Individuals saving for retirement have two basic choices. They can save on a pre-tax or after-tax basis. That is, a traditional 401k or IRA or the Roth version.
Conventional wisdom says if you expect your tax rate to be higher in retirement you should consider contributing to a Roth 401(k) or IRA. That makes sense.
If your tax rate is the same pre and post retirement, then how you save doesn’t matter much. If your tax rate is going to be lower in retirement, pay your taxes then.
However, there are other considerations.
- If you save on a pre-tax basis, especially in a 401k and thus your take home pay is higher, can you save more?
- Regardless of the differences in tax rates, would tax-free income in retirement be beneficial to you?
- Required Minimum Distributions (RMDs) are not required for Roth IRAs, but they are required for Roth 401k plans unless you are still working at age 72. However, you can avoid taking future RMDs from a Roth 401(k) by rolling the money over to a Roth IRA. Is that what they called a rigged system?
- And, Roth withdrawals don’t count toward higher Medicare premiums based on IRMAA😎
Seems nothing is as simple as it may appear. You can thank our incredibly complicated tax laws for that.
If you are interested in how workers are using their 401k, here is a good summary.