Roth Tax-Rate Comparisons Aren’t Enough 

Whether to invest in a Roth IRA should be based on several factors beyond current and future tax rates.

By Monica Dwyer
Monica Dwyer
Monica Dwyer

I am working with a couple who are in their early 30s. They have finished school, are starting to pay down their student loan debts, already purchased their first home, and had their first baby. They came to me to find out how to best position themselves for a successful retirement as well as all of the other little decisions they need to make along the way. Both have really great 401(k) accounts that allow for either pre-tax or Roth contributions, so they were wondering if they should focus their efforts on the Roth contributions or pre-tax contributions. They plan to retire at age 65. Both work in professional jobs, their income is relatively high, and they are no longer eligible for Roth IRA contributions.

This couple doesn’t have endless amounts of money, so they want to make sure that their contributions are done wisely.

I’ve calculated how much they could afford to contribute pre-tax and how much they could afford to contribute if they were not getting a tax deduction and doing a Roth contribution, equalizing the two for taxes.

Well, I was surprised to find out that based on our assumptions, it was best for them to contribute 50% of their funds to a pre-tax source and 50% to the Roth source. I would have guessed that a 100% Roth contribution would be best given their age, but that isn’t the story that the numbers told, so that was a lesson to run the numbers and not shoot from the hip. I’ve found similar lessons while working with older clients.

Some advisors believe that to determine the best place to put your money, you should just calculate your current tax rate and expected future tax rate in retirement. But there are several other factors to consider.

The Future of Taxation in the U.S.

While it is important to recognize current tax rates, future tax hikes are likely. The assumptions that we make today based on current tax rates are likely wrong. The more taxes rise, the more beneficial a Roth seems. I don’t feel comfortable providing clients with future tax rate projections, so this is just a talking point.

Growth Rate of Invested Roth vs. Pre-Tax Money

The actual growth rate of your investments is very important to determining what is best. Younger clients will benefit more from contributions than older clients because they have a longer time horizon. That said, the benefit isn’t necessarily negated for older clients either.

The planning software I use enables me to run calculations to determine how much of a tax savings a client can get based on converting from pre-tax to Roth IRA’s (after rolling the funds out of a 401(k), if necessary).

For example, John and Lisa, now both 55 years old and fully retired, did a good job saving for retirement. They also have a lot of after-tax savings they can use to cover retirement expenses. We discussed doing some conversions early in their retirement years and paying for them from the after-tax bucket of money. We also discussed using the after-tax bucket to fund their early retirement years to keep their ordinary income as low as possible.

Through the software’s Monte Carlo simulations and trials, I was able to show them how, in an average market scenario, clients can save hundreds of thousands of dollars over their lifetimes by doing this. The assumptions are that the current tax laws apply and we use projected future rates of return, which are lower than historical rates of return.

I also show client some scenarios where the markets perform lower than expected, typically around the 30th percentile, to see if they still save money in taxes. Clients should know that one of the risks of doing a Roth conversion is that the market doesn’t produce the returns that we expect.

Depending on the situation, doing larger conversions earlier and then smaller conversions later can increase tax savings, so it takes some trial and error to get the best result. This would be almost impossible to calculate without planning software.

Diversifying the Taxation of Your Investments

It is nice to have a combination of funds between pretax and Roth so that when you have a year in retirement that you want to take a large distribution, you can use some from the Roth to avoid a big tax spike. It can help smooth the cash flow for retirees. Often, I see people only save money in pretax accounts and then they end up being very sensitive to their taxes going up when they retire. Taxation can be uncomfortable when you have a year of excess distributions.

Andrew and Anastasia are 65 and they have required minimum distributions (RMDs), pension income and Social Security payments that keep them just barely in the 24% marginal tax bracket after their standard deduction. They have some home repairs this year that require an additional $60,000 of distributions. They don’t have the after-tax funds to be able to pay for the expense, so they would either need to take funds from their pre-tax IRAs or Roth IRAs. In addition, they have never taken money out of their Roth IRAs and they are very tax sensitive.

Andrew and Anastasia decide to pull the $60,000 from their Roth IRA rather than their pre-pax IRAs because that will prevent them from going into the 32% tax bracket. Although you could make an argument that it would make sense to keep the funds in the Roth, they decide for them that they should tap the Roth to prevent a large tax burden for them this year.

The Difference in Required Minimum Distributions

There is no required minimum distribution for Roth IRAs at any age; however, Roth 401(k)s and pre-tax 401(k)s will require distributions at age 72. This can incentivize a client to move money from their 401(k) into IRA accounts. RMDs are not required from a 401(k) as long as a client is working, and the plan rules allows for this. For some this can be an incentive to keep money in their 401(k) plan until retirement.

Ultra-High Net Worth Clients

For clients whose asset levels exceed the federal estate tax limits, conversions and contributions to a Roth IRA can make a lot of sense if the goal is to keep the total estate under the taxable limit. Anything over the estate limit ($12.06 million in 2022) is subject to a 40% federal tax rate. In addition, each state has its own estate tax rule. The government doesn’t distinguish between pre-tax and Roth funds when calculating the value of an estate.

One of my clients, 75 and single, recently inherited assets that he wasn’t expecting, pushing him above the exemption amount. Although he is unlikely to benefit in his lifetime by doing Roth conversions, given that he doesn’t have a lot time for his investments to appreciate from the time of conversion until his death, he would like his assets to go to his nieces and nephews (professionals with high incomes).

In addition to gifting, he has decided to do some Roth conversions for two reasons. First, it decreases his RMDs (thus decreasing his current income). Second, we can decrease the value of his estate so that he remains under the estate-tax limit.

His heirs save money in two ways: The estate will not pay 40% federal taxes for the amount below the estate-tax limit, and his nieces and nephews will not pay anything to distribute the inherited Roth IRA distributions. They will be required to distribute the inherited IRA in its entirety over a 10-year period under the new RMD rules set in motion from the SECURE Act (more on this in a moment).

There other methods of removing assets from one’s Estate that are not discussed in the scope of this article, such as the use of specific types of trusts and life insurance policies.

Planning For Future Generations

If clients are in a lower tax bracket than their children, it may make sense to convert to Roth so their children can inherit funds that will not be taxable to them. In contrast, pre-tax funds will be taxable to the heirs within a 10-year period after the parent passes. Here it depends on the needs, wishes and mindset of the clients.

New Inheritance Rules for RMDs to Non-Spousal Beneficiaries

In the past, non-spousal beneficiaries who inherited an IRA or 401(k) were able to stretch the distributions over a lifetime. Now under the SECURE Act, non-spousal beneficiaries who inherit IRAs (including Roth IRAs) and 401(k)s after January 1, 2020 must now take distributions on these assets over a 10-year period. When pretax assets are distributed, they are added to the beneficiary’s income for the year and taxed. Roth assets are not taxable upon distribution and are more desirable for beneficiaries, especially in the case where the beneficiary is in their prime earning and income years.

Legislative Risk

The government caps contributions into Roth IRAs and Roth 401(k)s each year because of the strong benefit these accounts offer: Tax-free growth for withdrawals after age 59 1/2.

Congress has already tossed around ideas of how to further limit the option to do backdoor Roth IRA contributions (hyperlink ) as well as the mega/super Roths in 401(k) accounts. As we continue to rack up government debt, Congress may also be tempted to pass legislation which taxes Roth funds, and that is a potential risk.

It is my opinion that Congress will not completely wipe away the benefit. Instead, I think it’s more likely that they will tax it at a lower level, grandfather Roth funds, or limit contribution levels to limit people’s options for contributing to Roth sources. This should be mentioned to clients and considered as a possibility.


The beauty of the art of financial planning is that there is no one size fits all model. Some clients have the funds to maximize their pretax 401(k) contributions and still make Roth contributions (either directly to an IRA account, indirectly to a Roth IRA through the backdoor Roth, or via the mega Roth 401(k) option). Other clients have limited resources and want to make choices to optimize where their funds are going. A good financial advisor can help clients figure out what the best options are based on their resources, time horizon, desired outcomes and goals.

Monica Dwyer, CFP, CDFA, is a licensed investment advisor with Harvest Financial Advisors in the Cincinnati/West Chester, Ohio area. She may be reached at This article is for informational purposes only. Any commentary and third-party sources are believed to be reliable but Harvest Financial Advisors cannot guarantee their accuracy.


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