Where Most People Get the Roth vs Traditional Math Wrong

About this video

• Video Title: Where Most People Get the Roth vs Traditional Math Wrong
• Channel: The Retirement Nerds
• Speakers: Eric, Zach
• Duration: 26:52

Overview

This video debunks common misconceptions about Roth vs. Traditional retirement accounts, emphasizing that the foundational math is often misunderstood. It explains that the crucial factor is not inherently which account type is "better," but rather the timing of tax payments and how that impacts your spendable income. The video also touches on behavioral aspects and advanced strategies for tax management in retirement.

Key takeaways

• The Foundational Math: The biggest mistake people make with Roth vs. Traditional accounts is getting the basic math wrong. Once this math is understood, other complexities become clearer.
• Spendable Amount is Key: The most important metric for most people is the "spendable amount" – how much money they can actually spend after taxes.
• Tax Timing: The core difference lies in when taxes are paid: upfront with Roth or later with Traditional. If tax rates are the same at both points, the spendable amount will be the same.
• Variables Affecting Outcomes: While the foundational math is simple (rate of return, time, tax rates at contribution and distribution), other factors like future tax rate changes, contribution behavior, max funding, and diversifying tax statuses can influence the decision.
• When Tax Rates Rise, Favor Roth: If you anticipate your tax rate will be higher in retirement than it is now, contributing to a Roth account is generally more advantageous.
• When Tax Rates Fall, Favor Traditional: Conversely, if you expect your tax rate to be lower in retirement, a Traditional account might be more beneficial.
• Max Funding Consideration: If you consistently max out your retirement contributions, prioritizing Roth can sometimes be better, especially if you're not likely to reinvest the tax savings from a Traditional account elsewhere.
• Diversify Tax Status for Control: Having a mix of pre-tax, Roth, and after-tax accounts provides "degrees of freedom" and greater control over your tax bracket management in retirement, allowing for a potentially lower overall effective tax rate.
• Don't Fear Past Decisions: Many people regret not using Roth accounts more, but the video suggests that for those in high tax brackets during their peak earning years, Traditional might have actually been the better choice. Similarly, concerns about Required Minimum Distributions (RMDs) are often overblown.