If you’ve read my past articles, you know that I’m a proponent of retirement investing early. Maximizing my 401K early in my career will put me in a good position when I retire. You also will know that I also have a Roth IRA account but I rarely invest any money into it. After meeting up with a friend who retired early, I found out that he only invested in post-tax Roth retirement accounts. He said that it was the best decision he made. He has no worries about paying taxes later on because all Roth contributions including gains are not taxable. I am seriously considering focusing on Roth accounts.
It got me thinking…should I pivot my retirement strategy and focus more on Roth accounts? I’ve been so set on pre-tax accounts instead of post-tax because I wanted to get the tax benefits early on. This has helped me bring my taxable income down in past years. It’s a benefit at the current time.
The thought of focusing on Roth accounts isn’t new. I’ve heard from others in the past about investing in Roth accounts, the benefits, and why I should also look into it. At the time, I thought I had everything figured out. I was contributing the maximum limit on my pre-tax retirement account and getting the tax benefits. Why bother with post-tax contributions? It’s like paying out of pocket.
In a previous article, I wrote about advice from someone who’s done it where I heard in a podcast to be aware of the taxes that you will have to pay once you take out distributions from your pre-tax retirement accounts. With an IRA, you have to pay taxes on the amount you withdraw including the gains. You didn’t pay taxes on it before so now you have to pay taxes later.
For example, if you need $100,000 and you plan to withdraw the money from your IRA, you will need to take out additional money to cover the taxes. Otherwise, your $100,000 will really be worth $80,000 if you need to pay 20% in taxes. If you withdrew $100,000 from a Roth, you won’t need to pay any taxes. You get to spend the full $100,000 amount without having to worry about taxes or the worry that it will put you in a certain tax bracket.
One thing I like to have in a financial portfolio is diversity. Not just diversification in the sectors you invest in but also the type of accounts you have. Like I said, I do have a Roth IRA but I rarely contributed to it. And when I tried to contribute to a Roth IRA this year, I found out that I wasn’t eligible because of the income limits.
So, here’s my plan. I am a federal employee and we have what is called the TSP which is equivalent to a 401K. Within my TSP there is an option to start a Roth TSP. I can contribute to both a pre-tax TSP and a post-tax Roth TSP. Regardless of the account I am still held to the maximum contribution limits, which as of 2021 is $19,500.
Not knowing how this affects my taxable income and my take home paycheck, I decided to split my contribution 60/40. 60% will go to my pre-tax TSP and 40% will go to the post-tax Roth TSP. Knowing that I’ll get less pre-tax benefits, my plan is to see how this affects me in the next few months.
If your 401K or other employer provided retirement account has a similar option, look into it. If you have a Roth IRA and are eligible, consider contributing to it more often. If you’re unsure about this, leverage the services from a financial advisor.
The notion of having to worry about paying substantial taxes in retirement, figuring out how I’ll pay the taxes, and worrying about being in a certain tax bracket, reinforces the idea to seriously consider focusing on Roth accounts. If you are interested in following my journey, email subscribe to get alerts of latest posts or follow me on Facebook, Instagram, and Pinterest.
To see all my previous articles, go to my Archive page