Are You Doomed Because You Don't Have a Roth Account?

 

In my last post I lamented the confusing and often contradictory personal financial advice being handed out over the media and online.  But one piece of advice seems to be consistent across all sources: It is better to have a Roth account than a non-Roth retirement account.  In fact, if you don't have one, you are advised to start moving your money into one right away.

But is it REALLY better?

There’s no doubt a Roth account has some advantages.  In these retirement accounts one deposits money that has already been taxed and which—upon withdrawal—will not be taxed again, nor will the interest/investment gains that have accumulated in it.  In a non-Roth account the deposits are not taxed upfront, but both the deposits and the accumulated growth in the account are taxed upon withdrawal. The difference between a Roth and a non-Roth account has been likened to paying tax on a bag of seeds as opposed to paying tax on the entire harvest. 

If you start socking money away in a Roth account early in life, then you would have decades of accumulated wealth by the time retirement rolls around that you could withdraw without paying tax on it.  The rationale for opening a non-Roth account has been that it is better to have the upfront tax deduction when you are more likely to be in a higher tax bracket than you will be in retirement.  But in recent years, given the growing national deficit, the lower-tax-rates-in-retirement assumption has fallen out of favor and experts have leaned into Roth accounts as the best alternative for retirement saving.

Now comes a study from three finance professors at Providence College, published in the Journal of Wealth Management and reported by Marketwatch that claims to show most taxpayers would be better off with a traditional (non-Roth) account.  In fact, over a 45-year lifetime of saving the typical retiree will end up saving nearly 25% in tax liability by using a non-Roth account.  They even concluded “[t]hose who expect to have $1 million or less saved in retirement are not expected to pay taxes on their distributions.”

I tend to believe them (well, as much as I believe any “expert”, and only to an extent), especially given the current income tax structure in the United States and the prospect that it will continue as is for another four years. The bulk of my retirement money is in non-Roth accounts.  I’ve already withdrawn tens of thousands of dollars (hey, retirement bucket list travel, grandkids…..don’t judge me!) and have not paid any income tax on it.  And I’m not using any special tax breaks or elaborate strategies. It's the tax brackets and the historically high standard deduction.

We simply cannot know future tax rates or predict what legislation will be passed years in the future and plan our finances with any certainty about those factors.  We just do the best we can.

So once again, do not automatically accept the conventional wisdom.  Carefully consider your own situation.  And by all means do not feel you have made a mistake by stashing your retirement savings in a non-Roth account.  At least you saved for retirement, and that’s more than a lot of people can say.

Until next time,

Roger

“How do you know what will happen tomorrow?....As it is, you take a certain pride in planning with such confidence.  That sort of pride is all wrong.” James 4:14, 16 Phillips