First Generation American asks:
Have you done the calculation yet of projected RMDs at 70.5? Conventional wisdom used to be to max out pre-tax income in your retirement accounts but now as we get closer to retirement, I am realizing my RMDs in my 70s may put me in the same tax bracket as I am in now. As a high earner, how do you decide your pre-tax vs after tax contributions into savings and has your opinion about it changed. Most early retirees in podcast interviews lately are talking about wishing they put more in roth when they were younger.
We are not professional financial planners. Please talk with a fee-only certified planner and/or do your own research before making important financial decisions.
For us, the RMDs (Required minimum distributions, note that it may be 72 for us, not 70.5) seemed kind of irrelevant because academic economists never seem to stop working and they have high salaries so I just assumed that we’d be in the same or higher tax bracket later. PLUS I’ve assumed that marginal tax rates will be higher because they’ve been historically low and we’ve been doing a lot of borrowing against our futures (and for us Gen Xers, Boomers will still be around much of our post-work lives, but not working themselves).
All of our IRA stuff is in Roth. We have it that way because we want to do backdoor Roth conversions (now, with the stock market down, is a good time to do that if it’s something you’ve been putting off), and the math is just way easier if you don’t have any IRA stuff in traditional accounts.
We do have some 401K stuff in traditional. Looking at what we have in traditional using this calculator, RMDs don’t by themselves put us in the same tax bracket. But.. we’ll have social security and probably dividends, and one or both of us may be working, who knows.
How do we decide which– well, at first we didn’t have Roth options, so we had to put $ in traditional. Then Roth seemed like a good idea because I figured we’d be earning more later and tax rates were historically low. Then Trump got elected and I switched everything to traditional in protest (pay taxes later). Then Biden got elected and I can’t remember if we’re 50% Roth or 100% Roth in our 403b/401k. I think my 457 only has traditional options. Obviously it’s not something I spend a lot of time thinking about!
To be honest, I went to a lot of talks by economists who study these specific questions and realized that there’s just too much uncertainty about the future to make a 100% good decision (I had originally thought: Oh everything should be in Roths! and then I went to a talk where an economist suggested that they could renege on the Roth promise(!)). Having our IRAs completely Roth and our 401k/403b as a mix without worrying too much about it seems to be working for us. Everything else is kind of second order tinkering (like: you end up investing more with one than with the other because of pre-tax vs. post-tax) and trying to predict increasingly unknowable future political environments.
Grumpy Nation, what is your experience with required minimum distributions? How do you decide between traditional and Roth accounts?