Is there an ideal percentage to put in traditional, Roth, and taxable accounts? The sponsor of today’s video is New Retirement:
In today’s video, we’ll look at whether there is an ideal percentage to invest in traditional, Roth, and taxable accounts.
0:00 Ideal Percentage Between Roth, traditional, taxable accounts
1:15 There is no ideal allocation
3:20 Rules of thumb
4:46 Roth conversion ladder
6:33 Other factors
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While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I’m the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
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When it comes to investing, diversification is key. It’s important to spread your investments across various types of accounts to take advantage of different tax laws and maximize your returns. One common strategy is to invest in traditional, Roth, and taxable accounts. But what is the ideal percentage to invest in each?
Traditional retirement accounts, such as 401(k)s or Traditional IRAs, offer tax-deferred growth. Contributions to these accounts are made with pre-tax dollars, meaning you don’t have to pay taxes on that income until you withdraw it in retirement. This allows your investments to grow over time without being hindered by annual taxes. Ideally, you should aim to invest around 30-40% of your total investment portfolio in traditional retirement accounts.
On the other hand, Roth retirement accounts, such as Roth IRAs or Roth 401(k)s, provide tax-free growth. Contributions to these accounts are made with after-tax dollars, so you don’t get an immediate tax benefit. However, the earnings and withdrawals are tax-free in retirement. Roth accounts are particularly advantageous for individuals expecting to be in a higher tax bracket during retirement. It is recommended to invest around 20-30% of your portfolio in Roth accounts.
Lastly, taxable brokerage accounts offer flexibility but are subject to capital gains taxes. These accounts allow you to buy and sell investments whenever you want without any restrictions. However, any gains you make on these investments are subject to capital gains taxes. Ideally, you should invest around 30-40% of your portfolio in taxable accounts.
Keep in mind, these percentages can vary depending on your financial goals, risk tolerance, and future plans. It’s essential to consider your individual circumstances before making any investment decisions. Consulting with a financial advisor can help you determine the optimal portfolio allocation for your specific needs.
Additionally, rebalancing your portfolio periodically is crucial to maintain the desired allocation. As the value of your investments changes over time, it’s important to adjust your allocations to ensure they remain aligned with your goals.
In conclusion, diversifying your investments across traditional, Roth, and taxable accounts is a smart strategy to optimize tax efficiency and flexibility. The ideal allocation may vary, but a general guideline suggests investing around 30-40% in traditional accounts, 20-30% in Roth accounts, and another 30-40% in taxable accounts. By carefully balancing your investments across these accounts, you can best position yourself for long-term financial success.
With Roth IRA, the money you are contributing has already been taxed. At any time for any reason, you can withdraw your contributions tax-free and penalty-free. Additionally, any earnings on investments can also be withdrawn tax-free and penalty-free, Not sure how much to contribute, I'm still at a crossroads deciding if to liquidate my $338k stock portfolio.
So basically, in an 8 minute video, the ideal percentage comes down to … "it depends".
I'm doing exactly what you said for conversions. My income is going down a substantial amount when I retire in a few weeks and I plan on doing conversions of my traditional IRA to Roth over time.
Clearly, as Rob points out, there is no easy or correct answer because we don’t know the future. My take as someone who made a good income while working is that my tax rate today with very little income is much lower. Looking forward to the New Retirement scenario planning show. The response that said the only guarantee is that the tax has been paid by putting the income into a Roth account is not logical, as they could be taxed differently in the future.
The M1 Finance $30 Bonus (IRA & Taxable Accounts) link is broken.
All my income comes from my investments…options. Is there a way to invest this in a ROTH IRA? I don't think it's considered "earned income"? I'm 57.
I had to unsubscribe because he looks like Anderson Cooper
If you’re on the ACA for medical insurance then Roth conversions may not make sense unless you’re rather healthy and have low medical bills. We are planning to hold off on Roth conversions until on Medicare (and delaying SS until 70.) The cost adder based on income is lower for Medicare than for the ACA.
Good topic. Having tax diversification is key to managing taxes efficiently in retirement.
In the scenario where one would be getting a pension, would it mean investing in Roth while working is better because your taxable income goes down only by 40-50%… meaning you'd still have an income, hence not as low as a no income tax rate?
I am maxing out my Roth 401k. I am currently at the 19% tax bracket. Sometimes I jump into the 22% tax bracket Sometimes because of overtime. The 19% / 22% tax bracket is for state and federal combined.
should do examples …would have made this easier ………………………SPECIFICS
The ideal percentages are whatever provides the most tax savings.
Hi Rob, thought-provoking as always. Thanks! One concern I have is the widow trap. I don't see that addressed in articles I read about Roth vs Traditional. My wife is younger and healthier and will likely outlive me and then file in the single tax bracket. That makes a massive increase in tax rates at the same time as a reduction in social security from our joint amount, and two of our smaller income streams will end when I die. I modeled it on Empower and she will have a much lower success rate estimate than we do jointly unless I can hang on longer than actuaries predict. A lot more Roth conversions of my Traditional IRA money would mitigate that risk. When estimating conversion amounts I have changed from trying to make sure that I fill up a tax bracket "without going over" to making sure I "go over by enough" to avoid converting less than I could have when the final tax amounts can be calculated in the next year. Overdoing it just a bit seems worthwhile now.
Most people maximize best in the traditional accounts. They lack the wealth to have tax problems.
Rob, one element you're leaving out is the cost & effect of inflation. They always say you'll be earning and spending less money. NOT TRUE! At least for me, I'm earning more now and spending more now than ever before. And that does not include my and my wife's Roth IRA. In RE to the Roths, I'm 79 and have yet to touch the Roths. We're being well taken care of by our regular investments, and that includes long trips to Europe each year. Save as much as you can for a great delayed gratification.
Too many unknowns. What are the tax rates saved going in, coming out, what are your investment returns gonna be in what timeframe, when do you have to start taking RMDs, what life events might require you to need money before your planned withdrawal. Bottom line, have some of each so you could manage withdrawals in the end and most importantly SAVE. The problem most people have is no savings or not enough savings. They'd LOVE to have to have the problem of paying taxes on money they didn't save……
This is the right answer. There is no logical basis for apportioning your funds between an IRA and a Roth on a set percentage basis without regard to the tax consequences in your particular case. Instead, it's a question of paying taxes at the lowest possible rate — again, in your particular case. Of course, you might have to make some decisions with seemingly insufficient information. Welcome to the world of personal finance.
On no choice of where the money goes add future catch-up (over age 50) contributions. I heard starting next year (??) these must go into a Roth 401K. What happens if your employer (like mine) does not offer a Roth 401K? No catch up?
Rob, I'm retired and my only income now is from my pension. Can I take some of my savings and put it into a Roth IRA, or does the money that is put into it have to be "earned" income? That is, money that is paid to you recently from being employed presently. If I earned the money years ago and saved it while employed, how would I differentiate it from the money I have earned in interest, etc. so as not to break the rules?
I get triggered every time a financial pro says "5 year rule" with no explanation since understanding the rules (there is more than one) is very complicated. I know CPAs that have different opinions. I"m going to have to read the relevant IRS rules myself. If you want it done right …
I've never had a good company sponsored plan hence why most of our assets are in taxable accounts. I had a decent plan once 20 years ago but after the Great recession that benefit was cut. The other plans had such high fees attached to their funds that I didnt participate. It actually worked out ok because I early retired and have no concerns about needing income to bridge to 59.
My plan just started offering the 401K Roth I am 2 years out from retirement would it make sense to put all the 401K money into a Roth 401k and if so would I still be able to put in the $7,500 in an individual Roth outside of that?
Good video, and I find it a fascinating topic. There's a window from 59.5 until beginning SS and Medicare where Roth conversions can be done tax free. Because drawing from a Roth account doesn't not count as income, yearly income could be $0 on paper, allowing completely tax free Roth conversions up to the standard deduction. Additionally, leveraging the 0% capital gains rate (after-tax brokerage) for incomes up to the limit is another powerful weapon to draw from. You are right, every single scenario is different and it's super important to evaluate each on a case by case basis to maximize their tax benefits. Cheers
Besides ease of access, is there really a reason to do after tax brokerage account investing when I can put more in Roth by way of mega backdoor Roth conversion or maxing Roth 401k? | understand it's nice having "3 buckets" to manipulate, but in the end I want to pay less taxes, so l'll take a little hassle if it saves thousands.
Currently both 45 and have been putting away heavily, now with 35% in Roth and rest in Traditional 401k. We may retire before 55, but with enough in Roth I could technically pull the contributions and side business. The popular reason for brokerage is to bridge until 59.5, but it seems if I have option to put in Roth now, and pull some contributions from Roth later, I'm still at advantage over putting in a brokerage account which would be paying capital gains.
The plan was to do some brokerage account once everything was maxed out, but at this point I really don't see the point in it and we can technically "let up on the gas" a bit and enjoy some of our earnings now instead of investing so heavily.
The older you are, the less you can control this.
May I suggest you rename the video to "Traditional vs. Roth accounts?" An allocation for retirement vs. taxable accounts wasn't covered as the title suggested would be included. 🙂
Taxable isn’t the worst possible outcome for an investment. At least capital gains and qualified dividends aren’t taxed as ordinary income.
Lets say your 62 and want to stop working at age 67. Also lets say from age 67 to age 71 you would like to draw about $12000 per year from a retirement account. You likely would be better going with a traditional IRA instead of a Roth. Lets say your goal then is to contribute $7500 per year in to an IRA from age 62 to 67 and with investment return you end up with $48000. Next if you had gone with the Roth you could go ahead draw the $12000 per year for 4 years with no income tax on it so you end the 4 years with Zero. However if you had gone with the Traditional IRA you also would end the 4 years with Zero in that retirement account. However with the Traditional Roth even though the draw is subject to tax it would be tax free because your deduction per year on your tax return is more then $12000 per year. Now heres why the Traditional is the better choice.Each year from age 62 to 67 your getting a $7500 deduction so depending on your tax bracket that may give you lets say $2000 per in tax savings that you can put in to a taxable investment account.
Here is my take. Being able to withdraw retirement funds tax free in you later years is pure gold. Therefore if you have sufficient income to pay the taxes today you should always try to contribute to to a Roth. Do it via back door contribution / conversion if necessary. However only do this if you have sufficient disposable income to pay the taxes on the conversions today. If you are struggling to make ends meet then I would not advise this approach. If you can do it though, you will thank me when you are retired in your 80's with a big Roth balance throwing off growth and income tax free regardless of the state in which you live. I call it my "money machine": closest thing to money growing on trees there is.