Roth, Traditional, or Both: Considerations to Weigh

Executive Summary

We review key points to weigh when choosing a Roth or traditional retirement plan to help you maximize retirement income. In some instances, it may make sense to choose both.

Key Points

  • Expected tax rate in retirement - If you expect your future tax rate will be lower than your present rate when you make the withdrawal in retirement, a traditional plan may offer you more spendable income. If you expect your tax rate will be higher or the same, a Roth may provide you with more spendable income.
  • Unexpected spikes in expenses - An irregular, large expense funded by a withdrawal from a traditional account could result in higher Medicare premiums, more of your Social Security benefits being taxed, and raising your tax bracket. Qualified withdrawals from Roth accounts do not have these effects.
  • Required Minimum Distributions (RMDs) - Traditional accounts, both 401(k)s and IRAs, require you to withdraw money once you reach age 70 1/2, while Roth IRAs do not (with some exceptions).
  • Gifting to heirs - If you expect your heirs to be in a lower tax bracket when they withdraw the money than you are currently in now and you are most interested in maximizing your gift, a traditional account would seem the best choice. But some prefer a Roth for a bequest since it is more straightforward in the eyes of the inheritors as the gift will be untaxed.

Conclusion

Traditional and Roth plans have different features that can affect your spendable income in retirement. Speak with your advisors to determine the option, or combination of options, that may be available and appropriate for you.

"Have you chosen the right plans to help maximize your wealth in retirement?"


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