Top of Mind

Top of Mind Mailbag: The Roth Conundrum

On occasion, a Top of Mind blog post generates so many reader comments that it is worth sharing. This was the case with our recent piece on the Roth Conundrum. Below are some of the comments we received in our “mailbag”:

One email addressed the potential future changes in tax law:

“Great read on Roth contributions. I’ve always had a concern about future tax law changes that could tax a portion of the tax-free accumulated earnings. While Congress/Treasury is a big fan of ROTH at this point, what will be their positions in 20 years? I vaguely remember when social security benefits were tax free. Thanks for the article." - Chip Ward, APA

My response:
Chip, thanks for taking the time to read my article and to provide such positive feedback! This is an excellent point that you raise—as I pointed out with my 1979 tax brackets, a LOT can change in a few decades!

Another email expanded on one of my examples and suggested certain types of individuals who could possibly benefit from a Roth:

“Hello Michael, I hope you are doing well. I read your article, The Roth Conundrum, and I agree with your use of the word “conundrum”! As my firm works with a decent book of group retirement plans, the “pretax vs. Roth” conversation is an important one. The plans we work with are small plans, often $1 million or less.

We believe that Roth deferrals for 401k participants often make sense for the following:

  • Lower-paid individuals
  • Married individuals that owe little/no tax, due to the recently enhanced Child Tax Credit
  • Young individuals that have decades to build a large tax-free pool of money through compounding
  • Individuals who want to build a tax-free pool of retirement assets, to gain withdrawal flexibility in retirement. (For example, withdraw from pretax sources up to the standard deduction, then pull from Roth sources so all income is tax-free.)

So, in your example, a single 25-year old making $30k per year meets two of the criteria above (lower paid/young). Your example did leave out the standard deduction for a single individual, which is $12,200 for 2019. So, this hypothetical individual would have an average tax rate of 6.5%:

  • $17,800 of taxable income ($30k - $12,200)
  • 10% on the first $9,700 of taxable income ($970)
  • 12% on the next $8,100 of income ($972)
  • $1,942/$30k = 6.5%

6.5% obviously makes Roth look a lot better than 11.4% does; however, the first $8,100 of pre-tax deductions would still be saving 12%, not 6.5%. So, the Roth discussion should compare a 12% tax rate now with the hypothetical rate in the future."

My response:

Thanks for reading my Top of Mind blog entry on Roth, and for sharing such wonderful and comprehensive feedback! I agree with all your assessments; I intentionally did leave out the standard deduction issue, since I wanted to keep the example as simple as possible and, as you pointed out, it doesn’t change the math all that much.

To me, the exercise of trying to figure out each year whether it makes more sense to tax retirement plan deferrals in the current year or the year of retirement is a fascinating one. I wish the tax code were simpler, so that this would be easier to figure out! But you seem to be on the right track with the examples of individuals who could derive the greatest benefit from a Roth.

Finally, multiple readers addressed a technical correction to my opening marginal tax-bracket example (the comment below is a blend of multiple reader emails:

Your opening statement about marginal tax rates is technically incorrect. In your example of a hypothetical single individual that earns $600k per year, you stated “the remaining $510,299 of income would be taxed at 35%.” The first $9,700 is still taxed at 10%, the next $29,775 is still taxed at 12%, etc. Only $306,200 (the size of the 35% bracket) would be taxed at 35%.

My response:

Thanks for pointing out the oversight! We will edit the piece to remove the impression that a rate of 35% applies to all of the $510K+ of income, since, as we know from the example, that is not how marginal tax brackets work. (Editor’s note: this has since been corrected).

Thanks once again to our Top of Mind readers for such fantastic feedback!

Do you have any additional feedback on Roth, or any other Top of Mind blog entry? Let us know on LinkedIn, Twitter or at!

Note: Information presented is believed to be from reliable sources however Cammack Retirement has not independently verified it.

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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