if tax brackets go up in the future, what matters most is your tax rate. Many couples, even wealthy ones, end up in the 12% or 15% tax bracket in retirement. So, it often doesn’t make sense to convert at 22% now if you can wait and convert at 12% or 15% later.
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I agree with you.

For most people, contributing to a traditional tax-deferred account is likely the better option, as they’ll probably be in a lower tax bracket when they retire.

What really matters are your personal circumstances: your expected tax rate in retirement, how much you already have in tax-deferred accounts, whether you have a pension, and other factors specific to your situation.

For more insights, check out this blog post from TFB: The Case Against Roth 401(k): Still True After All These Years.

Also, you can review this Wikipedia article for examples on the differences between Traditional and Roth accounts.
 
You're almost there! If the options are pretty similar, it probably won’t make a huge difference either way. When I’m unsure, I tend to prefer getting the tax break now rather than later. Plus, it gives you a bit more money to enjoy in the meantime.
 
Brindle77 said:
I'm 47, married, and filing jointly in the 22% tax bracket. My retirement savings are just over seven figures.

My employer provides a 401(k) plan with matching contributions, which are always tax-deferred.

Right now, my retirement portfolio is divided like this: 43% is tax-deferred, 19% is in Roth accounts (tax-free), and 38% is in taxable accounts.

I'm maxing out contributions to my Roth IRA, my spouse's Roth IRA, my HSA, and my 401(k). For the 401(k), I split my contributions about 50/50 between the tax-deferred option and the Roth (tax-free) option.

I'd definitely appreciate the short-term tax savings of going fully tax-deferred on the 401(k), but I can't shake the feeling that taxes will go up in the future. Because of that, I'm focusing on building up my tax-free (Roth) bucket since it's currently the smallest.

One strategy I’ve heard is to go all-in on tax-deferred for now, then during early retirement, live off taxable accounts while converting as much as possible from tax-deferred to Roth when I'm in a lower tax bracket. Is that the typical advice? What approach are you taking?

Thanks for your input!
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This is a complex situation for you. I’m guessing you have around $500k in tax-deferred accounts. In 20 years, that might grow to about $1.5 million in real terms (possibly anywhere from $1 million to $2 million). With a 4% withdrawal rate, that would give you $60k per year, assuming that’s your only income.

At that point, you’d likely be in the 12% (or 15%) tax bracket, which would suggest traditional contributions might be the better option. However, things get more complicated when you factor in Social Security.

If your combined Social Security is below the midpoint, your tax rate would be 12%. If it’s above that, it could go up to around 22%, and potentially higher than that, up to 40%. So, a lot could change before then, making it tough to predict.

If it were me, I’d consider these options:
  • 100% traditional
  • Maybe 50/50
  • 100% Roth until 2026, then switch to 50/50 or 100% traditional
Any of these could work, and time will tell which is best. Right now, I wouldn’t go for 100% Roth.

A big factor is whether you plan to retire early and can do Roth conversions during a period where you don’t need to worry about managing your ACA income for subsidies (which is really hard to predict right now). If you can do that, it would lean toward more traditional contributions.
 
Brindle77 said:
I'm 47, married, and filing jointly in the 22% tax bracket. My retirement savings are just over seven figures.

My employer provides a 401(k) plan with matching contributions, which are always tax-deferred.

Right now, my retirement portfolio is divided like this: 43% is tax-deferred, 19% is in Roth accounts (tax-free), and 38% is in taxable accounts.

I'm maxing out contributions to my Roth IRA, my spouse's Roth IRA, my HSA, and my 401(k). For the 401(k), I split my contributions about 50/50 between the tax-deferred option and the Roth (tax-free) option.

I'd definitely appreciate the short-term tax savings of going fully tax-deferred on the 401(k), but I can't shake the feeling that taxes will go up in the future. Because of that, I'm focusing on building up my tax-free (Roth) bucket since it's currently the smallest.

One strategy I’ve heard is to go all-in on tax-deferred for now, then during early retirement, live off taxable accounts while converting as much as possible from tax-deferred to Roth when I'm in a lower tax bracket. Is that the typical advice? What approach are you taking?

Thanks for your input!
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Don't jump to conclusions too soon—there's a lot of time between 47 and 67, and things can change.

For now, just keep contributing to your pre-tax 401(k), Roth IRA, and HSA while you're still in the 22% tax bracket. When your 401(k) balance hits over $2M, then you can reconsider your strategy. For instance, if you retire at 60, you could withdraw from 60 to 70 and stay in a lower tax bracket (12-15%) before Social Security kicks in. Plus, taxes are a bit lower for those 65+ due to the higher standard deduction.

If your income is over $230k a year, you'll likely be in a higher tax bracket than 22%. But, what's the chance of that happening?

If you do end up in a position where you're withdrawing $230k+ in retirement, that's a nice problem to have! It's much better than being in the situation where you're paying higher taxes now than you need to.
 
Don't forget about state taxes: where you live now versus where you might retire can make a big difference. For example, if you're in Texas now but plan to retire in California, a Roth IRA could be more attractive. On the other hand, if you're moving from California to Texas, traditional IRAs might make more sense.

We currently live in a state with moderate income taxes, but we might retire in a high-tax state, which has made us lean toward Roth IRAs.
 
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Realistically, it's unlikely that our income will exceed $230k in a year. My concern is that RMDs from my pretax accounts could eventually become larger than I'd like, pushing me into a higher tax bracket. But I'm not sure how to predict if this will actually be an issue.

I really hope I won't need to tap into my Roth IRAs; I want to leave them to my children as an inheritance.

Ideally, I’d like to retire between 55-60 and live off a mix of taxable and pretax assets, while managing which tax bracket I’m in. I might also consider converting some traditional IRA funds to Roth if I can stay within the 15% bracket.
 
Brindle77 said:
Realistically, it's unlikely that our income will exceed $230k in a year. My concern is that RMDs from my pretax accounts could eventually become larger than I'd like, pushing me into a higher tax bracket. But I'm not sure how to predict if this will actually be an issue.

I really hope I won't need to tap into my Roth IRAs; I want to leave them to my children as an inheritance.

Ideally, I’d like to retire between 55-60 and live off a mix of taxable and pretax assets, while managing which tax bracket I’m in. I might also consider converting some traditional IRA funds to Roth if I can stay within the 15% bracket.
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Retiring between ages 55-60 gives you several years before Required Minimum Distributions (RMDs) start, allowing you to make Roth conversions while you're still in a lower tax bracket.
 
Brindle77 said:
Realistically, it's unlikely that our income will exceed $230k in a year. My concern is that RMDs from my pretax accounts could eventually become larger than I'd like, pushing me into a higher tax bracket. But I'm not sure how to predict if this will actually be an issue.

I really hope I won't need to tap into my Roth IRAs; I want to leave them to my children as an inheritance.

Ideally, I’d like to retire between 55-60 and live off a mix of taxable and pretax assets, while managing which tax bracket I’m in. I might also consider converting some traditional IRA funds to Roth if I can stay within the 15% bracket.
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It's highly unlikely to face this scenario. Let me break it down with an example to give you a clearer understanding.

Let's say you have $1M in your 401(k) right now. If we assume a 5% real return and 3% inflation, your total return would be 8%. While some might argue that these numbers are optimistic, I'm using them as a more extreme example to illustrate the potential RMDs and tax rates.

After 14 years, with additional pre-tax contributions, the amount will be just under $2.5M in real terms. I used this calculator:
smartasset.com

Investment Return Calculator - Growth on Stocks, Index & Mutual Funds

By entering your initial investment amount, contributions and more, you can determine how your money will grow over time with our free investment calculator.
smartasset.com smartasset.com

At age 72, the RMD rate is 100 divided by 27.4, which equals 3.65%. So, the RMD in dollars would be 3.65% of $2.5M, which is about $91K.

Remember, tax rates are adjusted for inflation, so these calculations are in real dollars, not nominal dollars.

Even with generous assumptions and high returns, it's very difficult to exceed the 22% tax rate (i.e., earn over $230K per year in income).

And keep in mind, we didn't even account for any Roth conversions between ages 60 and 70.
 
Jet9Zorb said:
It's highly unlikely to face this scenario. Let me break it down with an example to give you a clearer understanding.

Let's say you have $1M in your 401(k) right now. If we assume a 5% real return and 3% inflation, your total return would be 8%. While some might argue that these numbers are optimistic, I'm using them as a more extreme example to illustrate the potential RMDs and tax rates.

After 14 years, with additional pre-tax contributions, the amount will be just under $2.5M in real terms. I used this calculator:
smartasset.com

Investment Return Calculator - Growth on Stocks, Index & Mutual Funds

By entering your initial investment amount, contributions and more, you can determine how your money will grow over time with our free investment calculator.
smartasset.com smartasset.com

At age 72, the RMD rate is 100 divided by 27.4, which equals 3.65%. So, the RMD in dollars would be 3.65% of $2.5M, which is about $91K.

Remember, tax rates are adjusted for inflation, so these calculations are in real dollars, not nominal dollars.

Even with generous assumptions and high returns, it's very difficult to exceed the 22% tax rate (i.e., earn over $230K per year in income).

And keep in mind, we didn't even account for any Roth conversions between ages 60 and 70.
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Thank you for this. It really helped me understand things better, and I was able to follow the explanation easily. After considering everything, I’ve decided to switch my future contributions back to 100% Traditional.

I appreciate all the thoughtful comments and feedback in this thread.
 
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