Traditional vs. Roth

It’s complicated. It doesn’t apply to self-employed because reasons, namely how they defined wages. And the IRS just granted a 2 year administrative delay in a recent Notice saying it won’t treat a plan as failing if it does regular pre-tax catch-up instead of ROTH catch-up for the affect individuals in 2024 and 2025.

But it is coming. Why on earth they came up with a new $145K number to track instead of tying it to the HCE limit which would have been $150K is beyond me.


I have a more general question in the discussion of Pre-tax vs Roth decisions…

Why would anyone choose to use a Roth if they did not have to? With a Roth, your current income is taxed at the highest marginal rate, and then the taxes you avoid paying in retirement are the lowest, ground up tax rates because presumably you will use them later when you have no earned income.

I presume that taxes will never be lower on high earners than present. I assume taxes will go up on high earners. Absent the government specifically raiding Roths, my Roth investments are safe from tax increase. As my income increases, I’m investing less on a Roth basis than earlier.

You might be a married couple filing jointly with a temporary SAHP and therefore your income may be taxed at a lower marginal, and you want to lock in the Roth savings now instead of pay the Traditional tax later.

If you anticipate having a low income in retirement, Traditional becomes more enticing. If you plan to withdraw a lot in retirement, Roth becomes more valuable. But it depends on the individual and many factors.

In addition to what rastlin said, Rothy’s (thanks, autocorrect) allow you to take out “principal” penalty free…eh I h (again, autocorrect?) which is useful for emergencies or college education expenses (which can also take earnings out penalty free though not tax free)

…all of this presupposes that things haven’t changed since I last read up on it.

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Yes for college expenses. Roth IRAs were essentially better 529s, though now 529s let you roll them into Roth IRAs up to $35k. Unsure what other emergencies you may reference, but I know you can withdraw for first-time home purchases.

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Just any reason whatsoever, really. You can take the principle out without penalty or tax.

Ah, yes. Misread somewhat.

Personally I am putting at least as much Traditional in as required to stay out of the 24% tax bracket. I might continue doing mostly Roth below that, but at 22% it’s kind of a tossup IMO. I wish the brackets were more graduated…

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my arc is included somewhere in this thread. yes, you are paying taxes now. in the future, roth w/d are tax free. can be useful for large purchases ($30K car requires $30K roth w/d, vs ~$40K from traditional). could just be a flexibility that is worth having.

You’re not taking investment growth into consideration. I’ll use an extreme example. For instance you invest $1,000 in Tesla circa 2015 in 2022 your shares are now worth $50,000

If this were a traditional tax deferred investment you save 30% on your initial investment and but have to pay $5k on taxes as you slowly sell off your shares in retirement

If it were a Roth investment you take the $300 hit up front and save big

So it really depends on your outlook of the market

If you’re retiring soon or you feel like the market will remain flat or even retract then Roth investments aren’t for you

Not how I see it. You save $300 up front putting $1000 into a pre-tax (non Roth) 401k. Your $000 grows to $50,000. You take $50,000 out in 5 consecutive years of 10,000 each year and pay $0 taxes because the first $11,600 each year is tax free

That’s not how I do the math. I assume you are using 30% marginal rate today and a 10% marginal rate after retirement…

If I have $1,000 that I can use for retirement savings, I can put $1,000 into a traditional or $700 into a Roth.

If the $1,000 in the trad grows to $50,000 and I pay tax at 10%, I have $45,000 of after tax spendable cash.

If the $700 in the Roth grows to $35,000, and I don’t pay any tax, I’ve got $35,000 of after tax spendable cash.

The Roth loses out on $15,000 of investment income due to paying taxes up front. That is more than the tax on the trad.

I’m planning for a higher income in retirement than present. So… I flip those essentially? Except my brackets are more like 32% vs 24% marginal.

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I see; it’s all the other income on your return that gets taxed at 10%, 12%, 22%, 24%…

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My inclination is to compare the marginal rate today, against the estimated weighted average rate in retirement (not marginal, not 1st dollar)

new to this thread

my company is now offering a Roth in addition to my 401K.

I am looking to retire in 6-7 years, unless i get pissed off at someone.

Under what curcumstance would i consider switching to the Ross?

I have been watching the market, hoping to divest and get safer investments

I am not trying to be an AH here. I am assuming that I will not have a job, therefore, I will not have any income.

I am assuming I will have some invested assets, but deferring taxes as much as possible and paying capital gains when I need to take down monies, which is not income.

The only income that I plan on having is the transfers out of the traditional 401k (which will have become a rolled over, self directed IRA)

If your (top) marginal rate now is less than what it will be in retirement, you’ll save money on taxes.

If you would somehow get value from the slightly more flexibility of the Roth.

If you need to get a marble rye up to the third story window you should find a different fiancée.

RN, an with apologies to the chocolate babka crowd, I would add to the list from 1695814…

You currently work in a low income tax state and plan to retire in a high income tax state.

My logic is that you cannot merely consider federal taxes, but also state taxes. If you work in Florida and plan to retire in Minnesota, then your retirement taxes will be higher and you are better off utilizing the Roth now to prevent higher taxes later on.

Wait, now I am not sure that Roth distributions are universally state tax free. Does anyone know if there are 50 different state approaches to taxing Roth IRA distributions?

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Won’t those be taxed?

State taxes in Iowa are on their way down to a flat 3.9% in 2026. Currently the max is 6% and I think it used to be higher. I also just found out yesterday that starting in 2026 Iowa won’t tax withdrawals from retirement accounts which is welcome news. There are only about a dozen states that do that, according to the article that informed me.

First, good point about state taxes.

All signs point to “universally state tax free” according to google.