5 Comments

1. 

   Charles Byrne on May 17, 2023 at 2:42 pm

   When you are young your tax rate is low so it really depends on your effective tax rate. If you are young and currently in the 10-12% bracket you might in actuality be paying a 6 or 7% effective tax after standard deductions and any credits. When the Trump tax cuts expire then you'll pay more in taxes unless congress and the president continues the current rates.
   That's an immediate disadvantage even if you manage to retire and you are in the lowest tax bracket whatever that rate is. Which is highly unlikely since most individuals accumulate wealth.

   Second, let's assume that the max IRA contribution remains $7K and that the individual can make that full contribution in either a Roth or traditional. Let's also assume that they average
   9% return after fees and they contribute for 49 years. Their IRA will be $6.2 million from $342K in contributions. If the choice was Roth only $342K was taxable and already paid. The remaining $5.87 million is tax free. If the choice was traditional then $6.2 million is taxable. Your portfolio will continue to grow in your retirement either way, but if there is a 10% tax rate then with a traditional IRA at the minimum you will pay $620K in taxes on that portfolio. Using 2022 data, even if you were just under the max allowable AGI (140K) and in the 24% bracket every year and paying $27,435 in taxes (15,213.50 + 24% over 89,075) and you counted the $7K at the 24% rate you would still only pay $82K in taxes on your growing portfolio with a Roth in the worst case scenario:
   Traditional $620K or more taxes or Roth $82K or less because you will not likely have a starting job with a salary that would put you in a 24% bracket

   The only advantages I can think of is that a traditional IRA would provide a $1,680 annual tax benefit @ 24% (realistically less for most everyone else) and that it makes it easier for a person in the lower tax brackets to contribute more or max their contribution depending on their tax rate. If they were disciplined and we're able to use that extra money in post tax investment they would earn about a million more over their lifetime and just pay capital gains taxes 0%, 15%, 20% depending on how much they withdraw, but still have 6.2 million taxable income with RMD. They could use that $1,680 into a 401K pretax plan if they have that option. They could shave off their mortgage by a few years. Human behavior has shown that many just spend this savings on overpriced coffee and other discretionary items that doesn't benefit them.

   Some would argue that you can strategically do a Roth conversion to reduce your tax liabilty in the future and get the best of both. I would say yes you can but you would still pay more than if you had just done a Roth and there is always talk by the Feds doing away with the backdoor Roth. I would save that option for 401K or other pretax investments you may participate in. Fedzilla will continue to borrow and grow the inevitable conclusion is that they will raise tax rates in the future or find other ways to bring in revenue. They could adjust the RMD to require more to be taken out. The social security tax could be increased or benefits reduced for individuals who have a larger retirement portfolio balance so you'd have to withdraw even more from your IRA to make up the difference. And your IRA taxable withdrawals could affect your medicare premiums.

   I'm not a financial advisor and each persons situation is different, but if I were 18 again and the Roth IRA was an option I would get a Roth then max out the contribution each year. Any remaining funds for retirement would then go to pretax or post tax. The only exception was if I could invest in a 401K and it offered a match. I would do the minimum needed for the match then try to max out the Roth unless the investment plan options were limited like company stock only (remember Enron), horrible return rates, high fees or anything that would wipe out the match benefits.

   We cannot do the if and buts and coconuts. We can only look at the current laws. With a traditional IRA and a growing portfolio you will pay more in taxes in the future compared to a Roth with tax rates and all other variables being equal.

2. 

   Eric Juli on May 17, 2023 at 2:42 pm

   I’d argue even if you think it will be tax neutral… advantage ROTH

3. 

   Lisa R on May 17, 2023 at 2:42 pm

   I have two Roth I have a 401K. Roth and a Roth IRA personal.

4. 

   John Freeburn on May 17, 2023 at 2:42 pm

   Young people should be contributing all into a Roth 401k if offered, regardless of income. It’s much easier to pay the taxes while still working than paying them when retired.

5. 

   john gill on May 17, 2023 at 2:42 pm

   It's not future tax rates rising that you base your decision between ROTH and traditional.
   It's taking advantage of your standard deduction and lower tax brackets with traditional and then you invest the rest in a Roth.