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To Roth or not to Roth- that is the question

Home Retirement Accounts To Roth or not to Roth- that is the question

  • Avatar mcheeks1029 
    Participant
    Status: Physician
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    Joined: 09/19/2019

    I have always thought that putting money into a Roth (backdooring if necessary) was the way to go… in fact the WCI talks about Mega Roth back doors.

    I also have encountered some theories that those that are “fortunate” enough to be taxed at the highest bracket should not do Roth and instead keep their funds in a traditional IRA so that one can gain on the compounding of the total money- rather than only on the money left post tax.

    as most of us are, I am numerically inclined and love to see the data- curious what the math shows or is it really personal preference?

    -understanding that no one knows what the tax rates will be in the future, etc just wondering what most of my peers are doing

    Thanks!

    #248182 Reply
    Lordosis Lordosis 
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    Status: Physician
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    Joined: 02/11/2019

    Taxes would have to go up quite a bit to make deferring tax in your peak earning years not worth it.

     

    https://www.whitecoatinvestor.com/roth-versus-tax-deferred-the-critical-concept-of-filling-the-brackets/

    “Never let your sense of morals prevent you from doing what is right.”

    #248187 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
    Posts: 1542
    Joined: 01/08/2016

    Many of us do both. It’s true that tax-deferred is a great option for employees in high tax brackets.

    The backdoor Roth is an alternative to additional taxable investments. As long as you have no tax-deferred IRA (401(k), 403(b), 457(b) are OK), you should do the backdoor Roth.

    Cheers!
    -PoF

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #248191 Reply
    Dreamgiver Dreamgiver 
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    Status: Physician
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    Joined: 03/09/2017

    Considering that for high earners traditional IRAs are not tax deductible, your question becomes a moot point.

    #248204 Reply
    Liked by artemis
    Avatar Bmac 
    Participant
    Status: Physician
    Posts: 318
    Joined: 10/21/2017

    Back door Roth a no brainer. Agree that pre-tax 401k or 403b generally better than their after-tax Roth equivalents for high earners in the highest marginal tax brackets.

    #248207 Reply
    abds abds 
    Participant
    Status: Physician
    Posts: 247
    Joined: 01/16/2017

    If you’re talking about a backdoor Roth then your income is such that your “traditional IRA” contributions are not tax deductible. So that account would suck and converting said non-deductible IRA to Roth only makes sense. Roth is way better than getting taxed twice, obviously.

    If you don’t have a retirement plan at work and you can contribute to a traditional (deductible) IRA, some others can help you with the math.

    I think most have 401k or other work plans as “traditional” retirement accounts, plus then doing backdoor Roth.

    #248216 Reply
    Liked by artemis
    Avatar Peds 
    Moderator
    Status: Physician
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    Joined: 01/08/2016
    Earnest refinancing bonus

    Well you can’t even do a traditional IRA at those brackets so what’s your argument?

    #248219 Reply
    Craigy Craigy 
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    Status: Spouse
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    You can find some good articles out there that compare the math between the two.

    For me, cash I put in backdoor roths and mega backdoor roth is money that would otherwise go to taxable accounts.  So it’s less of a question.

    I could technically also do Roth 401k, but traditional 401k takes a little bit of the edge off when tax time comes.

     

    LEVEL 1 WCI FORUM MEMBER.

    #248226 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 727
    Joined: 06/18/2018

    “I also have encountered some theories…taxed at the highest bracket should not do Roth and instead keep their funds in a traditional IRA.”

    “as most of us are, I am numerically inclined and love to see the data- curious what the math shows or is it really personal preference?”

    Alright, since you’re numerically inclined:
    – How much of a tax break will a higher earner (let’s say $600k mfj) get on that traditional IRA in the year they contribute?

    – How much of a tax difference will it be for that same high earner to make $12k in backdoor Roth contributions versus leaving the $12k in taxable?

    #248235 Reply
    Faithful Steward Faithful Steward 
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    Status: Financial Advisor, Small Business Owner
    Posts: 519
    Joined: 06/12/2017

    The math is fairly straight forward. What is your current marginal rate? Is it higher or lower than the marginal rate you expect to pay at when you spend the money? If lower, do the Roth. If higher, do the Traditional. If the same, I’d still do the Roth, as the odds of taxes going up over the years are probably greater than them going down.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #248381 Reply
    Avatar wa2106 
    Participant
    Status: Physician
    Posts: 196
    Joined: 11/29/2017

    Many issues with your question addressed above.  I think what you’re referring to is that for relatively low earners (those who aren’t able or barely able to max out their IRA’s) there is math that suggests that traditional may be better because it allows them to get more money into it (their contribution + what they would have paid in tax = total $6000) versus Roth (total available contribution – tax goes to tax man = $5000).  In that situation, both are equivalent in terms of value at 30 years.  But for physician there should be no issue with getting max into account which strongly favors Roth + traditional is not deductible if AGI >103k for MFJ.

    #248384 Reply
    Liked by MaxPower
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
    Posts: 1542
    Joined: 01/08/2016

    “I also have encountered some theories…taxed at the highest bracket should not do Roth and instead keep their funds in a traditional IRA.”

    “as most of us are, I am numerically inclined and love to see the data- curious what the math shows or is it really personal preference?”

     

    Alright, since you’re numerically inclined:
    – How much of a tax break will a higher earner (let’s say $600k mfj) get on that traditional IRA in the year they contribute?

    It depends on where you live (state, city income taxes), but if your marginal tax bracket is 37% federal + 8% state, you’re looking at a marginal bracket of 45%. There is no tax-deferred traditional IRA option at that income, but maxing out a tax-deferred 401(k) or 403(b) with $19,000 will save you $8,550.

    – How much of a tax difference will it be for that same high earner to make $12k in backdoor Roth contributions versus leaving the $12k in taxable?

    Click to expand…

    The year in which you do it, you’re looking at a tax savings of less than $100.

    Over decades, the difference can add up to six and even seven figures. It all depends on the variables.

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #248386 Reply
    Avatar molar roller 
    Participant
    Status: Dentist
    Posts: 87
    Joined: 05/31/2018

    The question for most of us is not whether to “roth or not to roth”, but “if not roth, what?”

    There are ways to spin the numbers any way you like, but the reason I do Backdoor Roth is that I have no alternative.

    There are probably some reasonable numerical arguments that if you have room in your tax-deductible space, it may be more advantageous to do with certain assumptions.

    For most of us, that bucket is fully filled, and we are just looking for another tax-advantaged account.  That’s why we use Backdoor Roths, and don’t even dream of touching HSA funds for healthcare expenses.

    So if you have maxed out your other options – what choice do you have?

     

    #248387 Reply
    Liked by MaxPower
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3301
    Joined: 09/18/2018

    Taxable investments or spend.
    Brokerage accounts have the ability to be tax efficient, think LTCG vs income, real estate has some advantages too. PE opportunities too. These are great problems to have. Tax aware is the next step down from tax advantaged.

    #248397 Reply
    Liked by Jack_Sparrow
    Avatar Jack_Sparrow 
    Participant
    Status: Physician
    Posts: 83
    Joined: 01/09/2019

    I do both, but prefer the traditional 401k/IRA as priority. Don’t get me wrong I have spent weeks putting together spreadsheets, running the analysis and reviewing the math…I know how the math works out but….

    I would rather have 5.2 million in my Traditional IRA, than 4 Million in my Roth IRA when starting retirement. Mathematically based on my anticipated withdraw rate and today’s tax structure you’d have more money to spend with the 4 million in a Roth. But the way I see it, you can always spend less in retirement and survive, but its harder to make more money at that age.

     

     

    #248928 Reply

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