Dear MarketWatch,
I earn over $100,000 a year and hope to for the foreseeable future. As of now, I am contributing 8% of my income to my 403(b) with a 3% 401(a) match; all Roth. It would be more, but I’m maxing out a Roth IRA and an HSA as well every year. I am a single father with a 9 year old daughter and I have no plans to get married so I plan everything single. I expect the house to be paid off when (I plan to retire anyway) at 65. I plan to collect Social Security at 67.
My question is, should I move my 403(b) and 401(a) income to pre-tax dollars, since I expect to be in a lower tax bracket once I retire? Or leave it at Roth. I look forward to some advice on what, in general, would be the most prudent option to maximize retirement dollars.
See: I am a 39 year old single father with $600,000 saved. I want to retire at 50 but I don’t know how. That I have to do?
Dear reader,
First of all, congratulations on maxing out your Roth IRA and HSA and contributing to your other retirement accounts; Managing that while you’re a single parent and paying for a house is no easy task.
You’ve asked the age-old retirement planning question: should you invest in a traditional account or a Roth account? For readers who don’t know, traditional accounts are invested with pre-tax dollars, and the money is taxed upon withdrawal at retirement. Roth accounts are invested with after-tax dollars at the time of deposit and then withdrawn tax-free (if investors follow the rules about how and when to take the money, such as after the account has been open for five years and the investor is 59 ½ years or older).
As you know, the general rule of thumb for choosing between a Roth and a traditional account comes down to taxes. If you’re in a lower tax bracket, advisers will typically suggest going with a Roth, since you’ll be taxed at a lower rate now versus a potentially higher rate later. For a traditional, you may be better off if you’re in your peak-earning years and expect to drop a tax bracket or more at retirement.
However, one of the biggest challenges is knowing future tax brackets. You may think that it will now be at a lower one, but you can’t be sure. We also don’t know what the tax rates will be like when you retire. Current tax rates are expected to increase in 2026, when the sections of the Tax Cuts and Jobs Act expire. Congress can do something before that, or after, of course.
Check out the MarketWatch column ‘Tricks for retirement’ for actionable tips for your own retirement savings journey
That said, if you think you’ll be in a lower tax bracket when you retire, it doesn’t hurt to have some of your money in a traditional account. Having tax diversification can also work in your favor. It allows you more control and freedom when retirement comes, as you can choose which accounts to withdraw from and how to save more on taxes. The more options, the better.
You should do your best to calculate the numbers now and then make a plan to do it every year or so until you retire. Here is a calculator that can help.
Make estimates where necessary and take inflation into account: I’m sure we’ve all seen how inflation can affect personal finances in the last year alone. There are a few other things you can do to make these calculations. For example, get an idea of what your Social Security income might be by creating an account with the Social Security Administration, which will show you what you could expect to receive in benefits at various claim ages. Also add any other income you may be able to get, such as a pension.
After calculating what you expect to spend in retirement, you can find out what your retirement needs will be and how that will affect your taxable income depending on whether the money comes from a traditional or Roth account. Remember: Withdrawals from Roths do not increase your taxable income, while investments in traditional accounts do when withdrawn.
Keep in mind that Roth IRAs have one big advantage over traditional accounts: they’re not subject to required minimum distributions, which is when investors must withdraw money from the account if they haven’t already done so before the required age. Traditional employer-sponsored plans, such as 401(k) and 403(b) plans, are subject to an RMD. Employer-sponsored Roth plans have also had an RMD, although the Security Act 2.0, which Congress passed in late 2022, eliminates the RMD for workplace Roth plans beginning in 2024. (The Act Security 2.0 also raised the age for RMDs to 73 this year and 75 in 2033).
See also: We want to retire in a few years and have about $1 million saved. Should I move my money to a Roth and pay off my $200,000 mortgage while I’m at it?
However, traditional accounts versus Roth accounts are only one piece of the puzzle in retirement planning. There are many other questions to ask yourself, and a financial planner if you are interested and can work with one. For example, what rates of return are you anticipating on your investments and how are your investments allocated? What state you live in now and that will change when you retire (it will affect your taxes). Are you worried about leaving an inheritance and have you considered life insurance? And even before you retire, as a single parent, do you have a will, health care power of attorney, and disability insurance in case something unfortunate happens?
I know this can be overwhelming, especially when you factor in the calculations and estimates for years and years from now, but it will all be worth it. Consider working with a qualified financial planner or speaking with someone at the company that manages your investments, and don’t feel obligated to stick with what you choose until you retire. As with many things in life, retirement plans tend to change and adapt as you do.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
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