Roth IRA Vs Traditional IRA How Much Will You Withdraw For Retirement?

Forbes

5 hours ago

Woman contemplating Roth IRA vs Traditional IRA decisions
Roth IRA vs Traditional IRA retirement savings decisions are some of the most important financial choices you'll make when planning for retirement. Choosing between these two types of accounts can significantly impact their future income, tax burden, and financial flexibility. That said, there are two retirement phases to consider regarding this decision: saving up for retirement and how much you will spend in retirement on a.k.a. withdrawals, a.k.a. distributions a.k.a. decumulation. In this first part of a two-part series, I will start with the end in mind, spending.
In this article, we'll explore the implications of withdrawals in each type of account, why the tax differences matter, and how aligning your strategy with your values, such as passing on savings to heirs or making charitable contributions can help you retire with both peace of mind and purpose.Roth IRA vs Traditional IRA: Understanding Traditional IRA Taxes
The first step in retirement planning if you have a long-time horizon is deciding how much income you want to spend. As horizons shorten, the question becomes how much income will my resources and current savings allow me to spend? Distributions from Traditional IRAs are taxed as income, while Roth IRA withdrawals are tax-free.
While there are many potential retirement income strategies, to simplify the tax analysis, we will assume a flat annual income.
Let's consider a simple scenario:
Provisional Income determines how much of your Social Security is taxable:
Provisional income =
Half of your Social Security + Other taxable income
= 50% × $25,000 + $X (Traditional IRA/401(k)/403(b)/457/TSP withdrawals)
Provisional Social Security Income
Because you'll be withdrawing at least $50,000, currently 85% of your Social Security will be taxed. 85% × $25,000 = $21,250 taxable Social Security
Withdrawals from these accounts tax both the original savings any matching contributions and all of the growth. Assume $63,000 gross withdrawal from IRA/401(k)/403(b)/457/TSP:
2025 tax brackets for single filer (estimated):
Federal income tax brackets Single filers for scenario
Total federal tax = $1,160 + $4,266 + $4,708 = $10,134
Income Realized After Tax on Social Security and Withdrawals
Ultimately, to net the $50,000 you had to pull more than what you wanted.Traditional IRA/401(k)/403(b)/457/TSP Tax Scenario
Traditional IRA Federal Tax Scenario
This calculation does not include state taxes. Depending on where you reside in retirement you may have to increase withdrawals.Roth IRA vs Traditional IRA: Understanding Roth IRA Taxes
If all your retirement savings are in Roth accounts (Roth IRA or Roth 401(k)), the outcome is very different from the Traditional IRA/401(k)/403(b)/457/TSP scenario. Here's a detailed breakdown of how much you'd need to withdraw to get $75,000 in post-tax income, assuming $25,000 from Social Security and needing $50,000 from your Roth accounts.
Current Federal Tax RulesSocial Security Provisional Income Calculation
Provisional income =
Half of Social Security + taxable income
= 0.5 × $25,000 + $0 = $12,500
Roth IRA tax scenario
That means you need less in Roth savings to achieve the same spending power as you would in IRA/401(k)/403(b)/457/TSP. As you know, retirement is not a point in time but over time. Unfortunately, a time period that is unknown as my 96-year-old mother approaches her 97th birthday. Inflation has changed her spending needs since she retired at 62.
Wish you had more money in Roth accounts? In 'Use Roth IRA Conversions to Cut Your Taxes and Boost Retirement Income' I explore how conversions can help manage taxable income and reduce Medicare IRMAA (Income-Related Monthly Adjustment Amount) costs.Roth IRA vs Traditional IRA: Required Minimum Distributions
Traditional IRAs have RMDs whereas Roth accounts do not. With RMDs, the government says that you have had a tax holiday for quite a while and we need to start collecting revenue. This can speed up the depletion of your accounts for your own use, much less for heirs that you may have hoped would reap the rewards of your unused funds. For more on IRA withdrawal rules, visit the IRS Required Minimum Distributions (RMDs) page.Roth IRA vs Traditional IRA: Income Related Monthly Adjustment Amount (IRMAA)
In addition to this consideration, you should also consider Medicare's IRMAA. This adjusts the monthly premium on your Medicare premiums. While IRMAA has a tiered system similar to the tax brackets, it is not as kind.
Medicare Income Related Monthly Adjustment Allowance
First, once you hit the tier, you are in that tier, there is no averaging of the brackets. Furthermore, if you are 1$ over, you are in the next bracket. In this case, your required minimum distribution, not your needed income, could push you into this new IRMAA bracket. I know a few people where their RMD pushed them into a higher IRMAA bracket.Roth IRA vs Traditional IRA: Taxes Over a 30-year period
Consider the following assumptions of a 30-year period Roth vs. Traditional IRA comparison assuming:30-Year Account Depletion Comparison (Inflation-Adjusted)
If you were to fully deplete each account over 30 years to meet your retirement income goal (adjusted 3% annually for inflation):
Roth IRA vs Traditional IR Account depletion
You can easily see that you would need $1.39 million more in Traditional IRA/401(k)/403(b)/457/TSP than in Roth to generate the same after-tax income over 30 years. Roth accounts provide a major advantage in tax efficiency and simplicity, especially in retirement years with predictable income needs.Closing Thoughts Roth IRA vs Traditional IRA Savings
All of the Roth IRA vs Traditional IRA scenarios were simplified in order to highlight the difference in savings from a future tax perspective. While many financial professionals have suggested diversifying the savings approaches. Under the scenario that I have laid out, clearly there is one winner. Many mistakenly believe that there IRA savings gives them a much larger current deduction than it already does. If you target the zero tax of Roth, you are taking tax increase risk off of the table.
Also, your cognitive powers are likely going to decline somewhere during a long retirement period. This may nullify the great tax diversification you had developed during your younger days.
All of this said, I don't believe in one size fits all. Your circumstances may be unique. I hope that this article on Roth IRA vs Traditional IRA encourages you to build your own scenarios and to stress test and build your own and stress test them.