A reader hit me up recently and really wanted to know if I thought he should choose a Roth or Traditional account for his retirement savings. This is a hard decision even if you have no student debt. However, it’s made out to be an easy one, with tips from friends, relatives, and even late night PBS broadcasts.
For those who don’t know, you can save for retirement with two different types of accounts. A Roth account allows you to pay taxes now, and when you retire your withdrawals are tax-free. A Traditional account gives you a tax deduction now, but you must pay income taxes on withdrawals down the line.
We’ll weigh the pros and cons of each option when you have student debt. Usually the best choice defies conventional wisdom.
Here’s What the Reader Asked About Roth vs Traditional
I’m intrigued by one particular aspect of your post regarding the Top 40 things to know about PSLF. Specifically, reducing AGI and getting “indirect matching” on pre-tax retirement contributions.I like this idea and am thinking about sending more money into the pre-tax realm, but can you comment on how this plays out if someone with low income now and higher expected income later (like your wife or myself = doctors, specifically residents) has the opportunity for post-tax retirement investment such as a Roth 401(k)? I’m already maxing out my Roth IRA so I’m specifically asking about the Roth 401(k), although I think, for the purposes of this, they are interchangeable.Say I make $60K/yr as a resident. This puts me in the 25% tax bracket.$100 post tax = $133 pre tax (roughly, with the understanding that the tax bracket is not flat but tiered – maybe you know a better way of comparing these)I tried using various online calculators to do the math to show the difference between putting $133 in a pre-tax account (or even $136, as the ‘extra’ $33 reduces my AGI and decreases my loan repayment by 10% = 3.30, and 133+3.30 = 136) versus $100 in a post-tax but can’t find a good one to calculate the taxes at withdrawal.Sorry if this makes no sense, but can you see where I’m going? Should I invest pre-tax now and reduce my AGI to reduce my loan repayment, or should I invest post-tax, pay a bit more on my loan but “save” by limiting my taxes at withdrawal when I expect to be at higher tax bracket.
My First Rapid Fire Thoughts
The real question here is what happens if you’re rich and have to pay a lot more in taxes than what you paid as a resident.