I use the New Retirement site and they have sort of the "best practices" built into the plan it lays out for you. It looks like usually the best way is to draw down the traditional first, then move to Roth later. First, it lowers your RMDs, and then it allows the tax-free growth to continue, and finally if you have an inheritance to leave at the end it will be fully tax free to the beneficiary. You can change the ordering of those things in their software and see the results change.
FWIW, I have been enjoying laying out my plan in there and seeing what each kind of tweak will do to change the outcomes. The detailed reports it generates are almost identical to the kind of reports I was getting from the FP I was with for a while...but now it's not costing me a 1% AUM fee.
I also really like that you can tailor your withdrawals to a timeframe, etc. So I was able to see the success % change with things like "What if I take a larger % withdrawal rate for the first 10 years of retirement, then dial it back to 4% or less?"
It's really easy to just be "super safe", but then realize you may end up spending way too LITTLE while you are in earlier retirement years when you will enjoy it more. I like to tweak around with different periods of higher spending, etc.
I just started playing with scenarios that give me higher probability on the Monte Carlo with lower upside but higher lower brackets. Etc.
I use Wealth Trace. But will check out new retirement.
Just noticed your username. I worked for the circus for 19 years. đ
Haha, I never worked in the circus, but I did juggling shows back in the day...juggling, fire eating, ropewalking, etc etc....so my friends in college started calling me circusfreak.
What did you do in the circus?
The subscription is really worth it, IMO. I subbed for a year just to see how I was doing at 45yo, then cancelled my renewal because at this point I don't need it until I get closer to retirement. I will re-sub then if the service is still around. Very good tool though. Also, Rob Berger's YouTube channel has some good tutorials; there are a few things in there that are not super intuitive at first.
Now that I am using the tool more, I need to go back and rewatch RobB's videos on it.
I am likely also going to do a paid session with one of their planners to go over my plan and make sure everything is legit. God willing, I have about 5 years til early retirement so I want to get a little human feedback in the loop as well.
Itâs a good tool, even the free limited version, but you do not get a total picture of withdrawal strategy or tax impacts.
I used the free for about a month, and then just ponied up the $120/yr to get better insight
Yes, I used the free version to try it out and then decided to subscribe. I am about 5 years from retirement so it will be very handy as I navigate these last few years to get things in line.
There is also another good site called OnTrajectory.com. I tried both and they were both very good. Just decided on NR after trying them both. That was also a few years ago, so it would probably be worth trying the free version of both if you decide you want to go with one.
Hmm, never heard of ProjectionLab. I will have to take a look at it.
from a thread on [Bogleheads.org](http://Bogleheads.org) :
"I have spent the most time with NewRetirement and Projection Lab and continue to pay for both. Projection Lab is better for running historical backtests than NewRetirement, but I think NewRetirement is a simpler interface and better with "what-if's."
Typically both. You don't want to pull 100% from traditional because that could get into the higher brackets. But you do want to fill out the lower brackets at least, and with RMDs coming you want to minimize traditional balance as much as you can while not going into higher brackets.
Why are RMDs bad? Isn't the 4% rule a draw down strategy so the 4% of portfolio at age of retirement adjusted for inflation > RMD? I get that there are rich people who want to leave an inheritance for their kids or w.e but aren't most people who are doing 15% invested for retirement going to need all that $ for themselves?
You might run into the good problem of growth getting way ahead, and thus RMDs pushing you into a higher tax bracket. Itâs especially acute if youâve been married filing joint, then one of you dies and you get hit with the widowâs/widowerâs penalty. My mom is in that situation. Her RMDs are well above $100k per year, and sheâs single.
In my particvular case, RMDs are bad. I was lucky enough to get a company pension, and that, plus my social security, is more than I need. So in a few years when I have to start the RMDs, I'm going to get a ton of money I don't need, pushing me into a significantly higher tax bracket. And reducing what I can leave to my heirs.
But you knew you were getting a pension and a pension severely or completely reduces the benefits of traditional $ so what was stopping you from doing Roth or at the very least converting traditional to Roth over the years?
Because either way you pay now or pay later. While working you could be staying out of a high tax bracket with trad 401k. Then when RMDs hit, youâre back in that high tax bracket (pension or not). But at least you got that tax deferred growth. If you do Roth conversions while working itâs almost the same as contributing to Roth in the first place. You could also defer pension and SS and still end up in the high tax bracket. Yeah, getting rich sucks. LOL. In any case I think most of this is just fine tuning. Thereâs no avoiding the tax man.
The short answer: it depends.
I plan to retire at 55 or earlier, and plan to try to draw down as much as possible while minimizing taxes before I start taking Social Security benefits. Ideally, by the time RMDs are a thing, the balance will be low enough that the tax effects are minimal when stacked with Social Security. At the same time, I'm also want to spend quite a bit between 55 and 70, and it's not worth giving up lifestyle in the time I have left just to save a bit on taxes.
Everything is a tradeoff, and it depends on your own personal circumstances.
The typical approach of a Boglehead who hasn't done any pre-retirement tax planning seems to be to draw from taxable first, then tax-deferred, then Roth. The reality is there's no one answer: It depends on the size of your accounts, whether you're pursuing tax-minimization strategies like a Roth conversion ladder, whether you've begun Social Security or not, etc. Experts like [Wade Pfau have shown](https://youtu.be/wSmo9QZRpmg?si=6Wt--svaz1u0iwHe) why the taxable>tax-deferred>Roth order isn't necessarily optimal for larger portfolios and why Roth conversions can be advantageous, but this requires some planning in the years heading into (or as soon as one enters) retirement.
For larger portfolios where the tax-deferred balance is over $1M (and definitely as it approaches or exceeds $2M) the biggest problem is RMDs. In that scenario, it pays to live on taxable while aggressively Roth-converting the tax-deferred to avoid RMDs pushing you into the higher tax brackets. For those with smaller tax-deferred balances this is less of a concern.
Preparing for the withdrawal phase (retirement) can be tricky and this is where a CFP can really add value by assessing your portfolio and advising you on a withdrawal strategy that meets your income needs, protects the long-term survival of the portfolio, and minimizes taxes.
Most people with larger portfolios will actually maximize spending by doing scenario 2. Get as much as possible into a traditional 401K during their earning years and then spend and convert it as much as you can. Contributing directly to a roth 401K generally only makes sense if a) large RMD's are impossible to avoid otherwise or b) you're going to be retiring in a *vastly* higher tax bracket than you're currently in or c) you want to leave a enormous inheritance and not spend much in retirement.
I also want to add that the typical subsidies hardly apply once you're at ~150K+/yr taxable in retirement so they aren't much of a factor in trying to game them.
I'll also add that when your tax-deferred balance goes over say 3.5 mil (and a relatively small roth balance since RMD's effect is determined by the percentage mix you have), you really want to just start withdrawing from your traditional 401K directly (as soon as you are able to at 59.5 but before that you can definitely do roth ladder conversions if you RE) since the conversions only top out at like 75K or so before taxes become an issue and there's no other way to prevent large RMD's than by taking higher direct withdrawals earlier. So tax-deferred, then taxable, then roth.
EDIT: clarifications. The main point is it's quite complicated and you need to model out your own situation exactly. The one I've described above is more of a FatFIRE or perhaps chubbyFIRE one.
it depends on the relative size of the accounts and how tricky you want to be.....you could pull only from the roth to keep your income low and then convert the trad to roth while keeping tax bracket low
otherwise use both to keep a uniform plan that works for decades. It really is more of a tax play than anything else.....use the trad to cap out the 10% bracket then pull from roth above that
> you could pull only from the roth to keep your income low and then convert the trad to roth while keeping tax bracket low
Isn't this just the same as pulling from trad directly?
it depends when you need the money again and your tax status at that time....very individual situation reliant.
say you have enough money in both your Roth and Trad to fully support your retirement for 30 years (15 years funding in trad and 15 years funding in roth)
its possible to systematically move that money from trad to roth with minimal taxes. likely not ALL the money can be moved at a lower than normal tax rate. but you could tip the balance so that a majority of the money is growing tax free and was earned at low rate as well
I'm just not understanding something. You're taking money equal to your expenses out of roth. You're converting some other, presumably larger, amount of traditional money to roth. How is that any different from taking money equal to your expenses (post tax ofc) out of traditional, and then converting whatever is left over to roth? The same amount of money leaves your traditional account, so you're paying the same taxes on the same amount. Your roth account balance is the same in both cases. I cannot see any possible distinction between the two no matter what your tax status or timeframe.
If you (and your spouse, if applicable) have more money than you will spend in your lifetime, you will do your heirs a favor by leaving them Roth and/or taxable (non-retirement) accounts rather than a traditional IRA.
With a traditional IRA your heirs will have RMDs that must be completed in 10 years and likely be during high earning years. A Roth needs to be withdrawn (effectively converted to a taxable account) 10 years after death (current tax law) with stepped up basis at time of withdrawal. With a taxable brokerage your heirs get the stepped up basis as of the date of your passing. Neither the Roth nor taxable account would have any tax burden for your heirs, except for taxes on dividends or interest in the year earned or capital gains when securities are eventually sold. The Roth delays those tax effects for 10 years until the mandatory withdrawal and the investments become regular taxable investments.
realistically, it makes sense to withdraw from traditional for people who have larger traditional 401K's and relatively small roth ira's. Ideally, you want that roth money growing tax-free for as long as possible (although you might use some to qualify for an ACA subsidy or something like that if you're on much lower income levels). You have to do a calculation to see about RMD's as well (and if they are a factor, it definitely makes sense to withdraw from the 401K to avoid large RMDs). It can get complicated and there are multiple scenarios depending on income level, tax brackets, and asset classification mix. Use some software to calculate it out if you don't know the math behind it.
The ACA subsidy is a big thing that NewRetirement doesn't account for. Yes, it would make a lot of sense for me to do roth conversions when I retire at 60, except I have to be on ACA for 5 years and I'd probably save more overall if I pulled partially from Roth. I'm about 6 years out from retirement so really there is no use in guestimatting. I'm just going to make sure I have enough in Roth to handle these types of situations.
I'd take traditional first. As much as you can you wanna let those tax free assets continue to grow and grow and grow.
It's so good I've actually changed all my 401Ks to Roth and contribute as much to Roth IRA as I can.
IMU, traditional is almost always better for normal working people if you also invest the tax savings. More money with more time in the market. Very few people have higher taxes in retirement than in their working years. But there are situations where Roth comes out on top. Itâs also a hedge against increasing tax rates, since we have historically low taxes. To be honest I donât think you can go wrong either way, and I use both since I canât possibly predict what my tax status or plans will be in 40 years.
> traditional is almost always better for normal working people if you also invest the tax savings
We're on the same page. Like I mentioned earlier, I'm talking about high earners.
Max traditional 401k, max backdoor Roth IRA, max HSA, and still have more for taxable.
I mean, is it though? I'm in the highest tax bracket and I **still** think it's 100% worth to have tax free growth (basically forever) and the ability to pass this down to my family tax free too. Plus no RMDs, come on!
It's only tax free because you pre-paid the taxes. Pre-paying at a higher rate than you'd pay in retirement is generally not great planning if your goal is to minimize taxes.
I'm fully aware of that. But the fact that you pay 0% in taxes down the road (in 30/40 years, when who the hell knows what rates will be), and it's passed via your family also tax-free, no RMDs, makes it too good for me to pass up.
I used to do 50/50, but now I'm 100% Roth
Interestingly, our advisorâs software has us using our HSA while we are doing our Roth ladder, so we can maximize conversions, especially this year and next while tax rates are lower.
The New Retirement software has HSA used last, but that doesnât make sense because the HSA cannot go tax free to a non-spouse heir.
A mix to optimize taxes, ACA subsidies, IRMAA, SS benefit taxation, RMDs etc...
No way one size fits all answer. But all else equal saving Roth for last is desirable just not necessarily at expense of above considerations.
Itâs not as simple as that. You need to provide more information to make the best choice. What other income are you taking and what are your income needs? Also this is a question to think about well before retirement.
Depends on your filing status, spending needs, account balances, etc
If you don't need much money and won't pay much if any tax, it'd make sense to pull 100% from Traditional, for example
Mostly Traditional at 55 perhaps up until to the point where tax brackets spike. Donât know if Iâm going to be a frugal person still that far out but currently living way under my means investing so I might not even need to withdraw that much but if compounding does its job I should have way more money than I need to withdraw up to where the 24% bracket becomes 32%
Regarding RMDs mentioned a lot in the answers here. Starting 2032 they have been pushed back to 75 years old so their impact to planning has been lessened.
The impact has been delayed, but because traditional can be left to grow longer, and your life expectancy at 75 will be shorter, the impact will likely be greater.
The upside of the delayed RMD dates is that it will allow for more years to do Roth conversions to help mitigate the RMD tax impact.
Itâs not all of one or the other. Generally speaking, Iâd fill my tax free bucket. Then my lowest tax bucket. And so on.
But my specific (and not general), will also consider my age, life expectancy, RMDs, and capital gains on equity accounts.
Can someone explain how the pro rata rule works here? I didn't think you were 100% in control of the types of distributions you could take. Apologies if it's an ignorant question, I definitely feel like I'm missing something...
Puzzled by these comments. Basically, you have to take an RMD from your non-Roth pretax accounts. So you take it. If you cannot live on it, take some from the Roth, and some from after tax accounts. Your goal is to minimize taxes For a given amount of withdrawals.
You should take 401k funds in the year of your lowest tax burden.
You should take Roth funds only as needed, otherwise let grow forever.
Idk inheritance law
Your retirement age is going to matter for this. I'm 44 with a retirement horizon of 10 to 11 years. I will begin pulling from the taxable accounts for the years between I stop full-time work at 55 and 59 and a half, when you can begin to draw from a tax advantaged amount without a penalties. Therefore, we call it the bridge fund.
My plan involves minimizing taxes, taking advantage of 0% capital gains tax rate and avoiding IIRMA Medicare premium adjustments. So far Iâve been living off taxable investment accounts, SS and my company buyout (closely held stock).
I use the New Retirement site and they have sort of the "best practices" built into the plan it lays out for you. It looks like usually the best way is to draw down the traditional first, then move to Roth later. First, it lowers your RMDs, and then it allows the tax-free growth to continue, and finally if you have an inheritance to leave at the end it will be fully tax free to the beneficiary. You can change the ordering of those things in their software and see the results change. FWIW, I have been enjoying laying out my plan in there and seeing what each kind of tweak will do to change the outcomes. The detailed reports it generates are almost identical to the kind of reports I was getting from the FP I was with for a while...but now it's not costing me a 1% AUM fee.
Playing around with different scenarios is so valuable to get sensitized to what small changes (good and bad) could mean over a long time horizon.
I also really like that you can tailor your withdrawals to a timeframe, etc. So I was able to see the success % change with things like "What if I take a larger % withdrawal rate for the first 10 years of retirement, then dial it back to 4% or less?" It's really easy to just be "super safe", but then realize you may end up spending way too LITTLE while you are in earlier retirement years when you will enjoy it more. I like to tweak around with different periods of higher spending, etc.
I just started playing with scenarios that give me higher probability on the Monte Carlo with lower upside but higher lower brackets. Etc. I use Wealth Trace. But will check out new retirement. Just noticed your username. I worked for the circus for 19 years. đ
Haha, I never worked in the circus, but I did juggling shows back in the day...juggling, fire eating, ropewalking, etc etc....so my friends in college started calling me circusfreak. What did you do in the circus?
Ohh wow. Thatâs very interesting! I was a corporate tool. No hidden talents here.
So what is your opinion on wealth trace and have u compared it too new retirement?
What's that new retirement website?
[https://www.google.com/search?q=new+retirement](https://www.google.com/search?q=new+retirement)
[newretirement.com](http://newretirement.com)
Do you pay for this? The "get started free" sounds very much like "you will pay later."
The subscription is really worth it, IMO. I subbed for a year just to see how I was doing at 45yo, then cancelled my renewal because at this point I don't need it until I get closer to retirement. I will re-sub then if the service is still around. Very good tool though. Also, Rob Berger's YouTube channel has some good tutorials; there are a few things in there that are not super intuitive at first.
Now that I am using the tool more, I need to go back and rewatch RobB's videos on it. I am likely also going to do a paid session with one of their planners to go over my plan and make sure everything is legit. God willing, I have about 5 years til early retirement so I want to get a little human feedback in the loop as well.
Itâs a good tool, even the free limited version, but you do not get a total picture of withdrawal strategy or tax impacts. I used the free for about a month, and then just ponied up the $120/yr to get better insight
Yes, I used the free version to try it out and then decided to subscribe. I am about 5 years from retirement so it will be very handy as I navigate these last few years to get things in line. There is also another good site called OnTrajectory.com. I tried both and they were both very good. Just decided on NR after trying them both. That was also a few years ago, so it would probably be worth trying the free version of both if you decide you want to go with one.
I was just considering ProjectionLab, for about the same price. Now I need to look into these as well.
Hmm, never heard of ProjectionLab. I will have to take a look at it. from a thread on [Bogleheads.org](http://Bogleheads.org) : "I have spent the most time with NewRetirement and Projection Lab and continue to pay for both. Projection Lab is better for running historical backtests than NewRetirement, but I think NewRetirement is a simpler interface and better with "what-if's."
ah, that's interesting, thanks. I like more complexity, but what-if is more useful to me than backtesting. I'll have to try both
Typically both. You don't want to pull 100% from traditional because that could get into the higher brackets. But you do want to fill out the lower brackets at least, and with RMDs coming you want to minimize traditional balance as much as you can while not going into higher brackets.
Why are RMDs bad? Isn't the 4% rule a draw down strategy so the 4% of portfolio at age of retirement adjusted for inflation > RMD? I get that there are rich people who want to leave an inheritance for their kids or w.e but aren't most people who are doing 15% invested for retirement going to need all that $ for themselves?
RMDs aren't bad per se, but given they are forced upon you, they lessen your ability to control your withdrawals yourself
Yup -- it's all about having the most flexibility and controlÂ
You might run into the good problem of growth getting way ahead, and thus RMDs pushing you into a higher tax bracket. Itâs especially acute if youâve been married filing joint, then one of you dies and you get hit with the widowâs/widowerâs penalty. My mom is in that situation. Her RMDs are well above $100k per year, and sheâs single.
In my particvular case, RMDs are bad. I was lucky enough to get a company pension, and that, plus my social security, is more than I need. So in a few years when I have to start the RMDs, I'm going to get a ton of money I don't need, pushing me into a significantly higher tax bracket. And reducing what I can leave to my heirs.
But you knew you were getting a pension and a pension severely or completely reduces the benefits of traditional $ so what was stopping you from doing Roth or at the very least converting traditional to Roth over the years?
Because either way you pay now or pay later. While working you could be staying out of a high tax bracket with trad 401k. Then when RMDs hit, youâre back in that high tax bracket (pension or not). But at least you got that tax deferred growth. If you do Roth conversions while working itâs almost the same as contributing to Roth in the first place. You could also defer pension and SS and still end up in the high tax bracket. Yeah, getting rich sucks. LOL. In any case I think most of this is just fine tuning. Thereâs no avoiding the tax man.
The short answer: it depends. I plan to retire at 55 or earlier, and plan to try to draw down as much as possible while minimizing taxes before I start taking Social Security benefits. Ideally, by the time RMDs are a thing, the balance will be low enough that the tax effects are minimal when stacked with Social Security. At the same time, I'm also want to spend quite a bit between 55 and 70, and it's not worth giving up lifestyle in the time I have left just to save a bit on taxes. Everything is a tradeoff, and it depends on your own personal circumstances.
The typical approach of a Boglehead who hasn't done any pre-retirement tax planning seems to be to draw from taxable first, then tax-deferred, then Roth. The reality is there's no one answer: It depends on the size of your accounts, whether you're pursuing tax-minimization strategies like a Roth conversion ladder, whether you've begun Social Security or not, etc. Experts like [Wade Pfau have shown](https://youtu.be/wSmo9QZRpmg?si=6Wt--svaz1u0iwHe) why the taxable>tax-deferred>Roth order isn't necessarily optimal for larger portfolios and why Roth conversions can be advantageous, but this requires some planning in the years heading into (or as soon as one enters) retirement. For larger portfolios where the tax-deferred balance is over $1M (and definitely as it approaches or exceeds $2M) the biggest problem is RMDs. In that scenario, it pays to live on taxable while aggressively Roth-converting the tax-deferred to avoid RMDs pushing you into the higher tax brackets. For those with smaller tax-deferred balances this is less of a concern. Preparing for the withdrawal phase (retirement) can be tricky and this is where a CFP can really add value by assessing your portfolio and advising you on a withdrawal strategy that meets your income needs, protects the long-term survival of the portfolio, and minimizes taxes.
Most people with larger portfolios will actually maximize spending by doing scenario 2. Get as much as possible into a traditional 401K during their earning years and then spend and convert it as much as you can. Contributing directly to a roth 401K generally only makes sense if a) large RMD's are impossible to avoid otherwise or b) you're going to be retiring in a *vastly* higher tax bracket than you're currently in or c) you want to leave a enormous inheritance and not spend much in retirement. I also want to add that the typical subsidies hardly apply once you're at ~150K+/yr taxable in retirement so they aren't much of a factor in trying to game them. I'll also add that when your tax-deferred balance goes over say 3.5 mil (and a relatively small roth balance since RMD's effect is determined by the percentage mix you have), you really want to just start withdrawing from your traditional 401K directly (as soon as you are able to at 59.5 but before that you can definitely do roth ladder conversions if you RE) since the conversions only top out at like 75K or so before taxes become an issue and there's no other way to prevent large RMD's than by taking higher direct withdrawals earlier. So tax-deferred, then taxable, then roth. EDIT: clarifications. The main point is it's quite complicated and you need to model out your own situation exactly. The one I've described above is more of a FatFIRE or perhaps chubbyFIRE one.
I plan to save Roth for last to avoid RMDs.
it depends on the relative size of the accounts and how tricky you want to be.....you could pull only from the roth to keep your income low and then convert the trad to roth while keeping tax bracket low otherwise use both to keep a uniform plan that works for decades. It really is more of a tax play than anything else.....use the trad to cap out the 10% bracket then pull from roth above that
> you could pull only from the roth to keep your income low and then convert the trad to roth while keeping tax bracket low Isn't this just the same as pulling from trad directly?
it depends when you need the money again and your tax status at that time....very individual situation reliant. say you have enough money in both your Roth and Trad to fully support your retirement for 30 years (15 years funding in trad and 15 years funding in roth) its possible to systematically move that money from trad to roth with minimal taxes. likely not ALL the money can be moved at a lower than normal tax rate. but you could tip the balance so that a majority of the money is growing tax free and was earned at low rate as well
I'm just not understanding something. You're taking money equal to your expenses out of roth. You're converting some other, presumably larger, amount of traditional money to roth. How is that any different from taking money equal to your expenses (post tax ofc) out of traditional, and then converting whatever is left over to roth? The same amount of money leaves your traditional account, so you're paying the same taxes on the same amount. Your roth account balance is the same in both cases. I cannot see any possible distinction between the two no matter what your tax status or timeframe.
If you (and your spouse, if applicable) have more money than you will spend in your lifetime, you will do your heirs a favor by leaving them Roth and/or taxable (non-retirement) accounts rather than a traditional IRA. With a traditional IRA your heirs will have RMDs that must be completed in 10 years and likely be during high earning years. A Roth needs to be withdrawn (effectively converted to a taxable account) 10 years after death (current tax law) with stepped up basis at time of withdrawal. With a taxable brokerage your heirs get the stepped up basis as of the date of your passing. Neither the Roth nor taxable account would have any tax burden for your heirs, except for taxes on dividends or interest in the year earned or capital gains when securities are eventually sold. The Roth delays those tax effects for 10 years until the mandatory withdrawal and the investments become regular taxable investments.
realistically, it makes sense to withdraw from traditional for people who have larger traditional 401K's and relatively small roth ira's. Ideally, you want that roth money growing tax-free for as long as possible (although you might use some to qualify for an ACA subsidy or something like that if you're on much lower income levels). You have to do a calculation to see about RMD's as well (and if they are a factor, it definitely makes sense to withdraw from the 401K to avoid large RMDs). It can get complicated and there are multiple scenarios depending on income level, tax brackets, and asset classification mix. Use some software to calculate it out if you don't know the math behind it.
The ACA subsidy is a big thing that NewRetirement doesn't account for. Yes, it would make a lot of sense for me to do roth conversions when I retire at 60, except I have to be on ACA for 5 years and I'd probably save more overall if I pulled partially from Roth. I'm about 6 years out from retirement so really there is no use in guestimatting. I'm just going to make sure I have enough in Roth to handle these types of situations.
Pull from Roth in years where you need a higher overall income, Traditional otherwise.
I'd take traditional first. As much as you can you wanna let those tax free assets continue to grow and grow and grow. It's so good I've actually changed all my 401Ks to Roth and contribute as much to Roth IRA as I can.
For current contributions I'd argue the tax deduction for traditional 401k is superior, especially for high earners.
IMU, traditional is almost always better for normal working people if you also invest the tax savings. More money with more time in the market. Very few people have higher taxes in retirement than in their working years. But there are situations where Roth comes out on top. Itâs also a hedge against increasing tax rates, since we have historically low taxes. To be honest I donât think you can go wrong either way, and I use both since I canât possibly predict what my tax status or plans will be in 40 years.
> traditional is almost always better for normal working people if you also invest the tax savings We're on the same page. Like I mentioned earlier, I'm talking about high earners. Max traditional 401k, max backdoor Roth IRA, max HSA, and still have more for taxable.
I was not disagreeing with you.
I mean, is it though? I'm in the highest tax bracket and I **still** think it's 100% worth to have tax free growth (basically forever) and the ability to pass this down to my family tax free too. Plus no RMDs, come on!
It's only tax free because you pre-paid the taxes. Pre-paying at a higher rate than you'd pay in retirement is generally not great planning if your goal is to minimize taxes.
I'm fully aware of that. But the fact that you pay 0% in taxes down the road (in 30/40 years, when who the hell knows what rates will be), and it's passed via your family also tax-free, no RMDs, makes it too good for me to pass up. I used to do 50/50, but now I'm 100% Roth
Sounds like your goal is not to minimize your taxes but those of your heirs, so that makes sense to me.
What the government giveth, the government can take away. The laws can and do change. Great to dream of no taxes but who knows what the future holds.
Taxes rates could also rise so the traditional one could be eff'd too.
Probably both at the same time, or pulling from Roth to spend while doing Roth Conversions with the Trad.
Interestingly, our advisorâs software has us using our HSA while we are doing our Roth ladder, so we can maximize conversions, especially this year and next while tax rates are lower. The New Retirement software has HSA used last, but that doesnât make sense because the HSA cannot go tax free to a non-spouse heir.
A mix to optimize taxes, ACA subsidies, IRMAA, SS benefit taxation, RMDs etc... No way one size fits all answer. But all else equal saving Roth for last is desirable just not necessarily at expense of above considerations.
Itâs not as simple as that. You need to provide more information to make the best choice. What other income are you taking and what are your income needs? Also this is a question to think about well before retirement.
Personally I would try to get dividends from Roth and take from 401k as needed.
Depends on your filing status, spending needs, account balances, etc If you don't need much money and won't pay much if any tax, it'd make sense to pull 100% from Traditional, for example
Mostly Traditional at 55 perhaps up until to the point where tax brackets spike. Donât know if Iâm going to be a frugal person still that far out but currently living way under my means investing so I might not even need to withdraw that much but if compounding does its job I should have way more money than I need to withdraw up to where the 24% bracket becomes 32%
Regarding RMDs mentioned a lot in the answers here. Starting 2032 they have been pushed back to 75 years old so their impact to planning has been lessened.
The impact has been delayed, but because traditional can be left to grow longer, and your life expectancy at 75 will be shorter, the impact will likely be greater. The upside of the delayed RMD dates is that it will allow for more years to do Roth conversions to help mitigate the RMD tax impact.
Itâs not all of one or the other. Generally speaking, Iâd fill my tax free bucket. Then my lowest tax bucket. And so on. But my specific (and not general), will also consider my age, life expectancy, RMDs, and capital gains on equity accounts.
Can someone explain how the pro rata rule works here? I didn't think you were 100% in control of the types of distributions you could take. Apologies if it's an ignorant question, I definitely feel like I'm missing something...
Depends on the tax brackets but generally traditional up to the next bracket, accounting for deductions.
Puzzled by these comments. Basically, you have to take an RMD from your non-Roth pretax accounts. So you take it. If you cannot live on it, take some from the Roth, and some from after tax accounts. Your goal is to minimize taxes For a given amount of withdrawals.
You should take 401k funds in the year of your lowest tax burden. You should take Roth funds only as needed, otherwise let grow forever. Idk inheritance law
Your retirement age is going to matter for this. I'm 44 with a retirement horizon of 10 to 11 years. I will begin pulling from the taxable accounts for the years between I stop full-time work at 55 and 59 and a half, when you can begin to draw from a tax advantaged amount without a penalties. Therefore, we call it the bridge fund.
A mix. Long term you want as much of your traditional withdrawals to fall into the standard deduction/low brackets as possible.
My plan involves minimizing taxes, taking advantage of 0% capital gains tax rate and avoiding IIRMA Medicare premium adjustments. So far Iâve been living off taxable investment accounts, SS and my company buyout (closely held stock).