Roth vs Traditional IRA

Archive link if you don’t have subscription:

Four-fifths of households in retirement will pay an effective tax rate of 0%, or nearly zero, write Boston College researchers Anqi Chen and Alicia Munnell (the director of the Center for Retirement Research, and a MarketWatch contributor) in a new paper. That includes federal and state income taxes.

Only those in the top fifth of retired households by income pay significant taxes, and even then the average rate for that group is only 11.3%, they calculate.

In the top 1% by income the average is 22.7%, they add.

“Regardless of the drawdown strategy, households in the bottom three [income] quintiles most likely pay zero taxes in retirement,” write Chen and Munnell. “This percentage rises to only 2 to 3 percent for the fourth quintile. In terms of financial security in retirement, this finding is good news—most households are not dramatically underestimating their retirement resources by not considering taxes.”

Conclusion: Traditional is way better than Roth. Defer taxes as much as possible. Don’t pay now if you can avoid it.

1 Like

Roth is impossible for tech people anyway.

1 Like

There’s always mega backdoor roth that several large employers provide.


Not really, esp for you and for many who holds multiple real estate and stocks above 2M level.

If you want to use those money during your period ( not for inheritance to heirs ) , TIRA adds lot of tax when you take it out.

By holding real estate you may easily cross 100k revenue by 70s. Any TIRA ( RMD - min withdrawal limit forced to take after 70s or 74 age) increase your tax liability high.

If you invest in Roth, you pay just $2500 tax for $6000, but retirement can exceed $1M easily.

Here is my case: My son earned $6000 each year during his 4 years study. I filed separate tax for him only to open Roth, maintained my me.

Four years contribution was $22000 ($5500x4). I made it to $42000 when he completed college.

At that time, I handed over the Roth to him and asked him to maintain.

He was fresh from college bought 200+ TSLA for that full amount. It multiplied the same way like WQJ.

At one time, he wanted to sell it and buy a condo full cash with his Roth IRA. I advised him not to do such, not to sell TSLA.

He is a techy with very high pay+options+Rsu. Just 4 years after college.

Initially he was very reluctant to contribute Roth IRA. Now he understood the benefit and is 100% contributing his full Roth 401k and backdoor Roth IRA.

Had I opened traditional he would be paying hefty tax after retirement.

Early birds under 35 age or any one, irrespective of any age, foresee retiring with $5M+ assets around 60, Roth is the way to go.

All techies can use “Backdoor Roth IRA”. Today is the first day eligible to use backdoor roth for 2021. I just transferred max TIRA for me, my wife and for my sons each full today.

Tomorrow, Roth conversion will happen maxing it.

1 Like

You really think your annual income in retirement will be higher than working?

This is the key question everyone needs to analyze and finalize.

I will put it this way.

Bright chances are there: When assets value increase in next 15 years, I will be paying same tax rate. Tax rate is almost max now.

If I leave these years, I can not roll back later.

See this case: hanera can not sell his AAPL without paying tax or it goes to inheritance.

WQJ it is the same, he has to pay taxes whatever he sells.

If those are in Roth, they can easily take it without paying any tax.

The pay flattens after sometime, but investment raises exponentially over time with power of compounding. This is the issue.

You don’t sell everything in 1 year though. You can sell a small amount each year which keeps you in a low tax bracket. You only end up in a top bracket if you sell it all in 1 year. If it’s in a IRA, then you can even sell and not pay taxes. It’s only when you withdraw, and you can control how much you withdraw per year to limit your tax bill. I can’t imagine a year where I withdraw as much as my current income.

No doubt, it depends on individual situation where they land into when they are retiring.

Higher income and higher net worth, esp on stocks, they need to analyze clearly and decide. They are vulnerable to stay in the same bracket.

Same way, young below 30-35 age techy above 200k, they have long years to grow with power of compounding. They are vulnerable if they do not plan properly. Their tax rate now is lower than tax rate after retirement.

I knew exactly how my son’s future when he was earning small $6000 at college. His tax rate was very low or no tax. He got 1099 regularly. He has 50 years of growth.

The four $5500 will become 922k at 8%, 1.44M at 9% and 2.25% at 10% yoy return. But in 4 years, his Roth exceeded $400k+ and now he has 45 years to grow. Just by simply buying QQQ, less aggressive than TSLA but diversified, the growth rate can be accelerated above 8% appx 9.14% next 45 years.

If someone maximize 19500 for 401k and 6000 IRA every year, think of their situation by the age of 70.

Just assume 8% and calculate the value.

I agree that No single solution fits all.

Usually recommended approach for high income (tech, doctors etc) are you max 401k in traditional, and then do backdoor roth IRA, and then mega backdoor if available. That’s the prioritization.


I think it is for my parents - they saved aggressively while working.

What is the mega-roth?

Mega backdoor Roth is where you can use after-tax dollars and contribute the difference between the maximum 401k contribution (2021 limit is 58k) and what you+employer contribution is (ie. if employer matches 100% up to the 19.5k you contribute this would be 39k). In this scenario you could contribute an additional 19k after-tax dollars to your 401k (39k + 19k = 58k). Problem is not all employers offer this, so YMMV.

Here’s a quick article with more details:

1 Like

My company provides mega backdoor roth.
I set up in-plan conversion with fidelity and contribute to after-tax 401K (after contributing max limit to pre-tax 401K as @BAJacket said). Whenever I make a contribution to after-tax 401k, it is automatically converted into my roth 401K immediately and grows tax-free from then on.
I found it very convenient.

1 Like

This is called “In line Roth conversion”, fidelity provides such service. The benefit is near zero tax during every conversion and that equals to complete Roth.

Last 4 years, I used such fidelity account to maximize retirement savings. In fact, I stay in my company to just fill Tax free Roth retirement savings only.


I had no clue the mega-backdoor roth even existed. Thanks guys!