Why I Never Contributed To A Roth IRA But Why You Probably Should

Let me share why I never contributed to a Roth IRA but why you probably should. I fully admit that I was once an ardent opponent of the Roth IRA in the past. But as a middle-aged father of two young children, I've come around. Contributing to a Roth IRA is a great way to diversify your retirement income sources.

If I could rewind time to when I was a junior in college, I should have opened up a Roth IRA and started investing. Don't make my same mistake. Time is the most powerful asset when it comes to investing.

Roth IRA Wisdom From My Father

My dad is in his 70s and he mentioned he wish he'd started a Roth IRA when he was young. When you're in your 70s, you must take required minimum distributions (RMD) from your pre-tax retirement savings accounts and pay taxes.

Given nobody likes to pay taxes, I empathized with his regret. It’s also a good idea to listen to your elders.

With the passage of the Secure Act 2.0, the RMD age increases to age 73 in 2023 and to age 75 in 2033.

But I don't have a problem paying taxes on income earned. It's only when I have to pay a surprise tax where the liability wasn't properly budgeted where I have a problem. This only happened to me once when the state of California passed a retroactive tax of 2.9% for the 2011 tax year.

Now that I'm older and wiser, let me share some of my excuses and encourage you to contribute to a Roth IRA if you are eligible. 

Why I Never Contributed To A Roth IRA

1) I didn't have much money left over.

When I first got a job in 1999, I was only making a $40,000 base salary living in Manhattan. $40,000 did not feel like a lot of money back then, especially since I couldn't even rent a one bedroom apartment on my own. Even splitting a studio apartment for $1,800 total required my brother-in-law to be a lease co-signer. In NYC, you needed to make at least 40X the monthly rent in annual salary, and my roommate and I did not make over $72,000 combined.

After maxing out my 401(k) to the tune of $10,500 and paying taxes, I didn't have much left. I needed the ~$200 month left in cash flow to pay for incidentals. Something always tends to come up – like actually having some fun once in a while.

Achieving financial independence on $40,000 a year living in Manhattan

2) I didn't know any better about the Roth IRA.

Ignorance is a common excuse for why we didn't do things. However, it is up to use to get smart for our own good. The Roth IRA was introduced in 1997, when I was a junior in college. Saving for retirement was the last thing on my mind at that age. Getting a job was number one!

The 401(k) was easy to contribute to. It was automatically set up with my employer as part of my employee welcome package. All I had to do was fill out a form indicating how much should be deducted from my paycheck and year-end bonus, if any.

With a Roth IRA, I had to open up a new account. This felt like too much of a PITA at the time. When you are already not feeling rich, you don't normally go out of your way to feel poorer.

Further, there wasn't a ubiquity of affordable online brokerage options or personal finance blogs to provide any guidance. 

3) The contribution limit was disappointingly low.

Even though I only made $40,000 my first year, being able to only contribute $2,000 maximum to a Roth IRA felt underwhelming. At age 22, I would much rather have $2,000 in cash than lock it up for at least five years. The poorer you are, the more valuable each liquid dollar is.

Check out the historical Roth IRA contribution limits. Only in 2019 has the Roth IRA contribution limit grown to a relatively significant amount of $6,000. The 401(k) max of $19,500 versus the Roth IRA contribution max of $6,000 ratio is now only 3.25X. Back in 1999, the ratio was 5.25X ($10,500 / $2,000). Therefore, focusing on the 401(k) was a better choice for me.

For 2023, the Roth IRA maximum contribution is $6,500. If you're 50 or older, you can contribute $7,500 to your Roth IRA. Expect the maximum contribution about to go up by $500 every two or three years.

Roth IRA contribution limits for 2023

4) I hated paying taxes.

When you're struggling to pay for a studio apartment with a friend while also working 70+ hours a week, the last thing you feel like doing is paying more taxes up front, which is what the tax-now Roth IRA retirement plan is.

My taxable income was $29,500, which put me at the 28% marginal federal income tax rate at the time ($26,250 – $63,550). Then, of course, I had to pay New York State and City taxes. It felt terrible paying 30% in taxes for a $2,000 Roth IRA contribution. So I didn't.

The only way I'd feel good paying taxes up front for my Roth IRA contribution is if the effective tax rate was 15% or less. Further, I had to be working a leisurely 40 hours a week or less. Working very long hours makes you really bitter about the tax system.

Historical Roth IRA contribution limits

5) I finally started making too much.

When I got my lucky break and moved to San Francisco for a new job, I was making a base salary of $85,000 and was guaranteed a $50,000 bonus. As a result, my total compensation in 2001 was about $120,000. This was $10,000 over the maximum $110,000 income allowed for an individual to contribute to a Roth IRA at the time.

Although it was nice to earn more money, it also felt disappointing to be shut out based on an arbitrary income limit. Why wasn't the income limit $150,000 or $200,000? The government was implying not everybody deserves equal treatment.

In San Francisco, I still lived extremely frugally. I shared an even cheaper apartment ($1,600/month vs. $1,800/month in NYC) for the first two years. The $40,000 a year lifestyle stayed with me for another four years. I still wasn't sure I'd be able to survive in the finance world for very long. It was only after I finished my MBA in 2006 did I start to spend a little more.

If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $140,000 for the tax year 2021 to contribute to a Roth IRA. If you're married and file jointly, your MAGI must be under $206,000 for the tax year 2020 and 208,000 for the tax year.

6) I'd be in a lower tax bracket in retirement than while working.

This was the main reason why I thought contributing to a Roth IRA was illogical. Not only did I feel federal income tax rates would come down since 1999 (which proved correct after the TCJA was passed at the end of 2017), I also believed it would be incredibly hard to amass enough capital to reproduce my average W2 income wage.

For argument's sake, let's say I made $100,000 in 1999, meaning that I paid a 31% marginal federal income tax rate, or ~25% effective federal tax rate. My $100,000 turns to $75,000. I would need to accumulate $4,000,000 in capital producing a 2.5% gross yield to match my gross working income. I was bullish on my future, but not that bullish.

The people who are angry at my after-tax investment targets for early retirement, yet strongly believe in contributing to a Roth IRA are demonstrating inconsistent logic. If you don't believe you can accumulate multiple millions, then you should not be contributing to a Roth IRA.

Further, I wanted the option to move to one of our no state income tax states in retirement. By contributing to a Roth IRA while working in one of the highest taxed cities in America felt like I was giving up.

Take Advantage Of The Roth IRA When You Can

After reading all my reasons on why I didn't contribute to a Roth IRA, I hope you see them just as poor excuses.

Unlike me, be super bullish about your future.

I felt so burnt out after a couple years working post college that I thought I was just going to be a beach bum in Hawaii paying zero income taxes for the rest of my life. My grandfather had an old farmhouse I planned on staying in for free, in exchange for maintaining his mango trees.

Instead, I had a good 13-year career in finance. I got promoted to Vice President at age 27 and to Executive Director at age 30. After retiring in 2012, I ended up building Financial Samurai into an asset that generates significant supplemental retirement income.

Further, with the massive bull market that ensued in stocks, real estate, and bonds since I started working full-time in 1999, my passive income has also grown significantly. Therefore, I'm once again back at a high federal marginal income tax bracket, which I definitely did not anticipate in “retirement.”

The Roth IRA Is Retirement Income Diversification

I've warmed up to the Roth IRA because it is clearly a way to diversify your retirement savings and income. The maximum contribution has also increased to a not so insignificant $6,500 a year. Meanwhile, the income threshold for contributing has increased to $153,000 and $228,000 for single and joint filers for 2023.

$228,000 is a healthy income for married couples that put them in the top 15% of income earners. Even if you live in an expensive area like San Francisco or New York City, at least one partner should be able to max out their 401(k) and contribute the maximum to a Roth IRA.

Roth IRAs also have no RMDs; they can be assumed by a qualifying spouse upon the owner’s death and rolled directly into the survivor’s account (or a new account in the survivor’s name). They can also be transferred to a designated beneficiary tax free as well, under the same distribution rules as Traditional accounts: lump Sum or 5-year exhaustion.

Could Have Had $200,000+ In My Roth IRA By Now

If I was able to contribute $4,000 on average to a Roth IRA and earn a 9% compound return for 19 years, today I'd have about $200,000 I could withdraw tax-free. Over a 50 year period, my Roth IRA would grow to $3,553,000 with the same terms. That's not something to sneeze at!

However, if you're already in a higher tax bracket, then doing a Roth IRA conversion is probably not worth the effort. You likely won't save tax dollars in retirement if you are above the 24% marginal income tax bracket.

Open A Roth IRA For Your Children

Unfortunately, I'm still not eligible to contribute to a Roth IRA. However, at least I'm able to open up a custodial Roth IRA for each of my two children.

They can earn up to the standard deduction tax-free, contribute to a Roth IRA tax-free, let their money grow tax-free, and withdraw tax-free! I won't allow them to make the same mistake as their old man.

My hope is to put them to work for our family business. This way, they can earn income, save for retirement, and learn useful skills.

In 15+ years, I hope they will thank me!

Related: I Could Have Been A 401k Millionaire By 40 Had I Kept My Job

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Readers, who is contributing to a Roth IRA and how's that going? Anybody contribute to a Roth IRA and make more than the income thresholds and have to stop? Is a backdoor or mega backdoor Roth IRA conversion worth it if you are in a high income tax bracket? Anybody now pay more in taxes as a retiree than as a full-time worker? If so, share us your secret to wealth. 

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123 thoughts on “Why I Never Contributed To A Roth IRA But Why You Probably Should”

  1. I have searched to see if there were other questions or a POV on mega backdoor Roths so hopefully not missing it..

    I have access to a mega backdoor opportunity through work (tech) where you can rollover an additional 32K into a Roth IRA via after tax pay and after tax bonus contributions. Most big tech companies offer this and most employees are probably pushing the 32- 35% brackets.

    What are your thoughts on these if you are maxing 401K and HSA prior and making a solid dent in after tax investments (non Roth)? Still little value given your tax rate should be lower in retirement?

    I have gone back and forth on this for 2 years but have maxed out twice.. . Thinking about 2024 and focusing more on non roth.

  2. Suggestions for those married, filing jointly, maxing out 401k contributions (plus an LLC employer contribution) when income disqualifies you from taking advantage of a roth IRA?

  3. Sam, I belong to a special class of employee that I believe benefits greatly from Roth IRA contributions, vice Traditional. I am a Commissioned Officer in the Armed Services, and have three (3) categories of pay; Base Pay, a Housing Allowance (called BAH), and a Subsistence Allowance (called BAS). Only the Base Pay is taxable (Fed Tax, FICA-SS, FICA-MC), but the other two are not! Together, BAH and BAS equate to ~25% of my overall monthly pay. Our employee offered 401k retirement account (called the Thrift Savings Plan, or TSP) has both Traditional and Roth options (since 2014), so in essence, I can contribute the MAXIMUM amount permitted annually (2023: $22,500) directly into Roth. Additionally, we are able to have private/personal Roth IRA accounts, separate & apart from the govt retirement plan, and have consistently maxed those out since 2010! I am married filing jointly tax payer, and just far enough over the lower threshold of the 22% marginal tax bracket that would benefit from the tax deferred contributions. So I say feed the Roth Pig and let it ride!

  4. I contributed to a ROTH before I had a 401k. It hasn’t grown that much since I focused on my 401k once I had access to one, but I’m still glad I opened one. Everything help when it comes to saving and investing for retirement!

  5. I’m considering converting a small IRA (roughly $45k) to a Roth IRA. I was very curious to see Sam’s thoughts on this but saw he had several different posts on Roth’s (sometimes conflicting :)). Here are my reasons for converting at this point in time:

    1.) Why now?: I’m 35 years old and work in sales in a very stable annuity like technology sector with uncapped income, and don’t expect my wife and my combined income to be lower than it is now anytime in the next 20 years. If Biden wins the election he has stated that he will be raising income tax on those who earn over $400k. So I see this year as the best time to convert.

    2.) My IRA is small, my tax bill won’t be more than $20k for this one time conversion. Then beginning this year I will fund this Roth IRA via a back door contribution at a rate of $6,000 per year every year until I retire or decide to stop. Effectively funding a Roth while still being above the income limits.

    3.) My wife and I both participate in traditional 401k’s which we max out every year. So this new Roth will essentially act as a hedge against our fully funded 401k’s and serve to give us more optionality on retirement spending as well as a more flexibility for inheritance strategy to our children.

    4,) Sam asserts that we will all likely NOT earn more in retirement than we do now. However, he does not address the possibility that Marginal tax rates can be raised significantly in the future, so that even if say your retirement income is $150k in retirement, you could be paying a 45% rate on that income in the future like say almost half of Western Europe already does.

    Sam and FS community, I’d really appreciate any thoughts and feedback on this strategy, feel free to rip it to shreds :)

  6. What are your thoughts about gifting $6k annually to son who then transfers that $6k to fund a Roth IRA in his name? He is in 20’s, a 1099 employee with about $50k income who does not have access to a 401k.

    Goal of these annual gifts is to: have him start understanding investing (we will be discussing investments prior to purchase), let $ grow tax free over his life time, allow him access to some of “my $” before he inherits (age gap is 26 years), and reduce his tax burden/add flexibility on wd’s when he inherits my wealth. Note I may also be doing same with a $9k IRA to get to annual $15k gift max.

    Assumptions: he is not going to raid the account for the wrong reasons, I am FIRE at 50 with net worth of $5MM/good cash flow – so $ is a small amount for me and fits in my annual expenses. Also he is sole beneficiary of wife/I’s $, and he has no other debt.

    I have put lots of thought to this but alway looking to get more perspectives … thank you.

  7. Best decision I made was to do Roth IRA.

    Roth 401K converted to Roth IRA after retirement.

    Roth conversions after early retirement when income was in lowest tax bracket.

    Retirement funds currently 88% Roth, 12% Traditional


    1. NO TAXES on distribution.
    2. NO RMD
    3. NO higher Premiums paid on Medicare.
    4. NO TAXES on Social Security

    Great benefits

    There are many options to adding to Roth for any tax bracket.

    Roth 401K
    Roth IRA

    1. Can you better explain your situation? How much did you made before you retired? How much are you pulling out each year for retirement? While you’re claiming that ROTH is better, I’d like to see the math behind it.

  8. Jason Hilliard

    Sam – great post. Have preferred the 401k route for your same justification. Retirement income will be lower than our working years income by a long shot, so have been focused on growing after tax accounts, 401k, and real estate. The company 401k matching has been awesome kicker to that return and growth. Also have been maxing HSAs and doing 529s. Goal is to get kids through college debt free and then be in position to retire.

  9. Hi Sam,

    I’m a recent reader and have loved scouring your posts for the past few weeks; thanks so much!

    As an Aerospace Engineer 6 years out of college, I have been investing 16% of my salary into my 401k since I began working (now I will be increasing that to 19k/year per your articles). I have always elected to contribute via Roth 401k. Could you elaborate on if you recommend this vs before tax contributions, and why? (personally I figured I’m making less now than I plan to be making at retirement, hence I’d rather pay my taxes now)

    I appreciate the insight,

  10. Read through about half the comments and not sure if anyone brought this up:

    You make 19,000 a year and your Roth and Traditional 401k contribution limits are 19,000, and you have a 20% tax rate. You live with your parents, all expenses paid.

    You also retire in 1 year, your tax rates never change, and your account return is 30%.

    With the traditional you put all your income in, make 30% bringing your balance to 24,700, and withdraw, paying your 20% tax rate and ending up with 19,760.

    With the Roth you pay your tax and contribute the balance to your account, which is 15,200. You get your 30% return and withdraw, receiving 19,760.

    Let’s say instead of making 19,000 you make 30,000. Any non-retirement account money contributes to family expenses.

    With the traditional you end up with the same amount, but with the Roth you now have enough money to contribute the maximum of 19,000, rather than only 15,200 before. So now you end up with 19,760 with the traditional, but 24,700 with the Roth.

    The secret sauce here is the difference between pre and post tax dollars, which means that with a positive tax rate, equal nominal limits for traditional and Roth make the Roth limit higher in post-tax terms. Even if you invest your tax savings from your traditional contribution, the gains on that investment are taxed, so you will come out better with the Roth, because of the higher contribution limit, post-tax.

    If you need the tax saving from the traditional contribution to live on, then this is a moot point, and if your company doesn’t offer a Roth option or the nominal contribution limits are not the same, then it’s also irrelevant. However, if you are saving above your traditional 401k limit and won’t need those finds till retirement, the Roth will always result in a higher return.

  11. thenocturnist

    Pondering ideas to create a baby roth. I have a 2 year old that I want to open a Roth for but he has to have earned income. In a few years maybe doing household chores will get him some earned income but what can a 2 year old do to have earned income? Modelling for baby products is a possibility. Any ideas from the bright minds here?

    1. Get with a tax professional to identify avenues to invest in a ROTH IRA for your child. Prob best to first have a 529 open and funded monthly prior to the ROTH.

    2. This is a little dated, but as someone else said, see a tax professional. Paying your child for household chores and allowance do not count as earned income for kids and can NOT be used to fund an IRA (any type). Modelling for commercials, mowing your neighbors yard, etc, etc, does count though.

  12. thenocturnist

    I do a backdoor ROTH for me and wife only after maximizing my pre tax accounts. It’s an easy choice for me as the other option would be an after tax investment account. ROTH is excellent for liability protection and as an asset transfer vehicle to your heirs as well.

  13. In fairness to your Dad…he was in his 50’s when the Roth IRA was born. :)
    I never agreed with an income restriction on the Roth…with the Backdoor option availble I suppose…although there are tricky pro rata rules tied to that. Lucky for me, my current company allows the elusive in-service/non-hardship withdrawal aka Mega Backdoor Roth option. I feel like I’m making up for lost time. Perhaps your next gig will have the same option, Sam. It’s at a company’s discretion as to whether it’s offered/an option.

  14. Shiver me timbers! I had posted a few times earlier this year expressing my opinion that ROTH contributions are a great benefit for average humans such as my wife and I. I was compelled to post because FS opined that ROTH contributions are not a good idea.

    Now, as an early Christmas present, FS has authored a new post promoting the positives of ROTH contributions. I feel like I scored on Jordan (23 not 45) during his dominant years!

    Sam, your posts are often thought provoking, as well as entertaining. But I am grinning ear to ear reading an article you wrote that supports ROTH contributions.

    Our household is now contributing all new money into ROTH 457 contributions at 15% yearly as well as doing large pretax to ROTH conversions each year without pushing us into a new tax bracket. Our goal is to convert at least 50% to ROTH from our pretax accounts.

    2019 ROTH 457 limits are 19,000 yearly, which is huuuuuuge in my feeble mind.

    The rest of our plan is:

    1. Paying off the mortgage off way early. Currently debt free other than mortgage.
    2. Contributing to post tax investment and high yield savings accounts as Sam has discussed.
    3. Maxing HSA accounts.
    4. 12,000 – 14,000 yearly into 529 plans for our 2 small humans.

    We had never even thought of doing post tax investment accounts until FS wrote his article discussing that subject matter.

    While funneling pretty decent sums of US currency into ROTH accounts, I figure we are tricking ourselves into investing more. We are putting the same amount into ROTHS as we were in pretax. We felt the pain initially then we did not recognize the difference.

    Keep up the fine work Sam! It is a little present to unwrap and read each week.

    Be well and Happy Holidays!

    1. Great stuff! And on behalf of the government, I want to thank you for your tax contribution.

      Every Roth IRA contributor plans to be a multi-millionaire, which is why they are paying tax upfront because they fear they will make much more in retirement and therefore pay higher taxes.

      To have such confidence in one’s financial future is a great thing. How can one not be bullish for our kids?

      Let’s just hope the stock market and real estate market don’t collapse too badly, otherwise, the DIRE Movement might really take off!


      1. Haha, while we all have plans to be a multi-millionaire, the sad truth is very few of us will ever get there. That’s why I 100% agree with you that for most people, the traditional 401k is better. When I say multi-millionaire, I’m also throwing an additional caveat on that, meaning that it is adjusted for inflation. You may have $2 million 40 years from now, but after 2% inflation over that same 40 years that $2 million is worth less than $900k in present terms money. People need to understand the full picture.

        Unfortunately most of the people commenting here are just regurgitating information that they’ve read on the web somewhere. Most people are not good enough with excel equations to run the numbers for their own personal situation.

        For me, I’m retiring once I hit 100% income replacement. Which the vast majority of people will never be able to achieve. And for me, I’ve ran the numbers multiple times (ROTH vs Traditional) and I am investing 100% in a traditional 401k. Why would I want to pay taxes at my highest marginal rate right now, versus a lower effective rate later on? That just doesn’t make sense!

        I do love your comment for anyone contributing to a ROTH!

        On behalf of the government, I want to thank you for your tax contribution.

        I do feel like the ROTH was set up by the government to fleece the general public out of more and higher taxes right now. The reality is that very few of us fit a situation where a ROTH makes sense. However the government tries to blanket promote it like it’s the best thing ever because they know it’s a money maker for the government, not for the public.

  15. Sam,

    I have long been a proponent of the Roth savings options for a number of reasons covered in your article. Additionally, being an avid saver and religiously maxing out my tax advantaged retirement accounts, I’ve seen the roth as an avenue to maximize the tax advantaged benefits (i.e. the maximum contribution for a roth is ~1.25x that of a pre-tax account, in pre-tax dollars). Given that I’m 30 years old, I’ve “grown up” in an environment with much higher roth contribution limits than most. This is evident by my current wealth allocation as outlined below (rounded directionally for simplicity):

    Roth Accounts – Post Tax: $250K (42%)
    Brokerage Accts. – Post Tax: $300K (50%)
    Trad. IRAs / HSAs – Pre Tax: $ 50K (8%)

    To the “tax diversification” point in the article, I’m concerned that I am over-indexed in post-tax savings. My question to you… what is your recommended mix of pre and post tax retirement savings? Should I be pivoting my retirement efforts towards traditional accounts?

  16. Taxes will go up, making tax free withdrawals later critical.
    The ROTH is a wonderful way to leave dollars to heirs.
    You don’t have to reduce net worth for taxes. $1M in a ROTH is really $1M. $1M in a tax deferred account may just be $600K, or less if taxes go up.

    1. While it is not true that taxes WILL go up, the Roth is a nice insurance policy against tax increases. You really do need to consider whether your tax bracket in retirement will be anywhere near where it is during your working years. If you are a high earner, it probably won’t be.

  17. Good Post Sam, I find the american retirement accounts confusing relative to Canadian accounts. Canada launched a Roth IRA look alike in 2009 (TFSA) and i think they built on it to make a better version. It is post tax contributions with tax free growth in perpetuity, you accumulate contribution room if you miss a year of contributions. It is almost fully liquid (can withdraw at any time but cant re-contribute the withdrawal amount in the same year. An it is available for all income levels – which is great. I don’t know that there are really any drawbacks relative to a taxable account.

    It is a great place to hold particularly tax inefficient investments, like REITs (taxable as regular income in Canada) and such.

  18. My stepson turns 21 next month. Our gift to him, which I know he definitely won’t appreciate right now, is sitting down with him and walking him through the process of opening a Roth IRA. We will also start it off with a modest amount and commit to matching that amount for the next 3 years (while he’s in college and only working part time). I really hope I can show him how even small amounts invested early in adulthood can make a big difference later.

  19. Just to clear up a rule that I have seen misunderstood by many and in this feed on Required minimum distributions on an inherited non spousal roth:

    There are two options: The first is that the beneficiary has to take out the entire balance by December 31st of the year containing the fifth anniversary of the owner’s death. The second is more complex, but potentially much more advantageous. The beneficiary will have to start taking distributions over the beneficiary’s life expectancy, starting no later the December 31st of the year following the year of the owner’s death (this process is called the Term Certain Method).

    If distributions to the beneficiary do not start by December 31st following the year of the owner’s death, the rule requiring a complete distribution of the plan balance within five years will become effective. Generally, a written election choosing the Term Certain approach should be filed with the plan administrator as soon as possible.

    Beneficiaries would be well-advised to choose the ability to take withdrawals from the inherited Roth IRA over their life expectancy. The funds in the Roth IRA will continue to grow and compound tax-free while still part of the Roth IRA and the distributions from the Roth IRA will be tax-free as well (as long as the owner had held the Roth for five years or more). Imagine inheriting an account that grows tax-free during your lifetime and pays you tax-free amounts on a yearly basis!

    So my really smart mom put probably $4K in an IRA early. She rolled it to a Roth as soon as the rule allowed conversions. (She also contributed the max she could to her employers 503B). She kept the Roth invested and named me the beneficiary. When she passed in 2006, I CAREFULLY read the rules and found a broker that would allow me to take the RMD over my life expectancy in the IRS tables. (instead of 5 years–not everyone would). I have the benefit of a tax free nest egg and an annual gift from mom that gives me more annually than she ever contributed! I am in a higher tax bracket than she was, and I pay $0 in taxes on that RMD. Her actions remind me constantly to learn and read and understand the rules.

  20. If I contribute to Roth IRA, I lose the ability to tax loss harvest. In a taxable account I can invest in low risk tax free bonds and pay LTCG (usually at a zero rate) at MY discretion. Maybe snag a 3K ATL deduction now and then. No rules with a taxable account. I can gift/donate appreciated assets and have step up basis at death. Only a Governmental wealth tax would stop me.
    My strategy is to maximize my 401k and then take selective distributions to a taxable account prior to age 70. I am going to pay tax on it either way. The QBD (if employed) adds an interesting twist since I can bring down TIRA/401k bucks to even up my taxable income. This new law makes working in retirement much more attractive.
    The only advantage I see to a Roth is it is not included as income for Social Security. If I was younger maybe contributing to a Roth would make sense for its long term tax free appreciation. I do not trust the Government not to change the law over a long term period.

  21. I think timing explains why Roth IRAs never appealed to you, and this is one of the only blogs that I read that isn’t super-positive on Roths.

    You became self employed soon after the Backdoor Roth IRA (no income limit!) was made possible in 2010 [1]. It took a few years for it to become popular/the knowledge to spread, and after you have money saved in SEP IRAs from self-employment, the pro-rata conversion rule basically negates the ability to use the backdoor. [2] Finally early in your career, as you’ve mentioned, it didn’t make since since maxing the 401k was better.

    Backdoor Roths have been popular for some time and are now officially IRS blessed, but I haven’t heard of a single case where someone got whacked from 2010-2017 even before the official clarification. I’ve contributed to a Roth IRA since the second year of my college and I think it’s one of the best financial decisions I made early – ability to withdraw contributions penalty-free in case of need, tax-free growth.

    Now that I’m full time employed I have access to 401ks but it’s still good to have tax diversification, and tax-free growth and withdrawal is still better than taxed growth and withdrawal (fully taxable accounts) or tax-free growth but taxable withdrawals (traditional IRAs above the deductibility limit). After you max out the 401k at $19K annually, Roth IRAs really are the next best choice (“paying more taxes notwithstanding”, besides HSAs you don’t have too many other ways to stash away money tax free)

    [1] https://www.forbes.com/sites/jimdahle/2018/11/16/celebrating-ten-years-with-the-backdoor-roth-ira/#41a891d5ce7e

    [2] (if you have $50K in a SEP IRA and want to put in a $6K contribution to your Roth IRA via the backdoor, you’ll end up being taxed on 50K/(50K+6K) * 6K = $5,357)

  22. An easy fix to all these mental gymnastics, crystal ball prognosticating is to just make enough money to max out 401k (hopefully your plan has after-tax and in-plan Roth conversations–gives you an extra ~10-40kish in Roth per year depending on how much your employer contributes), max out HSA, max out IRA, and have enough left over for your brokerage account. Easier said than done for some people though.

    Also, would be fun to run the math on whether an after-tax investment account with the capital gains taxes and how those gains push you into a higher tax bracket and whether or not it would be close to as beneficial as paying off mortgage debt instead now.

  23. Backdoor Roth IRA has the disadvantage of triggering a 5-year rule where you cant take out your initial contributions (and earnings) without getting the 10% early withdrawal penalty. You would have to wait 5-years to withdraw your initial contribution penalty free. But if you are not going to touch the money till later and build a large nut then no big deal.

    A regular Roth IRA you are allowed to withdraw the initial contribution at any time, making that account much more flexible.

  24. Steven I am fabulous

    Maybe if your city and state hadn’t raped you so much in taxes; you would have been able to afford to invest for your future?

    1. Life has been a struggle, but I feel OK supporting my city to help fund services and infrastructure for all. Just have to keep my head down and work harder and smarter. Hope you’re doing well.

  25. Forgive me if others have already pointed this out. If you work for an employer that offers a match on your Roth 401k contributions, then your contributions will go into a Roth 401K BUT the employer’s match will automatically go into a traditional 401k. You get the advantages of both tax-deferred and taxable retirement accounts by choosing the Roth 401k.

  26. Freddy I Am Crazy

    It absolutely is true that federal tax rates are down now compared to say 10 years ago, which to this guy makes those of us buying into Roth losers and chumps.

    But stop and think for just a second why taxes are down compared to 10 years ago.

    Isn’t that entirely and solely due to our dysfunctional political system cutting taxes while simultaneously not cutting spending, adding to the deficit , adding to the debt?

    Right now, we’re like a proverbial lobster enjoying the warm water bath some nice person dropped us in.

    Unlike said lobster, we know someday, probably the day I retire in about 15 years, with my luck, the debt will no longer be ignorable and something will have to give.

    Unless one actually believes deficits don’t matter, ever, no matter how large they become, one has to believe that taxes will rise by then and SS benefits will reduce in order to bring federal tax revenue and spending can come into more of a harmony.

    This guy needs to understand things being the way they are now is no indication things will always be this way. Hence the wisdom of the Roth. Isn’t that always fhe financial co’s disclaimer “Past results are 100% unrelated to future results”?

    The Roth is not a OSFA solution

    Probably makes no sense to anyone who hasn’t amassed sizeable retirement savings to begin with, and probably makes absolutely
    no sense to anyone struggling to save anything.

    But if one believes taxes will have to eventually go up, SS will be means-tested to the extent that one won’t receive expected benefits and one will have sizeable retirement assets at retirement time, Roth makes a ton of sense.

    Roth conversions might make sense to some but I don’t have such large piles of cash lying around now to pay the taxes to convert. Maybe if I win the lottery I could pull it off. Obviously winning the lottery makes the Roth/conventional debate moot.

    1. One of the benefits for society is the willingness for Roth IRA investors to pay taxes upfront. So I thank you for your contributions.

      Best of luck on your path to retirement in 15 years or so.

  27. nofreelunch

    “It’s only when I have to pay a surprise tax where the liability wasn’t properly budgeted where have a problem” This statement the above comment of “Do you know the exact tax brackets they are in now in retirement versus while working in their income is?” is exactly the issue here. There are new, hidden taxes in retirement that are hard to factor in. The worst is what Scott Burns calls the “Torpedo Tax”. The a tax that adds in your Social Security income to your regular income for tax when your regular income (e.g. pretax retirement withdrawals) is above $32,000/yr. This is not adjusted for inflation, so its impact increases over the years. You have to go through the math, but in the very worst case this causes the effective marginal rate on a dollar of regular income to be in the 40% bracket. (This happens at about $120,000/year, right now, but will climb down over time.) Then there are Medicare premiums that are increased up to 4x of the “normal” premium, based once again on “regular income” (e.g. pretax retirement account withdrawals). I believe all this complexity is an intentional obfuscation so you don’t make the best overall lifetime tax decisions. It’s up to you to plan, plan, plan.

  28. Marie Jacobs

    I do know a few retirees who are in a higher tax bracket now than in much of their working years. Not because their income is higher-it’s about the same between SS, pensions and 401k & IRA RMD’s-but because they have lost so many tax deductions they had when working. Not saving for retirement means no shelter from 401k. Paid mortgage means no more interest deduction. Grown children means no more dependent exemptions, child credit, child care credit, college expenses credit, or 529 plan deductions-significant with multiple kids. Not sure if the same is true under current tax law but I think it is an important point to consider your taxable income is made of income AND deductions so changes to both should be considered before presuming future taxable income.

    1. Great points! Do you know the exact tax brackets they are in now in retirement versus while working in their income is? It would help to understand better with numbers.

      I’m thinking the difference Cant be very much can it?

      1. Marie Jacobs

        I’m not their tax accountant but will try to give some details. One was where a blue collar worker took the company’s lump sum pension as a traditional IRA during Great Recession market crash (living off spouse income until spouse retired) and account doubled in recovery. Never made much in job but doing very well now. Withdrawals plus SS are similar overall income but SS is taxable and kid & house deductions now gone so overall taxable income higher, and RMD post 70 will still trigger SS taxes mentioned below when they thought they would be under because they never made much.

        Another was small business owner with large family who complains about now paying too much in taxes with no deductions to offset like he used to have. He was probably used to writing off family insurance, home office, car, phone, “workcation” travels, spending money for kids who worked in business during breaks and summers and other business deductions that go away when the business closed. Spending seems to have increased from working years to fulfill bucket list. I’d guess requiring withdrawals from well funded 401k. Former company had a generous age-based discretionary company contribution that primarily benefited owner as oldest worker.

        A third was surprised to inherit an IRA from parent and complaining about RMDs from it makes her taxes too high.

        A fourth took a large one-time withdrawal from 401k (only investment) a few months after retiring (I think bought a lake house) and was shocked next April that a half year salary plus those withdrawals sent him into the highest tax bracket so had to take another one-time withdrawal to pay the taxes, which made that also a higher than expected income year.

        Another moved states to be near family for health reasons post retirement and is now paying state income taxes on retirement income she never paid when working.

        Maybe they are all small dollars and people that age have nothing else to talk about besides their health and what’s on TV but all were very bothered by paying the “unexpected taxes” and the conversations eye opening for me as RMDs were not on my personal radar at the time. I could see a case for not maximizing pretax investments for 40 years.

  29. Girard Schultz

    I do not have a Roth, but my 22 year old granddaughter has one. I started the Roth when she was age 18. She will not truly understand the concept until later in her life. By the time young adults figure out the need, it’s too late. Compounding needs to start as early as possible. Grandparents help your grandchildren now, not in just estate planning.

  30. A little skeptical

    I have a slightly different and pessimistic view of the Roth IRA. I was 18 and in the Army when it was introduced, and I have a firm belief that for people my age it will be bad. The Roth IRA is tax free today, and if enough people invest in them, when it comes time to withdraw the government will probably begin to tax it, though at less of a rate than a traditional 401k. Almost 50 years from the ineption of the Roth until my
    first withdrawl is plenty of time for Congress to need a new revenue stream and an untaxed amount of money held by a bunch of retirees could look lucrative.

    1. It’s a warranted pessimistic view. I think you’ll enjoy this post: Disadvantages Of A Roth IRA: Not All Is What It Seems. The government hasn’t done a good job managing the federal budget. As our population ages, there will be an steady increase in social safety net spending. Hence, good to diversify.

      1. So don’t invest in ROTH accounts because you suspect they will be taxed on the back end in the future?

        If we are going to speculate about what “might be”, then how about the government will seize all investment accounts and personally owned property? Everyone will be assigned a universal income with caps? That is no way to plan for the future.

        That is bad logic. I will make decisions based on the facts and law as it stands today.

      2. I read somewhere that out 100% of retirement accounts that only 10% are in Roth accounts. There’s just not enough money there to tax

  31. Albert Jeans

    I decided to start doing partial Roth conversions on my IRA to lower future RMDs and have my investments grow tax free. If I just took the RMDs and invested the money, I would still have to pay some tax on the capital gains. Also, assuming markets always recover, doing the conversion during a market downturn also cuts down on the taxes I have to pay now and then lets the money grow tax free when the market recovers.

  32. Right now I have a 401K and a Traditional IRA for my retirement accounts. If/When I quit my current job, I plan to rollover my 401K to an Roth IRA.

  33. This is an interesting post. In a much commented-on post from a few years ago you listed all the reasons why a person should NOT invest in a Roth account. That was a thought-provoking post for me that really made me reflect on my long history of making Roth contributions. While I didn’t agree with all your conclusions, I was much smarter for having read it and really examining my own motivations. So thank you for that, and this is a great follow up.

    I always enjoy reading peoples personal experiences in the comments, so I though I’d share mine. I opened up my first Roth IRA in 1998, the first year they were available. It was my very first retirement contribution. I have maxed out my Roth IRA every year since then, with the exception of 2013 when my income was too high for a Roth infusion (a one-time event, income-wise). I have gone along for the ride as the contribution limit rose from a paltry $2k to the current $6k. I’ve also had the good fortune of working for a number of employers that offered a Roth 401k, which has allowed me to make substantial additional Roth investments over the years. Despite the drawbacks you previously articulated regarding Roth accounts (which are very real), I’m very glad I stuck with Roth. About 50% of my retirement holdings are now of the Roth variety. Yes, I paid a lot of income taxes over the years that I didn’t have to, but I feel the future tax savings and the flexibility a Roth provides have been worth it. I have older family members that have huge tax liabilities on their traditional accounts, and it weighs heavily on their minds at a time in life when they should be enjoying a stress-free retirement.

    A few previously unmentioned advantages of a Roth that I’d like to point out:

    Flexibility: Once I reach the 59.5 yrs of age I can take distributions from my traditional accounts right up to the point I would move into a higher tax bracket, then switch to taking Roth money out. Allows a person a lot more flexibility/control in keeping their taxes at a lower rate. May also provide flexibility in keeping SS taxes lower.

    Effective Contribution Limit: In a very real sense, you are able to contribute more $ to a retirement account with a Roth because every dollar you put in, and all future cap gains and dividends, are tax free. Putting $6k in a traditional account is really like putting closer to $4500 when you consider future tax liabilities, not to mention gains and dividends (that’s not even counting state and local taxes). Yes I know, you could take the tax savings from traditional ira contributions and invest them elsewhere, but from a strictly “get as much $ as possible into tax advantaged vehicles” perspective, your effective max contribution limit is higher with a Roth.

    As you have often state, financial decisions are really based on an individuals situation. My experience will be different than others. When I lived in high state income states like CA and OR, I decided not to contribute to a Roth 401k (though I did max my roth ira) because paying that extra 8-10% to the state made the math untenable for a roth. I’m now in a no income tax state and pumping every dollar I can into Roth IRA and 401k.

    Thanks for all the great post here on FS, and keep up the great work!

  34. We were ineligible for a number of years, but this year we only had partial income (retired), so will max out both our Roths. It’s nice to be dropping out of the max tax brackets.

    For the next 5 years we’ll be in the 12% bracket and will be doing Traditional to Roth conversions within that bracket. The current structure has the RMDs killing us with Tax Bracket bumps in 12.5 years.

  35. I will hit the incline limit this year.
    But I don’t know what I need to do about it.
    It’s not like I get contacted and told to “stop contributing” by anyone.
    Guess I’ll keep contributing until my tax preparer says stop?

  36. Sam you may not be able to contribute to a traditional Roth Ira but I assume you have a solo 401k plan which you have the option of doing a Roth 401k. There are no income limits on the solo Roth 401k but you can only contribute $18.500 as an employee contribution in 2018 (20-25% employer contribution must still be traditional). In the current historically low federal tax environment it makes more sense than ever before to do the Roth in addition to the other reasons such as RMDs, withdrawal flexibility starting at age 59.5 etc.

  37. Any thoughts on Roth 401ks? Our family annual income is $400k, in high tax CA.

    Highly doubt we could ever have that much income in retirement. The plan is to move to a no income tax state when we burn out.

    Thanks Sam, excellent website.

    1. Phil,

      I max out my 401k and divide the contributions 50/50 between a Traditional and Roth 401k. If nothing else, it will be a hedge to whatever happens with future tax rates and diversify retirement income. We have a similar household income in the state of TX.

  38. Anyone have any insights into a Roth 401k? My employer introduced this as a savings option about 4 years ago and I have been putting almost all of my savings into that vehicle.

    1. My employer had the option for the Roth 401K too. I don’t know much about them, other than it is after tax money, and that you are limited to the $18,500 limit to contribute between the combination of the standard 401K and Roth 401K. Other than that, I think it behaves more like a ROTH IRA as far as growing tax free and the withdraws are tax-free. I’m not sure if you have Required Minimum Distribution when you hit 70 years old.

  39. Robert Graham

    I like having the Roth. I like the tax policy diversification. I do think the best early bet, if available, is the 401k for most of the reasons you mention plus the potential for company matching.

    I made most of my Roth contributions in early low-wage, low-benefit jobs. It’s not my largest account, but it’s amazing what a good market, some savings, and 15-20 (well timed) years in the market will do for you.

    Cheers to always learning and listening to your elders.

  40. Stories like this make me feel stronger about the idea of making regional adjustments for dollar denominated laws. I am from, and have lived most of my life in the NYC area. I have lived a few years in the Midwest. Further, my friends who I attended engineering school with ended up moving to other regions of the US. While I earned more living in NYC, they lived better living in other regions of the US. My home, while more expensive than theirs, is smaller and less impressive. I’m not complaining, I like my home. I like living where I do, although I know I will not retire here. Anyway, I think you see where I am going. I think that COLA adjustments should be made for contribution limits to IRA. Now I am not saying the $6,000 should be adjusted as I can always move. I just think that I should be able to contribute. Thus I want the income roll-off to be COLA adjusted.

    In years gone by, we could not do such complicated things easily. In the current age, we have the technology.

  41. The backdoor IRA conversion is news to me. I haven’t been eligible to contribute for well over a decade, and before that I was focusing on maxing out my 401K contributions every year and couldn’t squeeze (or really didn’t prioritize) the Roth IRA contributions on top. I do wish I had back then, as I could have easily found a way to squirrel away a couple grand if I budgeted it right and auto-invested it over the year in small chunks, but I figured the 401K was enough and I was really the only one of my peers maxing that out at the time so I felt good about it.

    With the Fed basically giving their blessing to backdoor IRA conversions, however, and looking into that a bit today on various sites, I am going to try and get a contribution in by the end of the year (or at the very least, plan on doing a contribution next year). The only pause it gives me is that even though it seems to be OK, it still seems like a blatant screw of the system for someone who makes more than the allowed income cap to contribute to a Roth IRA.

  42. Captain Know It All

    Why you should avoid tax deferred accounts:

    “Big potential clue as to the answer to that question may be found in the early pages of Jim Rickards’ “Road to Ruin”, where he quotes an anonymous senior BlackRock exec who said the US govt had already approached BLK in 2014 about not being allowed to sell in a crisis.” h/t Luke Gromen

  43. I am not able to contribute to a a Roth IRA due to income, but I actively participate in my employer sponsored Roth 401k. I work hard to max out my 401k, while splitting the contributions between a Traditional and Roth 401k offering, 50/50.

    My goal is to simplify the efforts in preparing for retirement and diversify what my retirement income looks like. No telling which will prove to be more efficient and valuable over a lifetime.

    Regardless, it is hard to contribute that amount of money to the Roth 401k today knowing that the tax on that money could be saved immediately and deferred until retirement…

    Is the Roth 401k offering common – do other readers have access or take advantage of this retirement vehicle? My current employer provided my first exposure to a Roth 401k.

    1. There are benefits and disadvantages to both a traditional and a Roth 401K. The way I see it, traditional gives you a tax break today, reduces your take home pay, and allows you to earn investment returns on taxable income. So, in my eyes you’re getting a tax break and you’re getting that tax break + interest on the investment and taxable income. That’s the route I decided to go (or, should say stay with as I decided not to do the conversion to Roth 401K when it was offered to me by my employer years ago).

      Roth 401Ks don’t give you that tax benefit today, however every penny you earn is yours to keep (at least by today’s rules) so though your $18,500 may technically cost you more each year than my $18,500 in contributions, since you are contributing after tax, you will likely not have to worry about tax on any gains you make on that account in the future. So, even if I end up 20%-30% higher than you at the end of the race, your tax break means we’re probably going to cross the finish with the same amount.

      So, tax now, or tax later? The tax will still get paid eventually. If you believe income tax will be substantially higher in the future, than Roth 401K is a great way to leverage that future tax today at a supposed lower rate. If you feel taxes will be lower, or remain about the same, then a traditional 401K makes sense, as you will have a larger egg to roll down the compounding interest hill.

      In the end though, the taxes always get collected. I don’t believe that the Fed will ever go after the Roth 401K people, but I also don’t believe taxes will be substantially higher for me in the future, either, so… I have a feeling we’re going to end up at the same place using different methods.

      1. I think taxes will definitely be higher after 2025 given the expiration of the Trump tax cuts. In addition, I will start collecting another pension in three years at age 65, and plan on collecting SS at FRA (a year and a half after I start collecting the pension). So both income and taxes will be higher. In the three years until then, I am moving what I can (while staying in the 22% bracket) from my IRA to a Roth.

  44. Simple Money Man

    I have a Roth for diversification in taxes like many here. I haven’t bothered to research; why are the contribution limits between IRAs and traditional 401k’s so wide in the first place?

    1. Kathy Abell

      I could never understand that gap between 401k and IRA contribution limits either. And don’t get me started on the contribution limit for a Spousal IRA! (of course, maybe it’s changed since IRAs first came out – I’ve only had work related 401(k)s while earning W-2 wages and rollover IRAs since retiring.

  45. I have a slightly different take on the ROTH IRA. Using backdoor contribution, there are no income limits – so they are available to everyone.

    I max out my pre-tax investments (401K), then I also max out my post-tax ROTH IRA. There is really no reason not to. This way I have more flexibility when I do retire to draw money tax free from the ROTH, or from my standard investment accounts, or from my pre-tax 401K.

    If I had to choose pre-tax or post-tax investments, I would always choose pre-tax, but why make the choice? Why not do both?

  46. It is interesting that you have your own kind of IRA – the Backstop IRA. You had a grandfather with mango trees and a father with enough on the ball to help with your blog. That kind of IRA makes a person comfortable — it’s not do or die. You have something to fall back on regardless of its monetary value. That IRA was your real lucky break. I wonder if you see that.

  47. Thank you for this post Sam. Long time reader and your no to Roth post is one that always stumped me.

    No RMD is another huge benefit for Roth IRA accounts. I like the idea of having a mixed tax/non-taxable retirement fund.

    What do you think about Roth 401k plans?

    That is one where I go back and forth. I have been funding my Roth and traditional 401k 50/50.

  48. Sam, I think you should still contribute to a Roth IRA, even now. Besides all the reasons mentioned above, it will be a lot more painful to pay taxes when you stop working and income is more limited. Now, you can always absorb tax or expense shocks by writing more blog entries, do more consulting, etc, but that’s not really what you want to do when you are in your golden years. I’m in a high tax bracket now and mentally would rather pay some taxes now on money I don’t need now for the tax free growth and use of it when I’m not working. It will give me tax flexibility then. Keep on writing, I enjoy it.

    1. You’re probably right. But believe it or not, I am a custom to maximum taxation pain For at least 10 years out of my working career, And, I have worked in two of the most expensive cities and states in the country for taxation. So I have this hope that there is only upside from here with regards to taxes if I move.

      I just need a big nut right now for the next several years because of some houses I’m looking at.

  49. Nobody knows what the future will look like. To me the best strategy is to have money in all the different tax environments, Roth, non-qualified investment accounts and pre-tax qualified IRA and 401k accounts. That way you have the ability to control your withdrawals in a manner most optimum for whatever tax world you find yourself in. To some extent this may be moot for many of your readers. I think you attract the most erudite in the community, not me, but everyone else, in a like attracts like way. I suspect they will find, as I have, that seeking purpose and fulfillment after retiring, they will keep making money without even trying, to the point that many will be at a zero or negative withdrawal rate and paying taxes will be a minor annoyance. It is nice that you are so open and vulnerable about your world view over the years. It makes your blog a must read for a lot of us as the always extensive comment chain verifies.

  50. FIRE walk with me

    Several people have mentioned backdoor Roth conversions. My problem is that I have a reasonably large rollover IRA from a previous employer’s 401k, as well as a traditional IRA, and I understand that these would be taken into account in a Roth conversion from a non-deductible IRA. Has anyone found a good solution to this issue?

    1. You could rollover the IRA to either your new employer, or bite the bullet and start converting the IRA. Neither are great solutions, which is why I have kept my 401k at a previous employer so I can do the Backdoor Roth.

  51. Like you, by the time I had enough to contribute to an IRA, I had jumped above the income threshold.
    I still do the backdoor Roth, however. While you’re right that a traditional/401k is a better choice than a Roth, that’s not the decision I’m making. My choice is between after-tax investing (where gains are taxed again) or after-tax Roth (where gains are NOT taxed again). For net worth maximization regardless of timeframe, it’s an easy choice.

    1. I agree with this and think it’s a point that is normally not considered in this discussion. My back-door Roth contributions are AFTER I have maxed out my 401k – not in lieu of. Becomes an easy decision at that point.

        1. Sam, it sounds like you are agreeing (it is a no brainer) that you will put the max ($5,500 in 2018) into a non-deductible IRA (rather than a taxable account) and then backdoor it into a Roth.

          Am I reading your comment correctly?

    2. Andrew T Colucci

      I agree completely. If you’re above the Roth IRA level of income, and particularly if you are significantly above it (say, 200k-250k or more /year), I’d recommend max 401k, then max backdoor IRA, then taxable investment account.

      1. That’s what both me and my wife are doing: Max 401k with employer match, then max ROTH IRA through backdoor conversions, then taxable investment accounts. She just turned 50, so her maximums went up.

  52. Thanks for the post Sam. I feel like I should share my experience with the Roth IRA.

    I started contributing to my Roth in 1998 because I was married with a child and I paid little to no tax on my military income. I contributed about $30,000 over 14 years during which time my federal tax rate was usually negative (married with 3 qualifying sons). I expected that my income in retirement would be taxed at more than 0%, so it made total sense. For at least a few years, my AGI was under $50,000 so I also qualified for the retirement savings credit which paid me 10% of what I contributed. So, the government was paying me to contribute what was essentially tax-free money into an account that would never be taxed.

    Today the account is worth about $120,000. In a few years I can use the contributions tax free to supplement my early retirement if necessary. There won’t be any required minimum distributions when I reach 70, and when I do withdraw, my tax rate will almost certainly be higher than 0%.

    If it can be afforded, a Roth is perfect when your income is low and you pay little or no income tax. I understand this doesn’t apply to many people, but it has been interesting to see how “disadvantaged” the government thinks I am.

    1. You did well, and you are lucky to have not had to pay taxes or a high tax rate when you were younger.

      I wish I could’ve contributed and had a nice $200,000 tax free portfolio to withdraw from today. But hopefully for those eligible to contribute reading this post, it’ll motivate them to start now.

  53. It is hard to predict future tax rates. Income tax could remain low with additional revenue coming from a value-added tax system or some other method.

  54. My dad has the same thoughts as your dad. He helped me start my Roth IRA at 20 years old when I was interning in college and although I didn’t understand what he was doing at the time, I realize now it was the best lesson he ever taught me.

    I’m also a huge proponent of Roth products because I’m an accountant and you never know what the government will pass for tax laws in the future. But I also think you need a blend of pre-tax, post tax and after tax accounts just like you need to diversify between stocks, bonds and real estate so that you’re covered in most situations that could arise. Great article!

  55. The Sweatpants Philanthropist

    I opened my Roth at about 19 years old. I was making a part time dollar or two above minimum wage earning while I went to college. As the kind of teen who devoured The Motely Fool books I knew with a 45 year growth horizon I was better off paying the taxes now. In the early years it was all I could do to scrape together $500-1000 a year. Boy am I glad I did. Leaving college with no debt and a few grand in an index fund for retirement put me way ahead of the game. I’ve prioritized maxing out my Roth every year since. Even at higher marginal tax rates (22%) because I have a long time horizon

    1. FIRE and Loving It

      Completely agree. And for parents of minors or younger adults that can afford it, I highly encourage opening and funding Roth IRA/Roth IRA for Minors (depending on age) for the simple fact that they are paying little or no income taxes. Its a no brainer to then get tax free growth and tax free withdrawals at retirement (among other features/benefits). My daughter made $2-3k per year working weekends while in high school and contributed the max to her Roth IRA for Minor each year. Same for young adults in their earlier low income earning years who are paying low income tax rates (especially under the new tax tables) so the savings wouldn’t be that large. For parents/others that can afford the financial gift, or obviously if the individual themselves can afford it without entering their 6+ month emergency fund, fund the Roth IRA.

      1. The Sweatpants Philanthropist

        I actually prioritized Roth contributions as my emergency fund in my early years. Makes it a lot more tempting to figure something else out when you’d be pulling from your retirement to fund ______. Not the right choice for everyone but it works for me to have my Roth IRA as the defacto emergency fund.
        While my parents gave me many financial advantages starting my ROTH was not one of them. They certainly encouraged saving from every paycheck I got.

  56. I’m currently contemplating doing partial IRA to ROTH conversions over the next 10 years (I’m 60.) I’d likely convert about $100k to $150k a year, depending on which tax bracket it would bump me into. Any thoughts on this?

  57. Dire walk with me

    I never contributed to an ERISA plan. Why? What do you think is going to happen when deficit explode to 2-3 T per annum? The rules of the game will be changed. The gubermint will come after the ERISA assets first, forcing Treasury purchases in exchange for preferential tax treatment. A carrot at first, but more draconian as things deteriorate.

  58. Final Important Point: If you are a middle income person who generates $131,000 a year or less for your entire life, and is therefore able to contribute to a Roth IRA, do you really think when you retire, your income will now be more than $131,000 a year, putting you in a higher income tax bracket during withdrawal ceteris paribus? Be realistic. At today’s 10-year risk free rate of ~2% (as of 2016), you need $6.3 million dollars to generate $131,000 a year in income!

    You will likely NOT make more in retirement than during your working years. Stop being delusional!


    Amen. I won’t be contributing to a Roth. A pretty clear cut decision.

    1. Hi Jon, thanks for bringing this quote out from my disadvantages of a Roth IRA post. I’ve updated it!

      Given the 10-year bond yield is closer to 3% now, you only need $4.36 million to generate $131,000 a year in income, BEFORE taxes whoo hoo!

      It is funny to hear people be staunch opponents of contributing to a Roth IRA, yet are staunchly against my average net worth for the above average person and after-tax investments amounts to comfortably retire early articles.

      It’s like they don’t understand the math or something.

      Alternatively, maybe it is a VERY bullish sign that the average American is much wealthier and more bullish on their financial future than reality.

      1. Mickquick6652

        I understand risk free rate of return but asset accumulation goals should probably include the use of a withdrawal rate based upon expected age of retirement. When I retire at 65 I assume a 4 percent withdrawal rate with a good percentage of that withdrawal rate “risk free”. It’s ok to spend some principal. Using the risk free rate to estimate tax rates and assets needed to accumulate us just too conservative and unrealistic IMO.

    2. Even if that were to be the case, is it likely that marginal tax rates will be this low in 20-30 years? I could easily see the income span that forms the 22% tax bracket currently being 30% or higher in 20-30 years. Last year, my marginal rate was 28%, so I took the deductions in my 401k. With my marginal rate being 22% for 2018 and 2019, it is very tempting to add to a Roth IRA and possible the Roth 401k option next year.

    1. I could, but do I want to at my current tax rate, even though taxes have come down? Unfortunately, the answer is no again. Would you contribute to a Roth IRa if your federal marginal income tax rate was over 30%?

      But I’ll be damn sure to make my son contribute to a Roth IRA when he starts working minimum-wage jobs I’m high school and throughout college.

      I need to instill in him the discipline of saving and investing early on, so he can continue once he becomes an adult.

      1. I do a backdoor every year. Doesn’t help me for taxes since it’s all post-tax contributions. I still max out my 401K, and up to 25% of my 1099 income after self-employment tax into my solo 401K. I add money to my tax-advantage brokerage account w/ Vanguard as well. Just some extra cushion that is tax-free at the time of w/d for me. And I’m way above the 35% tax rate currently.

      2. Why wouldn’t you contribute to a Roth IRA with a 30% tax rate? At that income, you’re above the max for deductible traditional ira, so your comparison is with other post tax investments, not with a pre tax IRA.
        Given that, isn’t tax free growth preferable to 30% taxed growth? Especially when you can withdraw the contribution at any time after the Roth has been open for 5 years

        1. True. Probably need to get on it.

          Right now, I’ve got the Solo 401k, Rollover IRA, SEP IRA, and 529 plan. Gotta do the HSA too.

          One of the big reasons why I need liquidity without penalty is the desire to buy a nice house in Hawaii within the next 1-5 years. There’s a lot more opportunity now with inventory much higher and the economy slowing down.

          1. Sam, the SEP IRA and Rollover IRA are the biggest limitation for you to do a back door Roth IRA because of the pro-rata rule.

            For the purposes of the pro-rata rule, the IRS looks at all your SEP, SIMPLE, and Traditional IRAs as if they were one.

            When you do a backdoor Roth conversion, you will be taxed on the “pro-rata” percentage of your total pre-tax IRA balances to the total of all of your IRA balances.

            This can be avoided if you are able to “roll in” your rollover and SEP ira into a 401k.

            1. Thanks. Will look into the pro-rata rule, and simply ask my rep what my options are. Sounds a little complicated, but makes sense.

              It’s always a little difficult to take action that you know will cause you to pay more taxes.

            2. Yup, I used to contribute to my Roth IRA every year through the back door until I rolled over my big 401(k) into a Traditional IRA. Now I would have to pay taxes on almost all of my back door contribution.

              Because I rolled over my 401(k), back door contributions make little sense. At 49 years old, I decided that I am not going to turn my Roth into a fortune, so I just put money in my taxable account and call it a good day.

          2. Once you have even a moderate amount saved in non-Roth IRAs, doing the backdoor starts to become really tax-onerous.

            Ex: If you have $50K in a trad IRA and want to put in a $6K contribution to your Roth IRA via the backdoor, you’ll end up being taxed on 50K/(50K+6K) * 6K = $5,357 at your federal+state levels). It’s basically forcing you to mostly convert your Trad IRA to Roth, when you’d really like to have a separate bucket of $6K that gets put into a trad IRA and separately convert that chunk to Roth (but the IRS won’t let you do this). At this point it’s probably not even worth chasing marginal tax shelterage of a Roth IRA, which is a few hundreds of dollars on the $6K saved, and focus on better investments.

            1. The finance buff blog goes over the details of the back door roth process. But, yes you’ll have to “hide” the IRAs by rolling them into your 401k. (may or may not be allowed). It’s not too late to create some ROTH space, Sam!

  59. Sam, one of the advantages to living in Germany is that I get to read your posts before most of your readers are even up & out of bed!

    I’m glad you brought up this subject, as this is one of the most asked questions I get from my peers regarding my personal investment strategies: Traditional or Roth?

    I’m an Active Duty Military Service Member and as such, are able to take advantage of not only the Government’s Thrift Savings Plan (TSP), but also I choose to invest in private IRAs. The government does not consider this “double-dipping,” as the TSP is the military equivalent of an employer-based 401k; what I do w/ my after-tax money is my business.

    I came on active duty in 2002 and made a commitment to begin investing as a young Second Lieutenant. Although it wasn’t until after I got married in 2007 that I realized, as a single income earning household, I didn’t really need the benefit of tax deferred investing. We were already in a low marginal income tax bracket (15% filing jointly) and paying about a 5% effective rate, so that’s when the Wife & I decided to open up our private Roth IRAs.

    We prioritized contributions to these private Roths over the TSP based on the time value of money. Yes, I echo your sentiment about handing back ANY of my hard earned money to the government before it is absolutely necessary, given their irresponsible spending, but we looked at it this way: it’s better to pay the taxes now (while in the lowest possible tax bracket) and let that money grow for as long as it can in a tax-free status, than to defer the taxes into the future when our tax status may in-fact go up as I enter a 2nd career.

    It wasn’t until 2014 however, that the TSP program began to offer the Roth option within the investment portfolio. I saw this as a HUGE opportunity. When that happened, I shifted all reoccurring TSP contributions from Traditional to Roth and have never looked back. Through prudent planning & investment discipline, over the last 2 years we’ve been able to max out the TSP contributions in our Roth account ($18,500 each year), while simultaneously maxing out contributions to our private Roth IRAs ($5,500 each/$11,000 combined). Not bad for a Military Officer whose taxable pay is just under $92K/yr!

    One thing that your article didn’t address though was the advantages of Roth (v. Traditional) at the end of the line. Roth accounts have no RMDs; they can be assumed by a qualifying spouse upon the owner’s death and rolled directly into the survivor’s account (or a new account in the survivor’s name); and I believe they can be transferred to a designated beneficiary tax free as well, under the same distribution rules as Traditional accounts: Lump Sum or 5-year exhaustion.

    The only deal that’s any better than this at avoiding additional taxation is Life Insurance payouts… but someone has to LOSE so that someone else can WIN in that scenario!

    CAVEAT: It’s not that I don’t believe in paying taxes (I do work for the fed govt, after all; so thank you to all the other Tax Payers who provide my salary), it’s just that I share Sam’s theory of not further enabling the government’s bad behavior by giving them my $$$ sooner than necessary.

    – RD

    1. Great point about no required minimum distributions. I do wonder though when we will ever spend all our money if we just keep transferring it down to other people.

      Are you an American living in Germany? If so, how was life over there and what are you doing? Do you get the first $96,000 of income tax free?

      1. Charles Conrad

        Would I be less happy if I quit work, had only S.S. Retirement, lived in subsidies housing, received food stamps, and state medical and paid no taxes. I think I would be fine.

  60. You’re reasons for not contributing are somewhat valid, especially the fact that Manhatten is ridiculously expensive. For me, a traditional IRA has been a better deal since I’m in a much higher tax bracket now than I will be when I retire. So I want the tax savings now. I do however also have a Roth but it’s much smaller than my traditional.

  61. I always wonder at the logic of why there are phase outs to ROTH contributions based on income.

    The IRS has even come out and said that the backdoor ROTH method is legal. If they endorse that method why create all the extra hassle of doing a backdoor method, just open the front door for everyone to come in.

    I also think that having ROTH contributions open to high income people actually helps the IRS as these individuals are paying the tax up front at the highest tax bracket. Just defies logic why the IRS thought this would be a bad idea as they would get more revenue per ROTH dollar invested.

    2018 was the first year I did a backdoor ROTH conversion. I have always maxed out my retirement funding even as far as putting money on a traditional IRA that was a non deductible contribution because of salary. Over the years I therefore has a large cost basis (close to 70k) but never converted because of the pro rata rule (thought it was too much of a hassle to do rollover etc to avoid it which fortunately my 401k allows). Finally did it and it was not too painful. Now it will be easier doing backdoor diversions going forward

        1. I’m not sure. I have a sense that no matter how much or how little I have, my happiness will stay pretty steady. So long as our basic needs are met, life is pretty good in general.

  62. Jody Foster

    Can you contribute to a non-deductible IRA (no income limits, right?) and then do a backdoor conversion to a Roth?

    It would protect your future gains from taxes so it would dominate a taxable account; and it would be a good account to leave to your son as he could spread out the distributions while gains continue to accumulate.

    Thanks – love your blog!

    1. I was going to leave a similar comment. I have a 401k at work and make too much money to contribute directly to a Roth IRA. So I contribute to nondeductible IRA to make back door Roth contribution. I cannot think of a reason why anybody would contribute to a non-deductible IRA for tax differed growth, when they can transfer to Roth IRA and get tax free growth for no additional tax bill .

      Advantages of Roth IRA for high Net worth/high income individuals
      1. Allows flexibility for big expenses and tax planning (especially for those who are FIRE and maybe taking advantage of ACA credits to purchase health insurance on exchange)
      2. Allows you some pretax/after tax diversification for taking distributions (I have hard time thinking up scenarios where future tax rates are lower while Gov continues to run deficit spending)
      3. Functions as Emergency Savings (Can take contributions out after 5 year period without penalty. Personally would fund roth before 529 because you can use contributions to pay for college without penalty. Hopefully can fund both)
      4. Much better asset that tax deferred assets to pass down to heirs (imagine the tax implications of inheriting a large IRA/401k that you are required to take distributions, while your heirs are hopefully working in high earning professions)
      5. More tax efficient vehicle to participate in debt investments (how much better does an 8% return when you don’t have to share 3.2% with Uncle Sam)

      These are just a few I can think of off the top of my head. Would be interested to see what other thoughts the crowd can come up with to fund a Roth.

      1. Elyssa Kauerz

        Dont forget about taxable social security with its low out of date thresholds and no signs of improving. A Roth is one great anecdote. And converting some funds from pre-taxed plans is still on the table.

      2. The 5 year rule is for taking out earnings or for an conversions. You can take out regular contributions (i.e. not conversion) to a Roth IRA at any time.

  63. We choose to contribute to a Roth IRA because tax rates are at historically low levels right now and we expect to get bumped up a few tax brackets once my wife begins practicing after residency. How’s that for bullish about our future? Taking advantage of historically low tax rates in both our country and our marriage! After she begins practicing, we’re sure to lose our ability to contribute to our Roth IRAs.

    The Roth IRA is a good idea for tax and retirement diversification purposes. We intend to have a diverse set of retirement accounts we use over our lives to feel like we haven’t made any major financial mistakes by failing to utilize any of the accounts available to us. We’re happy just knowing we max out our contributions each year, regardless of account type. We use what’s available to us as much as we can.

    1. Headline rates are “low”, however, effective rates have barely changed in the last 60 years as many things that were deductible are no longer. There is a reason they passed the AMT in 1969 and it wasn’t because of the “high” (stated) tax rates – it was because there were millionaire incomes paying 0 taxes. The federal government has collected around 20% of GDP in taxes consistency since the late 50s. I don’t think there is room to budge that. That said, if you are below a 20% effective tax rate, I think a Roth makes sense.

      1. Young and the Invested

        Great points. It’s the effective rates that matters for your assessment.

        Last year, we were below the 20% effective rate and will most certainly be above it next year. Taking advantage of the Roth IRA while we can makes the most sense for us since we’ll lose access next year.

  64. My wife and I both max out the back door Roth IRA. It’s definitely good to have both pre-tax and post-tax buckets to withdraw from. We can never predict what will happen in the future, so it’ll be nice to have the option to change withdrawal strategies to whatever suits our situation at the time.

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