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The Roth Conundrum

With Roth utilization at next-to-nil levels in many retirement plans, the Roth marketing machine appears to have hit overdrive, as hardly a day goes by without an article touting the fantastic benefits of Roth contributions, as opposed to traditional 403(b)/401(k)/457(b) pre-tax deferrals.

But is Roth really a superior option for a participant’s voluntary contributions to a retirement plan? The argument for Roths at this point is centered on the historically low current tax rates: rather than defer pre-tax into a traditional 403(b)/401(k)/457(b) and pay higher taxes later, defer to a Roth and pay taxes now while they are low.

But is that actually the case? Let’s look at the current 2019 Federal tax brackets:


Keep in mind that tax brackets work on a marginal basis, meaning that someone who is single and earns $600,000 is only taxed at the 37% rate on $89,700 of income ($600,000 minus the 37% bracket cutoff of $510,300 = $89,700), while the individual’s remaining income is taxed at the rate in which the income range falls (e.g., the remaining $510,299 of income would be taxed at 35% and lower rates). Confusing? Welcome to the world of income taxation!

Let’s take a simpler example of an entry-level, 25-year old single employee who is making $30,000 this year. For this employee, his/her Federal marginal tax rate is quite low, only 11.4% (10% of $9,700, plus 12% of $20,300 ($30,000 minus $9,700) = $970 + $2,436 = $3,406/$30,000 = 11.4%). So, indeed, a pre-tax voluntary retirement plan contribution, even when combined with state and local taxes, may not generate a lot of tax savings. If that individual anticipates his/her earnings to steadily rise over his/her working career so that the amount of income he/she receives in retirement is significantly higher than $30,000 per year, and he/she expects tax rates on that income to be higher than the current rate on his/her $30,000 income, then a Roth might make sense for this year’s retirement plan contribution, since it would be taxed at a lower rate now, and not taxed at a higher rate later on.

The problem is that this analysis needs to be performed EACH year, in order to determine whether a Roth is more favorable or not. And income taxation is far more complicated that I am making it sound; there are deductions from income, tax credits, and state and local taxes to consider, as well as Social Security taxation at retirement, among countless other variables.

Even with tax brackets at historic lows, trying to predict what the future will bring for our 25-year-old example when he/she starts to withdraw those funds 40 years or so from now is near impossible. Take a look at where the tax brackets for individuals were 40 years ago:

Source: 1979 Tax brackets -

Now, these tax brackets seem high, of course, but back then they were also at historic lows. So, there is no doubt that it is tough to predict future tax rates!

Regardless, I believe that there is a decent argument that can be made for Roth deferrals, and that is tax diversification. Since it is difficult to predict whether each year’s earned income will be taxed more or less at present than at retirement, accumulating both Roth and pre-tax balances provides tax diversification for each scenario. In addition, a prudent decumulation strategy for retirees often incorporates diversified tax options with respect to distributions, particularly in the early years of retirement, as many retirees attempt to bridge the income gap before Social Security kicks in. Of course, non-taxable distribution options would not be limited to Roth (HSAs, for example, are an option for medical expenses).

Do you think that everyone should be making Roth contributions? Let me know on LinkedIn, Twitter or at!

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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