Roth can be one of the most powerful tools in retirement planning, but knowing when and how to use it isn’t always simple. In this episode, we break down Roth 401(k)s, Roth IRAs, backdoor Roths and Roth conversions, plus how your age, income and tax bracket can help determine whether Roth makes sense for you.
Episode Transcript
Intro/Closing 0:02
Welcome to the Real Talk Retirement Show, where we explore the financial side of retirement and beyond. Whether you’re currently retired or planning for the future, we offer real, relatable conversations about money and personal finances. Most importantly, we dive into all these topics using Real Talk. Now, let’s get real about your money and your retirement.
Brian Graff 0:28
Welcome back, everyone, to another episode of The Real Talk Retirement Show. We are Brian Graff and Tracy Burke from Conrad Siegel here with you as always. And today we’re going to cover a topic that we’ve probably mentioned a hundred times on this podcast, but we’re finally going to give it a whole episode on its own. So that is drum roll, please. Roth. Now, this might not sound like the most exciting topic on paper, uh, but you know, for Tracy and I, it’s almost like talking about the NFL playoffs leading up to the Super Bowl. So, you know, and really, Tracy, when it comes to retirement planning, Roth is a massive lever. And today we’re gonna do a deep dive.
Tracy Burke 1:08
That’s right, Brian. Uh, you know, that Roth account uh concept, it touches a lot of people’s retirement and rightfully so is one of those popular tools that we tend to use. So
The Three Tax Buckets Framework
Tracy Burke 1:20
before we get into the many doors, so to speak, that people can use to put Roth to a good use, uh, let’s start by painting a picture. So I want you to imagine really three buckets sitting on a shelf in your kitchen. So, for those of you viewing uh on YouTube, you’re gonna see some visuals on here. If you’re not, you’re just gonna have to use your imagination. But the first bucket, that is your brokerage account, which is basically a regular taxable account. Money goes in into this bucket already taxed. Every year, if that earns interest and dividends, and likely it does, um, or if you sell something for a gain, you’re gonna owe some tax on that. Uh, so there are a little bit of tax advantages, but lots of flexibility. So that’s bucket number one. The second bucket here, the blue bucket, is your traditional um uh bucket. Really, this could be your 401k, your traditional 401k, your traditional IRA. Money gonna get is gonna go into this bucket before tax. So you’re getting a break today. You’re able to deduct it from your taxes today. Uh, but then the IRS has a claim on that entire bucket, everything that’s in there, uh, the growth included whenever you pull money out later. So that’s a second bucket. The third bucket is the Roth bucket. And again, that’s really what we’re gonna focus on today. So money goes in after you’ve already paid tax in it or on it. Uh, and then once it lands in this bucket, the growth and and all of it really, the IRS is no claim on it, as long as there’s a couple of rules, and we’ll talk about those rules momentarily. So, again, three buckets, three completely different tax outcomes. So, most people, you know, spend a lot of their intention on how they’re saving for the future, right? And and that’s that’s all good stuff. But often we see people don’t often stop to think about which bucket those savings actually lands in. So that’s what we really want to focus on today, out of those three buckets. Um, now, quick note before we really dive in, there’s a lot of numbers at play here in terms of limits and contribution limits and what you can and can’t put in and so forth like that. We’re gonna try to stay pretty high picture and we’re not gonna rat off every contribution limit and income threshold uh in today’s episode. Um, but there’s a lot to it. And again, in a few short months, that’s just gonna change again. So we’re gonna be general, try to be general in a sense of numbers. Uh, but like I said, every year these change and depending on your situation in particular. So if you want exact figures that apply to you, you can always reach out to us for those or or your trusted advisor. All right, Brian. So why don’t you go ahead and kick us off with what is behind Roth Door number one?
Brian Graff 4:17
Sounds great, Tracy. Before I do, great job with the props, by the way. I think that’s a a first for the Real Talk Retirement Show, isn’t it? Here we go. Must have cost you a fortune, those buckets. Now, there for those of you that aren’t viewing this and you’re listening, they’re probably what, dollar store buckets that Tracy wrote on, but still wonderful graphics and a great way to illustrate different types of accounts.
Door 1 Roth In Your 401k
Brian Graff 4:36
So, door number one, Tracy. Uh, without further ado, we have behind door number one Roth in your employer retirement plan, your 401ks, your 403Bs, et cetera. So let’s start here, since this really is one of the most accessible Roth vehicles for most listeners. Uh, it wasn’t always this way, but today the majority of workplace retirement plans offer a Roth option within their um within their menu. And if your plan does offer it, you can direct some or all of your contributions into that Roth bucket instead of the traditional or the pre-tax bucket. Uh comes out of your paycheck the same way, but it is taxed up front instead of when you take a distribution. And really, here’s the detail that many people miss there is no income limit on Roth 401k contributions. It doesn’t matter what you make. Uh that’s a genuine advantage over a Roth IRA, which we’ll get to next. Um, and just so you know, for 2026, the base retirement plan contribution limit, so the total maximum amount which you can contribute is $24,500, with higher catch-up amounts available once you hit age 50. And again, in that 60 to 63-year-old window. Uh, we’re not going to walk through every tier here. Uh, just know that there’s room to save more as you get a little closer to retirement.
Tracy Burke 6:03
Yeah, that’s that’s right, Brian. And just a few things that I would suggest maybe we clarify. Um, and and and these rules, as I think you indicated, they do change from time to time. And and this is one that’s changed recently. But for a long time, when the employer does the what we call the employer match, meaning the money that the employer puts in on your behalf, often you have to put in X number percent, and they’ll put match that to some extent. Um, that money, the employer match, always landed in that traditional bucket. Um, no matter you know which bucket you were putting your own money into. Uh, since 2022, retirement plans have had the option to allow those matching dollars, the money that the employer is putting in, to go into the Roth bucket uh in instead. Uh but again, the plan has to allow for that, meaning it had to, you know, the plan rules have to be amended to allow that. Uh so if you’re not sure, check with your plan before assuming either way. Not only does the plan have to be amended, but the the employer has to agree to do that. And that means they’re sort of paying the taxes on your benefit for that portion anyway. So um, you know, it might not happen a whole heck of a lot, but possible. Uh the second item to clarify would say uh you mentioned this, you know, a little bit, Brian, you know, for the higher income earners, and that really how we’re gonna define that for the for Roths. Um, for those who are uh earning over $150,000 a year NYSA for Roth, for Roth 401ks, if you’re doing a catch up contribution, meaning if you’re over age 50 and you’re doing a catch up contribution in your 401k, you must do it in the Roth. And that’s a relatively new rule. So just a clarification there. All right, so let’s
Door 2 Roth IRA Basics
Tracy Burke 7:56
move along. We’re gonna go to door number two. Um, so door number two is really the Roth IRA. We talked about the Roth 401k. Let’s talk about the Roth IRA. Uh different vehicle, but a lot of similarities. And of course, you know, this is one you would typically open up your own uh on your own. Um, it’s not part of your employer plan. So you would do that, you know, at a brokerage firm or with your advisor, however, you do that on your own. Uh the contribution limits are definitely lower than the 401k. Uh, those limits for 2026 are $7,500 for that’s that’s the base, the normal comp um you know, uh limit that you can add to it. And unlike the Roth 401k, there is an income cap. So once your income gets into a certain dollar amount, um, and and generally that’s in the six figures, that ability to contribute into a Roth IRA starts to phase out. And again, this depends on your filing status, um, and and then it disappears completely above a certain point. So there’s lots of factors into that one uh that that’s there. But currently, that amount um, as I mentioned into six figures for single tax filers, it’s about $170,000 a year, roughly. And then for joint filers, it’s about $250,000. Anything that’s that if you earn more than that, you cannot directly put money into a Roth IRA.
Brian Graff 9:26
Yeah, and if you’re a high earner or you’re not sure where you fall, uh bringing this up with your advisor certainly might be a great idea if they haven’t already talked to you about it. And by the way, Tracy, something I it comes up in a lot of my conversations is people don’t realize that they can do both. They can put money into their Roth 401k and a Roth IRA, and those limits are not combined, correct? Yep, that is absolutely correct. Okay. Uh so let’s get to door number three, then, Tracy,
Door 3 The Backdoor Roth
Brian Graff 9:52
uh, which is our next door literally, which is a backdoor Roth. Can you tell us a little bit about that?
Tracy Burke 9:58
Yeah, and for sure. And I remember vividly uh Lee when when I was growing up, my mom always told me, you know, if you’re going to somebody’s house and the front door’s not open, go around and try the back door. So we’re gonna do the backdoor Roth here uh for this one here. So for for anyone who does make too much or has too much income to contribute directly to the Roth, we just gave you those those limits of what you can do directly into the Roth. Uh, there can be a workaround. It’s not just, hey, I make over this dollar amount and I can’t put anything in. There could be a workaround. And that’s what we call this backdoor Roth. So what how that works is basically you can put uh you know your contribution for this year into a traditional IRA. So I’m gonna go back to the bucket. So this is your traditional bucket, right? So you’re gonna put that money into the traditional bucket. Um, and again, because you make over a certain limit, you uh you also don’t receive a tax deduction. So there’s no tax break on the front hand. So it’s really after tax dollars that’s going into um this traditional bucket. Um, and then what you do is you convert it into the Roth all right away. So here’s your Roth bucket. You take the money you put into this one, you dump it into the Roth bucket, and now you converted it. And when you’re converting it, you would pay taxes on that as a conversion. But the good news is you just heard me say that the money you’re putting in, in that case, the backdoor Roth, you make too much to get a tax deduction. So it’s after tax. You’ve already paid taxes on. So you’re simply putting it here first, and then within days, you can transfer it into the other bucket. That’s what’s called a backdoor Roth. Now, to some folks who might say, uh, that sounds a bit like a loophole. Is this all legal? Uh it is, it’s very, you know, well established. IRS has sanctioned this strategy, they’re well aware of it, and lots of people do it. Uh, the one catch to know about uh really is if you’ve already have other pre-tax IRA money um in in this bucket, again, in your traditional bucket, if if if this isn’t empty and you have money already in here that is pre-tax from maybe years before or something like that, then there can be, they call it a pro-rata rule. The IRS is a rule that that money, once it’s mixed together, you put new money in here, even though the new money’s after tax, if you have pre-tax money, now it’s all mixed. Think of like, you know, when you put creamer in your coffee, there’s no turning back. You know, you dump it in and oh no, I put the wrong one in or whatever you did. You can’t go in and there and sift it out, of course. So uh just, you know, if if you’re in that situation where you have money pre-tax already in your IRA, talk to an advisor just to make sure you know how that works and what makes sense there. Uh, but I would say that, you know, that backdoor Roth, one of my favorite financial planning tools for higher income earners that can’t use the front door. So again, coming in through the back door. Uh, and that one that honestly we use for quite a bit of our clients that are in those situations. So uh, Brian, why don’t you take us to the the the next door?
Door 4 Roth Conversions
Brian Graff 13:19
All right. So let’s talk about door number four then, which is Roth conversions. Oh, different situation. Um, unlike what Tracy just talked about, this isn’t about getting new money in. It’s about money you already have sitting in those traditional buckets. Uh, maybe an old 401k or an IRA you’ve built up over the years and moving some of that money over into Roth. And now, actually, many 401k plans are allowing conversions within the plan itself. This is a pretty new feature, something you should you can look into to make sure your retirement plan allows it. So, with these conversions, if you will, you’re paying taxes now on money that’s already there in exchange for tax-free growth in the future. Uh, this can really make the most sense in a low income year, perhaps, or simply to diversify your tax buckets. Uh, maybe you’re already retired but haven’t started Social Security yet. Maybe you had a slower income year for some other reason. Uh, those gap years uh before the required withdrawals start are often the best window to convert. So you’ll be filling up a lower tax bracket now instead of paying a bigger bill down the road.
Tracy Burke 14:31
Yeah, and and I would share a story on this one, Brian. We we’ve seen a lot of clients in that situation. You you just sort of mentioned those gap years, and that’s from between retirement and, you know, maybe Social Security starting or maybe not, uh, but definitely between retirement and when you have to start taking those required minimum distributions. Um, we’ve seen a lot of folks be able to do Roth conversions in that bucket, because if you do planning in advance and you you you you time it well, you may be able in those gap years get into a very low tax bracket, either the 10 or the 12%, those two lowest tax brackets during those years. And like I said, if you plan well, it can be an extremely effective strategy. So something just to think about and work through. Obviously, you know, it there’s some complexity. Uh, you know, you and I talk about it, Brian, because you know, like it’s it’s fairly easy because we we see this, we do this, this is sort of our bread and butter in a lot of ways. Yeah. So uh, but just for others, you know, it it gets a little complex and we get that. So reach out for some help for sure. Um, so now that we’ve really uncovered those four Roth doors, just want to uh talk about a few rules that apply no matter which of those doors that that you’re you’re using there.
Key Roth Rules And No RMDs
Tracy Burke 15:53
So uh really, however you get the money into the Roth, and that’s in a lot of ways what we were talking talking about so far, uh, getting money out of the Roth once it’s in there, largely the same set of rules. So there’s a couple of rules. One is what’s referred to as the five-year rule. So at a pretty high level, you know, Roth accounts as a five-year rule before earnings uh can generally be withdrawn tax-free. So we talked about, you know, you’re putting money in, you’ve you’re paying taxes on the contribution, but all that earnings, whatever the the uh earnings that it makes over time, will come out tax-free, but it had has to be the account has to be basically open for five years. Um, so details again get complicated, um, you know, especially with Roth conversion, some other things. So speak with your advisor or give us a call uh about those rules, you know, that apply to your specific situation. Uh, the other sort of rule when money’s coming out that is important to realize those contributions themselves. Uh, again, the money that you put in, um, they can generally come out at any point, tax and penalty free. And again, as we said, you’ve already paid tax on that money before it went in. So the IRS, in a sense, doesn’t really care if those dollars stay in or they come out. They’re not going to make any future um, you know, tax dollars on that. So they allow you for the money that you put in, you already paid taxes, really, at any point in the future to pull out without penalty or without any taxes on it because you’ve already paid the taxes. So it’s really the earnings that carry these conditions. So what one, you know, the the money that the the uh contributions are earning in the future that have that five-year condition in a sense. Um, so while it’s probably not the most effective way to do um, you know, do with your Roth contributions, we have seen some people take their contributions out tax-free to pay for maybe some larger ticket expenses, maybe uh, you know, for the kids’ college or for home down payment or something that like. That’s a way to access from Roth IRAs, not Roth 401ks, but Roth IRAs using some money in a tax-free or tax penalty way. Um, and then the other thing that I would mention, I think it’s worth knowing, uh, Roth accounts and and this is both the IRA and as of a recent rule change, the 401k Roth as well, um, neither require you to start taking withdrawals at a certain age, like traditional accounts do. Uh, you know, as we sit here today, uh, everybody uh that hasn’t already started taking those required minimum distributions, you will have to do that as early as age 73. For younger folks, it’s it’s at it’s phased uh from between 73 and 75. Right. So again, um, you know, there is no required distributions from either Roth IRAs, Roth 401ks. And again, that really just gives you more control over your own money for a longer period of time. So, so Brian, what as we sort of tie all this together, you know, the question sort of comes up well, should I use Roth? Should I use traditional? How do you actually
How To Choose Roth Or Traditional
Tracy Burke 19:22
decide? So, with all those doors, Brian, tell us how how does somebody sort of pick the best uh option?
Brian Graff 19:28
Right. Well, I guess the answer mostly comes down to tax bracket, you know, what your tax bracket is today versus your best guess at retirement. And you know, Trace, we always say we don’t have the crystal ball, right? It’s hard enough to know what tax rates are gonna look like next year, let alone five, 10, 20 years from now, right? So it really comes down to your best guess and and how you generally look at things. But you know, if you are early in your career and you’re in a lower tax bracket than later in life, you’re, you know, you know you’re not making as much now as you’re gonna be making in the peak part of your career, Roth tends to look a little bit better since you’re paying taxes now at today’s rate, right? When you feel like you’re in a lower tax bracket. Uh, however, if you are in the the peak earnings years in your career and in a higher tax bracket, traditional contributions may make more sense right now with Roth again becoming more attractive uh once your income does drop in retirement, like like Tracy talked about in those gap years, especially.
Tracy Burke 20:24
Yeah, and I would add for a lot of people, the answer isn’t all or nothing either. It’s a you can do both, right? You can put some into traditional and some into Roth. You could put your 401k money into Roth and your other maybe IRA money into traditional, or split up your 401k money, puts half into traditional, half into Roth. It’s not an all or nothing. So you have a lot of flexibility. Uh, as you know, or if you know, listeners can tell, we’re pretty big advocates of that Roth bucket. So uh, you know, it just gives you more flexibility later. You know, you can control your taxable income uh instead of sort of being stuck one direction or another.
Brian Graff 21:04
Yep, for sure. And uh again, it’s all about filling those buckets that Tracy has. So uh Tracy, let’s have a little bit of fun now as we get towards the
Rapid Fire Roth Or Not
Brian Graff 21:12
end of this this episode and let’s play a game, okay? Okay, and I’m gonna do my best game show host impression, so bear with me. I’m gonna give you a quick situation, and Tracy, you tell me Roth or not. Okay, and of course, you know, everybody’s situation is different. So we’re gonna give you a quick disclosure here. You know, these are general ideas, and we recommend talking to an advisor before making these decisions, but it can give you an idea of how we look at these situations. So without further ado, Tracy, let’s play Roth or not. Okay. Scenario number one we have a 24 year old, first job out of college, lowest tax bracket you’ll probably ever see. Tracy, Roth or not?
Tracy Burke 21:52
I would say Roth on this one, right? You know, it sounds like a great candidate for that Roth. Um, you know, you as you I think you said. She was in the lowest tax bracket, likely will ever be. And as we talked about, that’s the one of the deciding factors. So pay the low tax now and then let decades of growth, you know, come out um tax-free later. And and you know, if we just pause a second, uh, as I’ve shared, and I think you know, it’s probably evident, as I mentioned, we’re pretty um, you know, bullish on the Roth component. And so much of it is the time element. Time is such a powerful part of this Roth conversation. And speaking really directly to everyone in their 20s and and even those in their 30s, if it just imagine this, you know, imagine putting, let’s say, $5,000 a year into a savings vehicle, and we’re gonna say that this would be into the Roth bucket. Put $5,000 a year in for 30 years. You’d be putting in $150,000 total over those 30 years, right? $5,000 times 30 uh years, and and let’s assume you get a 7% rate of return. You’re going to end up with uh mathematically about $472,000 in let’s call it that Roth bucket. That means, you know, if you put in $150,000 was the contributions, you’ve already paid taxes on that, and the balance is $472. That means $322,000 of that is in investment growth. So over two-thirds of that balance is is in growth and is tax-free. $322,000 tax-free sounds pretty incredible to me. What do you think, Brian?
Brian Graff 23:47
I think so, Tracy. Wait, you know what? I’m sorry. Let me go back to my uh normal voice now so we don’t lose lose any of our uh valuable listeners. Okay. All right. So game show host Brian is is off the table. Okay, so I I think that’s great, great stuff, Tracy. But in our second scenario, uh, we have a 59-year-old executive. Okay, so top tax bracket, planning to retire in about three years. Roth or not?
Tracy Burke 24:11
All right. I would say not on this one, right? Uh, because again, planning to retire in a top tax bracket. Um, you know, so probably the traditional is gonna be better, most likely. Uh paying tax at a top bracket, you know, just it’s expensive. It just doesn’t make a whole lot of sense right now. Uh, so traditional makes more sense today. With Roth conversions, though, as we talked about, once um, assuming income does drop in retirement, taxable income drops in retirement, especially in those gap years, there may be some windows where that person, though, could do Roth conversions at that point.
Brian Graff 24:45
Yeah, great stuff. Okay. Uh, scenario number three. Someone is working and has a 401k plan. Uh, this person really has no idea what Roth is at this point until they listen to this great podcast where we’re two handsome fellas explained everything to them, right? Maybe a little stretch here, but I’m going for it. Um, so that person uh with that 401k plan goes and and finds out that the plan does offer a Roth option, but they’re really just not sure how to split up their contributions. So, so Roth or not?
Tracy Burke 25:15
Yeah, well, I was gonna say this one sound, you know, sounds familiar, of course, but uh you know, I’d say that that person should start simple and they should also consider if they’re that podcast that they love so much, consider giving a five-star review to the process. That’d be something uh as well. But again, this this this person you said early or mid-career, you know, or sort of in their mid-career, I think is what you said. If they’re early or mid-career, I would probably lean towards the Roth. Again, it could be a mixture, though, right? Splitting between the the two isn’t a bad answer either.
Brian Graff 25:50
No, great point. So that gets us to our last uh scenario, scenario number four, where we have a retiree, someone who’s already two years past leaving the workforce, hasn’t started Social Security yet, though, and their taxable income is is unusually low this year, Roth or not?
Tracy Burke 26:07
So so this one, of course, is is is sort of you know a caveat on there. Unless they have earned income, they can’t do either, right? They can’t put money in if they don’t have earned income. But um, this is where a good conversion window can take place. And I was just mentioning that uh if they do have earned income, and a lot of people uh in those early years of retirement, maybe they’re working part-time somewhere and they have earned income. Uh, if they are in that low tax bracket, why not do the Roth, you know, at that point, uh, if they are in a low tax bracket. But like I said, it’s a good conversion window opportunity. Um, and you know, that’s exactly the kind of gap we just talked about. Um, we look at filling up those lower tax brackets while you’re able to.
Brian Graff 26:50
Great stuff, Tracy. Very, very nicely done. That concludes our game show. Not sure if our producer Zach can throw in any uh any fun game show type ending music. But uh and Tracy, unfortunately, I don’t think we budgeted any prize money for you. Oh sorry about that. I thought I won. No, but but your prize is knowing that you gave folks a really decent gut check and things they can apply to their own situation. Isn’t that prize enough, Tracy? I think it is.
Tracy Burke 27:18
Yep, just that satisfaction certainly is.
Action Steps And Final Wrap
Tracy Burke 27:20
So, as we always do, Brian, let’s end with some action items. You know, we always want to leave our listeners with some, you know, some ideas or some few things sort of in a nutshell that they can actually do. So why don’t you kick us off on that?
Brian Graff 27:33
Absolutely. So, first we’re gonna talk to pre-retirees, those folks that are still in the workforce. Uh, we would definitely encourage you to check your workplace retirement plan. Does it offer a Roth option? Likely it does, but make sure you check. Uh, if you’re early or mid-career and in that lower tax bracket, consider directing at least some of your contributions uh to Roth. And then if you’re a higher earner, um, you know, shut out the direct IRA Roth contributions. Uh, you know, because you’re earning too much, remember, ask your advisor whether a backdoor Roth fits your situation.
Tracy Burke 28:07
That that’s that’s good stuff. And then, you know, adding a few ideas for those who are maybe already in retirement. So for those retirees, again, mentioned a couple of times, but if you’re in that gap, gap period of times, um, you know, and really retired, but before Social Security, maybe, maybe not, or at least those required withdrawals start to kick in. Talk to your advisor about whether a conversion makes sense uh at that point in time. And uh, you know, again, review whether a mix of traditional or Roth dollars gives you more flexibility in really how you manage that taxable income going forward because it’s balancing that and being most tax efficient.
Brian Graff 28:48
Absolutely, Tracy. Well, that concludes this episode of the Real Talk Retirement Show. And I don’t know about you, Tracy. This is already up there as one of my favorites. We had props, we had a game show. I mean, come on. Tracy’s holding up his bucket right now for those of you that are that are listening. Uh, so you know, again, please, everyone, always reach out to us with any questions or comments. You can get us at podcast at conradseagle.com. And as always, we are here to help. And remember to share this podcast with your friends, families, coworkers. And as Tracy mentioned earlier, we would love a five-star review. And please subscribe if you haven’t already. Thanks so much, everyone, for staying with us on this journey to and through retirement. We’ll see you next time on the Real Talk Retirement Show.
Intro/Closing 29:32
Thank you for tuning into today’s show. The Real Talk Retirement Show is created and produced by Conrad Siegel, an advisory firm that specializes in helping people prepare for retirement and beyond. If you want to learn more about our work or meet the team, you can visit ConradSegal.com. Information on this show is for educational purposes only and should not be considered personalized investment, tax, or legal advice. Before making decisions, you should consult with the appropriate professionals for advice that is specific to your situation.