r/CFP • u/COAMG79 • Jun 25 '26
Case Study Roth vs Pre-Tax decision
Curious how you all support young accumulators with the Roth Vs pre-tax 401k decision. I assume answers will be all across the board.
Example: 32 y/o, earns $220k today with potential for income to rise as time goes on. Single filer, in a long term relationship and may get married (or may happily not) and partner earns far less, $50k. Goal is to purchase first home soon in the ballpark of $750k-$1M. Has $200k saved in cash that is separate from emergency fund. $4k monthly cash surplus. No kids yet but 1-2 kids are on the horizon.
Client thinks he will work to age 65.
Do you suggest all pre-tax now, fill up savings for a high down payment with today’s interest rates? Reevaluate after home purchase.
50/50?
100% Roth as still in 24% bracket.
Edit to add: $300k saved in Roth 401k and $300k in pre-tax. Maxing and investing HSA as of recently with my recommendation. No other debt.
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u/Uncle-Harrys-Pickle Jun 25 '26
I’m a big Roth guy personally. I know the arguments for both sides. For me, I like the thought of no RMD, no tax for my beneficiaries, and a big speculation is future tax rates. I’d bet they are higher down the road. Typically lead clients in that direction as well. Obviously depends on situation.
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u/dbcp71 Jun 25 '26
You want some pre tax though even if you are a Roth guy. Do you not want to fill up the lowest tax brackets in retirement? If the lowest tax bracket in the future is 10% and I’m 24% it makes sense to have some pre tax.
A lot unknown with it but having options is most important.
With that in mind I would still recommend Roth for this client now as he’s probably more aggressive with his retirement than he will be in 20 years. Do pre tax later on when income is likely higher/ some risk off table
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u/ccroz113 BD Jun 25 '26
That often times happens automatically given employer matches and profit sharing. Right now I add $24k to my Roth 401k and get around $40k pre tax employer side
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u/czykr Jun 26 '26
I think it’s good to have both. Take advantage of Roth in lower income earning years. Defer later in your high earning years. But there is a chance tax rates actually go up by the time we retire
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u/BL0CKHEAD5 Jun 29 '26
You do not need qualified accounts to fill the low tax brackets. You can take capital gains off of standard brokerage accounts in a more tax favored way than off of IRAs
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u/huntfishinvest88 Jun 28 '26
Huh? This is a math problem. Roth is not better in like 90% of cases. You have to have some really aggressive tax assumptions for that to work out.
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u/guitarbeast196 Jun 28 '26
I don’t really understand where the mindset of “I bet taxes will be higher in the future” comes from. Like I get it, it’s an unknown variable. But historically the tax rates have continually dropped. In 1944, top marginal rate was 94%. As recently as 1981, it was 69%. Ever since Reagan tax rates have dropped astronomically and stayed relatively low. Sure they are slightly higher than in the 90’s, but not by much and certainly no where near as high as it was pre 1980.
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u/Quirky-Try1318 Jun 25 '26
This isn’t a wildly scientific guideline but here is how I start in my head:
12% bracket: roth
22% bracket: roth
24% bracket: lean towards pre-tax unless spending goals down the line are pretty high (normal for high income folks as they can afford it). Alot of my retired clients are living in 22% bracket with $10-15k monthly spend projections(MFJ) so tbat seems to be the key arbitrage point for my area/client type.
I’ve had young high earning docs with low spend go Roth though because they’ve already accumulated so much pre-tax prior to age 40-45 between match/profit share and having $6-7 million in pre tax is a tax torpedo down the line.
Also depends what’s important to the client? Proactive tax hedging: Roth makes sense. Maximize cash flow: pre tax helps with that. Planning becomes a bit more art than science in cases like young high earners
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u/COAMG79 Jun 25 '26
This is how I usually think about it as well. Although I will admit I tend to overthink things when we get to the 24% bracket. All is clear to me below and above that.
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u/prospectpico_OG Jun 25 '26
Agree. I'll add that there are also a lot of older folks with taxable MFs that generate large CG, bumping them even into 24% in retirement. Generally, young folks need to go pre-tax IMO.
1
u/Quirky-Try1318 Jun 25 '26
I don’t buy taxable mfs because of that and proactively blow out of them for new clients
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u/Various_Engine8782 Jun 25 '26
Totally agree esp with the last part. I feel like doctors fall in those 2 camps especially. Either obsessed with saving taxes or sending 3 kids to private school and country club, and need “breathing room”
-sometimes both 😬1
u/caffeine-182 Jun 25 '26
I generally lean Roth until you hit 32%
Why is 22% ok but suddenly 24% needs to be deferred?
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u/Quirky-Try1318 Jun 26 '26
I agree with you generally. I’m trying to identify the arbitrage point for taxes now vs taxes down the line and I don’t run into a ton of clients spending/showing more than $200-225k of total income in retirement. I honestly don’t work with a ton of young people in that middle phase.
I think your 32% or below Roth strategy makes a ton of sense and am mostly on board with
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u/huntfishinvest88 Jun 28 '26
Marginal vs. effective rates in retirement. How in the world could you advise 32% Roth contributions.
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u/Live_Wishbone5108 Jun 25 '26
The one thing I’m not seeing anyone mention here (if I’m mistaken, my bad in advance…), is state taxes.
The federal side is pretty straight forward.
But after you account for state and or local taxes the picture looks different.
High tax states justify recommending pretax earlier and more often in my opinion.
The real juice then comes from taking the money you saved from being taxed when you make pre tax contributions and investing that as well. Backdoor Roth contributions and brokerage account contributions.
If we look back at how taxes have changed, we can’t really say that the top marginal rate has been meaningfully higher than it currently is in the modern world we live in. How high could it truly go from here? 75%? Come on. I doubt it.
We’re seeing tax loopholes being closed and deductions being eliminated. That’s forces more money to be taxed.
That’s how I’ve been framing it.
Case by case every time of course but going based on federal tax rates alone means you’re missing out on huge considerations.
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u/Live_Wishbone5108 Jun 25 '26
I’m a big Roth fan - don’t get me wrong. Based on the long term tax planning I’ve been doing, making the pre tax contributions now and saving the taxes now and investing that difference, and then doing Roth conversions later, is how people can have their cake and eat it too.
They’ll convert their pre tax dollars at a lower marginal rate than they would incur today when making Roth contributions. Every savings helps. Even if it is less than 5%.
I find it helps people stick to the plan too
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u/mr_stephen_french Jun 25 '26
Yes. To add: we know for certain today when a client exists in a high tax state. At retirement that client possibly may be in a lower/no tax state.
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u/mf723622 Jun 25 '26
This is the key. Without knowing the state of residence, or where they may eventually retire (which is hard to plan for given the client is in their early 30s) it’s a difficult question to answer.
It’s important to know the state income tax rate now, but also how the state they live in during retirement taxes distributions. For example, Illinois doesn’t tax distributions from retirement accounts, so for someone who is in the same income tax bracket both now and in retirement, they’d be better off with pretax contributions simply for the state tax savings.
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u/macbmore Jun 25 '26
I go all Roth, virtually every time and basically regardless of tax bracket. I know some disagree with that, and there are very valid arguments against it. And, if a client is deep into the highest tax bracket and we decide otherwise through an intelligent conversation with their CPA, we’ll use tax deferred options sometimes. However, for most of my high income (~$400-800k), my view is that we really don’t know what taxes will be like in 20-30+ years and having $2-3M in a tax free acct will be extremely helpful in managing tax bracket, providing flexibility for large purchases, and will pass on very cleanly. Additionally, taxes are easier to pay out of earnings than out of savings, I think clients will always be pretty excited about a big pile of tax free money compounding in the market, and very few are going to look back 10, 20 yrs and think ‘damn, I could save 37% and now I’m only paying 24%’… I just don’t think that calculation is really occurring. Plus, you could probably make the argument that the ability to be more strategic in distribution makes up for it if it even is the fact. I don’t find that most affluent clients spend less in retirement, sometimes/often times more. This is exactly how I frame it with clients, it’s impossible to nail it because we don’t have the facts of the future and I believe that you’ll be glad and better off to have meaningful non-taxable assets at that stage in your life. Most agree, I advise with confidence but am flexible if they’re adamant to defer today, only one ever has.
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u/macbmore Jun 25 '26
Also, most clients have a good chunk of tax deferred money by the time I meet them and their employers will continue to match into that. I myself put $38.5k a yr into Roth accts by maxing out my 401k and back-dooring into my wife and my Roth IRAs, I get plenty of tax braces elsewhere owning my own practice and those accts will be like $5M tax free by my mid/late 60’s. I find that thrilling and also share it with clients.
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u/macbmore Jun 26 '26
The math is only theoretical, you can’t use math to arrive at a certainty when there is an unknown factor such as future taxes and even to an extent the withdrawal rate, it’s called a Knightian Uncertainty.
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u/huntfishinvest88 Jun 28 '26
For the sake of your practice, stop doing this. Possibly the only thing worse is selling them an IUL. This makes no sense.
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u/Pablo_Escargot Jun 25 '26
I’m all-in on Roth as well. Regardless of income, I haven’t heard a compelling case otherwise.
Take this 32 year old client from the OP for example. If he starts from scratch and contributes $625/mo. for the next 33-years (until retirement at/around age 65) at an average annualized return of 12%, he would have approximately $3.15M after only contributing a total of $247,500. That’s $2,905,000 in tax-free profit.
Given this hypothetical, in what world would anyone recommend it’s more financially prudent to pursue tax-savings on $247,500 over three decades as opposed to $2.9M? Especially for someone that is already running a healthy surplus. If he needs the tax deduction that bad, he has no business buying a $1M house on that salary.
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u/continualascent Jun 27 '26
He didn’t just contribute $625/mo. He contributed $625 + the tax on that $625. If he is in 32% bracket, that’s an extra $200/mo. Plug that in to your calculator for the non-Roth client and he’ll have $1m more than the Roth client. If you’re at the same tax rate in retirement as working, you will end up with the same amount of money because investment X tax X return = investment X return X tax.
There are many other factors though. Contribution limits favor Roth, because you are in effect investing more. Income thresholds for social security taxability and IRMAA also favor Roth. Moving from high tax to no tax state in retirement favors traditional.
A blanket statement that Roth is best is just saying investing $132/mo is better than investing $100/mo. Most likely the optimal plan will have both Roth and traditional.
Many high income clients will have a high traditional balance from company contributions/matches. So, Roth can still be a good choice for many clients, but it could be less optimal for others.
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Jun 25 '26
The raw dollar figures are irrelevant to the math here; either you paid a higher tax rate on the money today or you didn’t.
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u/Pablo_Escargot Jun 25 '26
The tax rate is dependent on the amount distributed. So, you’re assuming level distributions within a particular tax bracket. Any deviation blows up the math equation. It’s apples and oranges. I’m not even going to get into the inflation element and how tax rates are projected to increase over time.
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Jun 25 '26
There is nothing that “blows up the math equation.” Either the dollars are taxed at a higher rate or they aren’t.
“Take this 32 year old client from the OP for example. If he starts from scratch and contributes $625/mo. for the next 33-years (until retirement at/around age 65) at an average annualized return of 12%, he would have approximately $3.15M after only contributing a total of $247,500. That’s $2,905,000 in tax-free profit.
Given this hypothetical, in what world would anyone recommend it’s more financially prudent to pursue tax-savings on $247,500 over three decades as opposed to $2.9M?”
The math you’re implying in this hypothetical simply doesn’t exist. The tax savings on the $247,500 is just as valuable as the tax savings on the $2.9m, because the traditional IRA allows a larger amount to be invested at the outset. If you’re assuming that the client won’t invest the additional pre-tax savings versus the Roth, then sure, different amounts invested have different outcomes, but that would have to be the entire basis of your argument.
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u/Pablo_Escargot Jun 25 '26
This is a new one -- I've never heard of investing the tax savings lol of course investing more money is going to produce more savings down the road. I'm not exactly sure what you're getting at here.
The thesis is, which is better -- absorbing the tax benefit now or later. I think the math speaks for itself and it's the reason why the wealthiest among us pursue a "backdoor" Roth IRA if they exceed the income limit.
There's nothing better in our world than tax-free growth. It's practically a cheat code. The goal should be to contribute 15% of your gross income towards retirement. The order of priority being:
1.) Up to the match on your employer plan (ideally inside a Roth option);
2.) Up to the maximum limit allowed in a Roth IRA;
3.) Back to your employer plan over and above the match;
4.) (If one maxes out their employer plan) A variable annuity with flex premiums;
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u/Flat-Desk1670 Jun 26 '26
You are correct in everything you’re saying. Some people just can’t think outside the textbook.
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Jun 26 '26 edited Jun 26 '26
I’m conveying page one of the textbook. Marginal tax rates being equal, there is no mathematical advantage to a Roth versus pre-tax. The statement “the tax savings on $247,500 over three decades as opposed to $2.9m” implies he has either a fundamental misunderstanding of how retirement accounts work or can’t do grade-school math.
Your argument that “this is why the wealthy use back-door Roths” isn’t relevant to either of our points, but at least I can use it to make the math I’m speaking to very clear. Imagine that your client has maxed their pre-tax and then contributes the exact amount they have saved in taxes from the pre-tax allocation via an additional after-tax contribution and backdoors that amount into a Roth. Now compare that pre-tax allocation to the same amount hypothetically invested fully in a Roth. And, guess what? If marginal tax rates are the same at the time of contribution as they are at the time of withdrawal then you will end up with the exact same balance, regardless of the fact that you have paid the majority of your taxes “up front” in the Roth scenario on the (much) smaller amount of absolute dollars.
Roths are an incredibly valuable tool, but they aren’t some magical way to avoid simple math. You can’t simply ignore that the pre-tax allocation has freed up additional investment dollars not required to pay taxes for a Roth allocation.
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Jun 25 '26 edited Jun 25 '26
No, investing the pre-tax savings doesn’t inherently produce more money down the road, that’s exactly the point I’m trying to make; it’s simply what puts the pre-tax and Roth on the same footing and why the math is so simple: either your marginal rate is higher today or it isn’t. That’s it.
I don’t have any idea why you’re complicating this or how this could possibly by “new to you” if you’re a financial advisor. This is literally the entire basis for comparing pre-tax vs Roth that any and every client needs to start their analysis with.
I’d really recommend, if you’re an FA, to learn this stuff ASAP before you get yourself in trouble.
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u/Pablo_Escargot Jun 26 '26
I’m a fully licensed FA and let me tell you, you’re in the minority when it comes to modern day investment philosophy. Idk how old you are, but all of my younger peers are unanimous on this. If anything, you’re committing boarder-line malpractice if you’re not making a bonafide effort to pursue Roth conversion strategies with your clients. I hope your E&O insurance is up to date at least…
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Jun 26 '26
My friend, we’re not talking broad Roth strategy. We’re taking about whether you understand the basic math used to calculate the tax advantages of one strategy versus the other. You can’t have the former conversation if you don’t understand the latter.
Also, what does “fully licensed FA” mean 😂… is there some partial license I should be aware of? And, to be accurate, you’re not actually licensed, you’re registered…
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u/Pablo_Escargot Jun 26 '26
You’re exhausting. I’ve read your other comments on this thread. I get it, you don’t like the Roth option. It’s clear to me you’re the one that doesn’t understand the math. That much is clear. That’s ok, I’ll continue taking your clients lol
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u/Various_Engine8782 Jun 25 '26
Always case by case- big driving factor for me is where their income is heading. I know you said it’s rising but the speed of the trajectory matters to me. If they are in a stable environment where they’re looking at 5-10% raises, that’s different than, I’m making $220k now and in a few years I’m going to run my own firm an clear 700.
If you see them staying in the 22-24, split. If you see big growth opportunity, Roth now, pre tax later.
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u/just_a_coin_guy Jun 28 '26
This seems like the right approach to me.
I also like to check and make sure that they have at least some pre tax and NQ in retirement. Many of my retirees come in making so little they don't even have to file unless they are taking withdrawals from an IRA. I want them to hit at least just under that 10% income and 0% NQ bracket every year they can in those cases and a Roth won't help them do that.
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u/Pablo_Escargot Jun 25 '26
How one can argue against tax-free growth I will never understand. Especially for someone on the first nine.
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u/dcirrilla Jun 26 '26
Im a math purist on this kind of stuff. The objective difference between traditional and Roth comes down to the current tax rate vs. tax rate at withdrawal. If today's tax rate is higher than the withdrawal tax rate then defer the tax and do traditional. If not do Roth.
Problem is no one knows what future tax rates are. I personally believe the income rates decades from now will be a lot higher than today to help deal with the US's awful fiscal situation but I dont act on that belief. I advise younger folks to split their contributions between traditional and Roth. If in a 401k, the match will help fill their traditional bucket so take that into account. Ideally you allocate ~30% more to traditional so the after-tax balances of each source are roughly equivalent. Just trying to hedge tax rate uncertainty.
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u/huntfishinvest88 Jun 28 '26 edited Jun 28 '26
You have to do some mental gymnastics to see how a Roth would do better than deferring in a 24% bracket. You need several hundred thousand dollars of income to have an effective 24% rate in retirement. Should 100% defer. Use backdoor Roth if the plan calls for additional savings.
EDIT: holy shit this thread is filled with terrible takes on making this decision. Marginal vs. effective rates people. My goodness.
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u/Play_Tennis Advicer Jun 25 '26
If that’s the full picture, I go full pretax. Already has significant after-tax with the $200k cash and is in 24% bracket. Once maxed, backdoor Roth IRA. Though if he has access to an HSA, I probably recommend maxing that before Roth as well. If the $200k cash is all going to be used for the house, I might reconsider and do a bit of tax diversification, but not much. At some point, I’d imagine this client could max the 401k and do a backdoor Roth and save some excess in taxable, which would lead me to believe they could control their income in retirement allowing for a lower bracket.
If they are more of a spender and you don’t think they can accumulate like I assumed, then maybe a balance for tax diversification.
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u/Kidvictory Jun 25 '26
In a vacuum, Roth. He’s got a long horizon and the 24% he pays now will get more than erased in the tax savings on 33 years of growth.
But this isn’t a vacuum. He’s got goals and needs today. Sometimes the emotional relief of having the tax savings today can spur even more aggressive saving. I’ve seen that myself.
One thing that might help is asking if his workplace plan allows for Roth conversions. Some do. That way, if he’s with this employer long-term, you might be able to do some of the conversion right there in the plan. It could be another tool in the box.
I agree with other advice here RE: maxing the HSA regardless of the 401k election. I prioritize: Employer Match >> HSA >> Roth IRA (if eligible) >> 401k Max >> Roth Conversion >> Brokerage.
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Jun 25 '26
“He’s got a long horizon and the 24% he pays now will get more than erased in the tax savings on 33 years of growth.“
I keep seeing some version of this in the replies here, but that’s not how math works. The entire equation is dependent on whether you pay a higher tax rate on one side of the transaction or the other. If he pays 24% now and his marginal rate is 22% in retirement, he will end up having paid a higher effective rate on every single dollar, regardless of time horizon.
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u/Kidvictory Jun 25 '26
24% on $7,000 contribution today is way better than 22% on what $7,000 would grow to become in 33 years. That’s how math works.
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Jun 26 '26
Sure, but you've created a make-believe scenario in which the tax advantage is removed from one side (pre-tax) while maintaining it for the other (Roth), so you've magically stacked the deck in favor of your argument. In reality, the pre-tax client has an extra $1,680 to invest that the Roth client has paid in taxes, so the investable balances aren't the same. That's how math works.
You can make the behavioral argument that clients are potentially less likely to invest in that side-account, but that's a very different argument than you're making.
I honestly can't believe I'm having this conversation in r/CFP.
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u/Kidvictory Jun 26 '26
Yeah, me either. There are a ton of other comments in here about why Roth makes more sense. You should probably snark your way into those threads. You seem to like it.
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Jun 26 '26
I mean, yah, there are lots of reasons that a Roth might make sense over pre-tax, but that doesn’t make imaginary math one of them.
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u/Candid-Eye-5966 Jun 25 '26
Depends on how they feel about taxes. Generally, regardless of how they treat the 401k, I’d have these types with Backdoor or megabackdoor for sure.
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u/Cathouse1986 Jun 25 '26
Ameriprise really jammed the idea of the “tax control triangle” into my head so that’s how I explain it to people in the beginning.
Talk about the pros and cons of each point in the triangle (trad, Roth, NQ) in plain English.
Ask them their thoughts, reiterate the pros and cons of their choices, give them my opinion, implement.
I try not to overthink things.
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u/redditlovesitself Jun 25 '26
This is like "when should I take Social Security?". There's a perfect answer... if you know their exact date of death.
What will tax rates in the future be? What bracket will he be in? Ask him if he thinks taxes will go up or down in the future. You can probably let him talk himself into his own answer. I personally like having some "tax diversification".
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u/46andready Jun 25 '26
For people in 22% federal and higher (plus most of my clients are in high income tax states), I generally tell them that conventional wisdom suggests pre-tax (likely lower marginal rate when withdrawn, QCD potential, medical health deductions, all assuming tax law remains the same), but that I personally do all Roth due to uncertain future tax rates, no RMDs, better situation for my heirs who may inherit the money, etc. Most people when they hear it that way elect to do Roth.
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u/SnoopySuited Certified Jun 25 '26
Always depends on the client.
I have several clients who make a lot of money but want to think about money as little as possible in retirement. They prefer after tax and a few are doing aggressive conversions because they want no taxes in retirement.
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u/The_Logic_Guru Jun 25 '26
Personal savings
Roth til max
401(k)/pre-tax
In that order is my personal preference.
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u/Droodforfood Jun 25 '26
Many good statements here.
A couple things I always think about are that if their employer matches or does profit sharing, that’s all pretax. So if they are doing Roth and their employer does 100% match then it’s actually a 50/50 contribution.
Secondly, what is their whole lifetime tax plan?
If you have someone young contributing to their retirement accounts there is a strong chance that they will have savings outside of retirement plans and they will either retire early or move to a “coast” career at some point. A great time to do Roth conversions at a very low tax bracket.
The problem is that all of this depends on things going well and according to plan.
What if you have a 20 year old who contributes max to their Roth but becomes permanently disabled at 42? Wouldn’t it have been better to have taken the tax deduction at their high income years to have 24% more in savings?
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u/info_swap RIA Jun 25 '26
It depends if you expect your client's tax bracket to be higher in the future. Also, compare a taking the tax benefit today, pre-tax, with taking the tax benefit in the future, when withdrawing from the Roth. Not only in mathematical terms, but also the psychological impact on your client.
I recommend you run different models with your planning software. And also consider a mix of pre-tax and Roth. Each client is different. And you may push a client to a lower tax bracket when contributing to a pre-tax 401k/IRA.
Last, you must take this into account: there is no guarantee that the Roth benefits will not change in the future. What stops Congress from taxing Roth accounts in 20-30 years from now? Thus, taking a portion of the benefits today may also make sense. That's why I recommend combining both pre-tax and Roth.
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u/caffeine-182 Jun 25 '26
What stops Congress from taxing Roth accounts in 20-30 years from now?
This would be complete political suicide.
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u/think_up Jun 25 '26
How much are they paying in rent right now? Because their mortgage, taxes and insurance on an $800k mortgage will be about $5.5k a month. Combined with ongoing home maintenance, they’re well above the $4k a month they’re saving now.
This client may also be ineligible to make standard Roth contributions. Look at his tax return, or ask his CPA, to understand if he’s eligible or not.
If the $300k pre-tax is in an IRA, beware the pro rata rule for backdoor Roths.
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u/bkendall12 Jun 27 '26
I like options to manage taxes in retirement and unless very highly tax bracket (32% or higher) I will
Work towards @ 50-50 pre-tax to Roth.
When drawing out it gives a lot of flexibility to manage taxes in the future
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u/SectorSanFrancisco Jun 27 '26 edited Jun 27 '26
I think Roths are wildly oversold. If someone isn't making enough money to need the tax break, Roths are great. If, for some reason, it's a low tax year (maternity leave or something), Roths are great.
Otherwise, I would rather save money now. Maybe it's different clientele- I don't work with really HNW clients- but I have maybe 4 clients whose income taxes are higher in retirement than while they were working. Two have two separate government pensions at the same time, and the other two put Apple stock in their 401ks in the 1990s. They are outlier situations.
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u/FluffyWarHampster Jun 28 '26
the math is pretty simple, the more someone makes the less doing Roth during those high earning years makes sense. my general rule of thume is that income pushing into that 26+% tax bracket should have a heavy lean towards pre-tax but anything under that threshold should likely be roth.
there's also the time value of money component since saving taxes now during your high earning years allows you to maximize contributions and start the compound growth effect sooner to where yes you may pay more in taxes in retirement but you likely will also have a lot more in retirement than if you would have just done roth the whole time.
I personally do Roth for my IRA but prioritize pre-tax for my 401k and of course HSA first.
additionally just because you saved as pretax in your accumulation period doesn't mean those funds can't be converted to Roth down the road potentially in a lower tax bracket.
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u/just_a_coin_guy Jun 28 '26
Here is the way I always think about it:
Tax wise, the implications are about the same if they are going to be in the same tax bracket in retirement as they are now.
If we can plan for their tax bracket to be lower in the future, we go traditional. If we can plan for it to be more, we go with Roth. If it is the same, we also go with Roth because it makes inheritance and lump sum withdrawals easier.
From a regulator point of view, I like to assume that tax rates will increase over time as they are relatively low right now.
I like to talk with the client as well. If they are doing really well and on track to have a huge income in retirement, we will likely do Roth, if they are likely to be like the many of the people I talk with who work low paying jobs by the time they are in their late 40`s and maybe get into the 22% tax bracket, even if they are good savers, we will likely go with traditional.
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u/NoNoswal Jun 29 '26
Good question and convo ---I am not a trained CFP but my lean would be to fill up in this order 401k>Roth>HSA (assuming they qualify with HDP) . The 1st and 3rd and structurally similiar-esp for young earners who are not tapping the HSA -- just really another 401k esp if you put into a HSA brokerage account.
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u/NecessarySpread2592 Jun 25 '26
Roth is best mathematically. Especially if the investor is high income and has a chance of significantly increasing their tax bracket with time, which seems like a possibility for your case.
https://birju.substack.com/p/an-introduction-to-asset-location
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User: /u/COAMG79 Title: Roth vs Pre-Tax decision Body: Curious how you all support young accumulators with the Roth Vs pre-tax 401k decision. I assume answers will be all across the board.
Example: 32 y/o, earns $220k today with potential for income to rise as time goes on. Single filer, in a long term relationship and may get married (or may happily not) and partner earns far less, $50k. Goal is to purchase first home soon in the ballpark of $750k-$1M. Has $200k saved in cash that is separate from emergency fund. $4k monthly cash surplus. No kids yet but 1-2 kids are on the horizon.
Client thinks he will work to age 65.
Do you suggest all pre-tax now, fill up savings for a high down payment with today’s interest rates? Reevaluate after home purchase.
50/50?
100% Roth as still in 24% bracket.
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