Prioritizing Roth 401k for Higher Tax Bracket Retirement

For individuals in their 40s with no Roth 401k, considering the tax bracket, prioritizing regular 401k or Roth 401k is crucial.

### Retirement Planning Strategies for High-Income Individuals
* 💰 " If you are in a lower tax situation, **Roth makes sense for you**. If you're in a higher tax situation, every dollar you put on the pre-tax side of your 401k can be **super valuable**.
* 🕒  Due to changes in tax laws and the required minimum distribution (RMD) age now being **72 or 75**, high-income individuals have an opportunity to save Roth dollars, especially after retirement when **taxable income is lower**.
* 📈 " From whenever they retire to the required minimum distribution age, you use those years and you do a tax projection every year to figure out **how much you can convert of those tax-deferred accounts at a lower tax rate**.
* 🎁  Roth accounts offer a potential **tax-free growth for 10 years**, making them beneficial from a **legacy perspective**.
* 💸  For high-income individuals who cannot contribute directly to Roth IRAs, a backdoor Roth IRA contribution strategy can be used, involving **non-deductible traditional IRA contributions** and subsequent **conversions to Roth**.
* 🏦 " I would love a scenario where you're **maxing out your 401k on the pre-tax side** and then still doing **backdoors** so that way it's not either or, it's a **both-and**.
* 🚪  High-income individuals with the right retirement plan structure, especially those with high W-2 income, can also consider the **mega backdoor Roth strategy**.

[Music] We're going to move on to Andy's question. It says when starting the 401K journey, Roth 401k was not a thing. Now I find myself in my 40s with no Roth dollars, healthy 401K doll, and I'm in a higher tax bracket. Now should I prioritize regular 401k or Roth 401k? All right, so anchor, we don't, we don't know enough about all of your different financial variables to be able to give you like specific advice around this, but here's what we say generally. If you are in a lower tax situation, we define lower taxes. If you add up your marginal federal rate and you add up your state marginal rate and it's below 25%, there's a really good chance that Roth makes sense for you. Now if you're in a higher tax situation, meaning you add your marginal federal and your marginal state and it's 30%, you're in a higher tax situation and we would argue that every dollar you put on

the pre-tax side of your 401k can be super super valuable. I mean, you can think about it, $1 goes in, saves me 30 cents in taxes. That's kind of like a 30% imputed rate of return today. So, it's really really hard to walk away from that current year tax benefit. But we see this all the time, Brian. People get later on in their careers, later on in life, and they've not yet begun building Roth dollars. One, do High-income folks have an option to build Roth? And two, does it mean that he has to start building Roth dollars right now today? Well, anchor, I want to make you feel better about something. Um, there's a trend that's been going on with tax laws that have been set up coming out of Washington DC is that we we we have this timer in the background for all of our retirement savings, especially the traditional ones that you've been funding because you're in a higher tax bracket. Where you knew at 70 and a half you were going to have to

start making required minimum distributions now like 73 75 now now it's 75 years of age likely for you for you so there's an additional 5 years and why does that matter because um a lot of people I think have the same regret or fear that they didn't get to save Roth dollars because that was a concept that kind of you know started around 98 in the IRAs and then it turned into Roth 401ks but you would missed that opportunity because of your tax rate. You're going to have an opportunity especially if you retire anytime before 75. Once your earned income falls off, you know your taxable income likely is going to drop as well, and that's going to drive you into a much lower marginal tax rate. It's not uncommon and we do this for a lot of our clients. We do a lot of Roth conversion planning, but from whenever they retire to required minimum distribution age, you use those years and you do a tax projection every year right around October November of every year.

where you figure out, hey, what's my income and my tax obligation going to be for the year? What tax rate, marginal rate am I going to be? And if it's in a low enough marginal tax rate, how much can I convert of those traditional retirement dollars, those tax-deferred accounts, and still maximize that lower tax rate? It's a great planning opportunity, so don't feel stressed out just because you don't have a lot of WTH. Now I will tell you, as you get older and you're getting to a point where you say, yes, I don't have the wealth multiplier. If you go to to money.com resources, you can see what your wealth multiplier by age is. A lot of times as you get 50s and Beyond, you realize your wealth multiplier is not as high. But maybe from a legacy standpoint, if you have children and other things because Roth accounts are, you know, you still have to pay them out for 10 years, unless there you have a special needs child or somebody, you know, there's some unique, you know, language in

there for spouses and other things, but um, it's still 10 years of tax-free growth potentially. So think about it from a legacy perspective as well. But there's some great opportunities. You haven't missed the boat; it's just there. There's yet more to come. Can I throw out one other planning opportunity that I would encourage you to think about? For a lot of high-income individuals who make too much money to be able to contribute directly to Roth IRAs, there is a strategy where you could potentially do backdoor Roth IRA contributions, or we call it Roth conversion strategy. If your account structure is right, meaning you don't have any other IRA rollovers or SE IRAs or simple IRAs, you just have Roth assets and then qualified assets like 401K, 403b, there's nothing that says that you couldn't do a non-deductible traditional IRA contribution and then convert those dollars to Roth. And that's a tax-free conversion if you did not take the deduction on the front end if you want.

to know more about that we talk tons about backdoor Roth's uh at moneyguide decom you can go search any of the shows we've done on that but for higher income folks I would love an a scenario where you're maxing out your 401K on the pre-tax side getting all of that tax savings this year and then still doing backdoors so that way it's not either or it's a both and and you're bu up both of those buckets and then there's even an additional option with the mega back door if you're structured in the right retirement plan you have a high enough if you're especially W2 High income W2 there's opportunities for that too we've done content you know to to go research on that as well

I Have Zero Dollars in My Roth Accounts at 40! (Prioritize Roth Going Forward?)

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Prioritizing Between Regular 401k and Roth 401k

Starting a Roth 401k in your 40s when in a higher tax bracket requires considering various financial factors.

In a lower tax situation, prioritizing Roth 401k makes sense, while in a higher tax situation, the pre-tax side of the 401k can provide valuable current year tax benefits.

High-income individuals have the option to build Roth dollars, and it's advisable to start building them to balance tax strategies for retirement savings.

The Importance of Starting Required Minimum Distributions at 75

Starting required minimum distributions at 75 allows for an additional 5 years to save Roth dollars at a lower tax rate.

Retiring before 75 can lead to a decrease in taxable income, driving a person into a much lower marginal tax rate.

This presents a great planning opportunity for Roth conversion and maximizing the lower tax rate.

Maximizing Retirement Savings through Backdoor Roth IRA Contributions

High-income individuals can utilize a backdoor Roth IRA strategy to contribute to a Roth IRA, despite income limitations.

This strategy involves making non-deductible traditional IRA contributions and then converting those funds to a Roth IRA, allowing for tax-free growth.

Having the right account structure is crucial for this approach to maximize retirement savings.

Maximizing Retirement Savings for Higher Income Individuals

Higher income individuals can maximize their retirement savings by contributing to both traditional 401k and doing a backdoor Roth IRA.

This strategy allows them to take advantage of tax savings and build up their investment buckets.

In addition, for those with a high enough income and the right retirement plan, there is the option of a mega backdoor Roth IRA, providing further opportunities for saving for retirement.