Should I do Roth? Traditional vs. Roth Savings for Retirement
- Joe Boughan
- May 2
- 5 min read
Summary
Deciding between Roth and traditional retirement contributions hinges on weighing today’s tax certainty against tomorrow’s unknown tax landscape.
A Roth account locks in after‑tax treatment up front and provides tax‑free growth and distributions, while traditional accounts defer taxation until withdrawal. By building side‑by‑side projections of current versus future tax liabilities, identifying “conversion windows” (often the years just before RMDs and Social Security), and personalizing the analysis to life events and income trajectories, investors can tailor a strategy that balances certainty and flexibility.
In this guide, we explore the mechanics, modeling techniques, real‑world case studies, and actionable steps to optimize your retirement tax outcomes—whether you’re looking for a Boston area financial advisor or top financial advisor in cape cod or open to working virtually with a fiduciary advisor anywhere in the U.S.
1. Understanding Roth vs. Traditional Accounts
Roth contributions are made with after‑tax dollars: you pay income tax now, then let your investments grow tax‑free and enjoy tax‑free withdrawals in retirement Schwab Brokerage. Traditional 401(k) or IRA contributions reduce your taxable income today, grow tax‑deferred, and are taxed at ordinary rates upon distribution T. Rowe Price.
ROTH | TRADITIONAL PRE-TAX |
|
|
|
|
|
|
Should I do Roth or Traditional Pre-Tax Retirement Savings?
1.1 Tax Timing and Certainty
With Roth accounts, you lock in your current marginal tax rate, shielding future growth from uncertainty—especially valuable if you expect higher rates later MarketWatch. Traditional accounts offer upfront relief but expose you to unpredictable future brackets.
1.2 Contribution Limits and Rules
Both Roth and traditional 401(k) contributions share the same annual limits (e.g., $23,000 combined in 2024, plus $7,500 catch‑up if over 50) Empower. Roth IRAs also have income‑based eligibility and contribution caps, necessitating strategies like backdoor conversions for high earners.
2. Modeling Your Tax Trajectory
Rather than categorically favoring one option, the optimal choice depends on where your tax rate stands today versus where you anticipate it in retirement Employee Fiduciary.
2.1 Current vs. Future Rate Projections
Financial planners build detailed projections of income, deductions, and tax brackets—modeling scenarios where, for example, a high‑earner’s income drops from over $1 million pre‑retirement to $100–200 K in retirement YouTube. These side‑by‑side forecasts reveal whether your projected retirement tax rate falls below today’s, guiding contribution strategy.
2.2 Capital Gains and Income Tax Rates
Roth conversions trigger ordinary income tax on the converted amount. By comparing this year’s capital gains rates and marginal brackets to forecasted future rates, advisors assess whether paying today’s rate yields net savings over a lifetime .
3. Identifying the Roth Conversion Window
A “conversion window” often emerges in the years immediately before Required Minimum Distributions (RMDs) and Social Security benefits begin.
3.1 Pre‑RMD / Pre‑Social Security Phase
During this transition, income typically dips, lowering your marginal rate—an ideal time to convert pre‑tax balances at a lower rate than you’d face once RMDs increase taxable income or Social Security adds to your tax base WSJ.
3.2 Real‑World Impact
Studies show converting even a portion of pre‑tax assets during this window can deliver six‑figure gains in after‑tax wealth, especially for high‑earning professionals with substantial account balances NextGen Wealth.
4. Case Studies: Power of Roth Growth
4.1 Peter Thiel’s Private‑Company Strategy
It has been said that Billionaire Peter Thiel reportedly placed shares of a private company into a Roth IRA, which appreciated to over $1 billion—completely tax‑free on withdrawal MarketWatch.
4.2 Mitt Romney’s Roth Success
Similarly, it is reported former Governor Mitt Romney converted private equity shares into a Roth, turning modest initial contributions into multi‑million‑dollar tax‑free balances Forbes.
4.3 The Ross Family’s 100% Roth Portfolio
A recent Wall Street Journal feature describes a family who built a 100% Roth retirement portfolio exceeding $2 million—leveraging backdoor and mega‑backdoor strategies, market downturns, and consistent conversions to lock in tax‑free growth WSJ.
5. Crafting Your Personalized Strategy
5.1 Asset Allocation and Diversification
Once your tax approach is set, align your asset mix—stocks, bonds, real estate—according to risk tolerance and time horizon. Nobel‑winning research shows 80–90% of portfolio returns derive from strategic asset allocation Employee Fiduciary.
5.2 Cash Flow and Contribution Planning
Determine required contribution levels—balancing cash flow needs, employer matches, and emergency reserves—so you optimize both Roth and pre‑tax vehicles without sacrificing liquidity.
5.3 Tax Optimization Techniques
Consider advanced tactics like tax‑loss harvesting, Roth “laddering,” and strategic Roth conversions in low‑income years to minimize cumulative tax drag.
6. Implementation & Monitoring
6.1 Account Setup and Execution
Open or convert accounts as planned, ensuring timely execution to capture market conditions and limit tax liability.
6.2 Ongoing Reviews
Life circumstances and tax laws evolve. Schedule annual or semi‑annual plan reviews to recalibrate contribution splits, conversion levels, and investment allocations.
6.3 Rebalancing & Risk Management
Regularly rebalance portfolios to maintain target allocations and revisit insurance, estate planning, and liability coverage to safeguard assets.
7. Frequently Asked Questions
Q: Should I go 100% Roth or split contributions?
A: Splitting can hedge uncertainty: lock in some tax‑free growth now while retaining upfront relief via traditional accounts Reddit.
Q: Can I convert large sums without spiking my bracket?
A: Consder stagger conversions across years or convert only up to the bracket threshold to avoid unintended rate increases.
Q: What about legislative risk?
A: Roth’s future is broadly supported, but always stay adaptable—monitor policy shifts and adjust plans accordingly. It is technically possible that the laws on Roth could change and revoke the tax-free status, but I would consider this as much lower likelihood of other tax changes which are generally more widely accepted as "on the table" in conversations about tax policy.
Next Steps:
Run a personalized tax projection comparing current and future tax rates.
Identify your Roth conversion window around retirement transition.
Adjust your contribution split dynamically to balance tax relief and future certainty.
If you would like to get some support with your financial planning, please reach out to us at Parkmount Financial Partners. We are a financial planner in the Boston area. Our primary office is in Scituate, MA, but we work virtually accross the US where we are registered or exempt, and we would be happy to talk with you.
Click here to schedule a no obligation FREE initial consultation here: https://www.parkmountfinancial.com/free-consultation-schedule
The foregoing content reflects the opinions of Parkmount Financial Partners LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security, or the implementation of any strategy or strategies. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
コメント