Many retirement specialists tout the advantages of Roth accounts. Whether a Roth IRA or Roth 401(k), these savings vehicles can grow free of taxes, withdrawals after the first five years are tax-free and there are never any required minimum distributions (RMDs). What’s not to like?

But sometimes traditional IRAs and 401(k)s are actually a better choice, advisors say. The trick is to know when clients should go one way or the other.

When Roth IRAs were first introduced more than 25 years ago, they were not an immediate hit, recalled Steve Parrish, professor of practice and scholar in residence at the American College of Financial Services. That’s because they don’t lower a client’s current taxes, unlike traditional IRAs and 401(k)s. “For years, consumers and sometimes even advisors saw no logic in paying taxes now when they can be deferred until later in life, when marginal rates will likely be lower,” he said.

In time, however, experts increasingly looked at Roths as a potentially valuable planning tool for lowering taxes in retirement, improving “net retirement income and legacies,” he said.

Despite their merits, however, Roths shouldn’t necessarily dominate clients’ retirement planning, he said. In certain situations, traditional retirement accounts are a better fit. “It’s been somewhat humorous seeing all the articles that make it sound like you have to do a Roth to be with the cool kids,” he said.

Tax Bracket Forecasts
A primary factor for determining the relative benefits of traditional versus Roth retirement accounts for particular clients concerns the client’s current and projected future tax bracket, advisors say. While future tax rates are impossible to predict accurately, there are a few rules of thumb.

“One way to take advantage of timing is what we call the ‘tax valley,’” said Dustin Wolk at Crescent Grove Advisors in Milwaukee. “If a client defers Social Security until age 70, there will be years from retirement to age 70 when they will almost certainly be in a lower tax bracket. These are optimal years for taking distributions or performing Roth conversions.”

Traditional IRAs can be converted to Roths at any time, he said, but taxes will be due on the conversion—that is, on the principal and any earnings or appreciation that hadn’t been taxed previously. That’s why it’s better to wait for a low-income, low-tax year. Tax brackets are likely to bounce up again, he said, when clients begin taking Social Security, and go up even further when RMDs from their traditional IRAs and 401(k)s start (currently age 73).

Younger workers, who are typically in a lower tax bracket, may not need the immediate tax break of a traditional IRA, advisors say, though they would almost certainly benefit from a Roth. By the time they need to take money out in retirement, not only will the Roth have had many years of tax-free growth but withdrawals will be tax-free, too, unlike with traditional IRAs.

Midcareer workers, however, who may be at their top earnings, might get the most benefit from a traditional IRA’s current-year tax deduction, advisors say.

“Tax brackets are prone to change over time,” said Megan Wiley at Seattle-based Badgley Phelps Wealth Managers. She said she generally recommends “flipping the switch” from Roth contributions to traditional IRA or 401(k) contributions “at or above the 24% marginal income tax bracket. [Then], after a person is done working and potentially in a lower income tax bracket, it could make sense to explore Roth conversions.”

Some advisors, however, say that even high earners can be better served with Roths than traditional IRAs. “A case can be made for Roth conversions for high-income earners,” said Grace Yung of Midtown Financial Group in Houston. For example, she said, some high earners anticipate paying even higher taxes in the future, perhaps from an inheritance or some other windfall. “This means one could be better off paying taxes now, rather than waiting to potentially pay much more later with traditional-IRA distributions."

The tax-free distributions of a Roth may also be a better fit, she said, for those who anticipate receiving regular, lifetime retirement income—perhaps from an annuity. In addition, spouses who inherit a Roth IRA can also enjoy the tax-free income, she said. Even non-spouse heirs, such as children or grandchildren, who must liquidate the entire amount of any inherited IRA (traditional or Roth) within 10 years, can at least benefit from no taxes on the distribution. “In the case of a traditional IRA that has grown to a sizable amount, this [required depletion of funds] can result in a big tax bill,” she said.

At the same time, some clients may not land at a lower tax bracket after leaving the workforce because they “lose deductions [in retirement years] that had helped keep their taxable income lower,” said Laura Dix, CEO of Legacy Financial in Woodburn, Ore.

Worse still, she said, clients with traditional 401(k) and IRAs could be pushed into a higher tax bracket when they reach age 73 and have to start taking RMDs from those accounts—unless they reduce that burden by making qualified charitable distributions (QCDs). In 2024, taxpayers can transfer up to $105,000 of their RMDs to certain approved charities, without pay taxes on that distribution.

A Compromise
Often, advisors say, the best strategy is to divide retirement savings between traditional and Roth accounts. The IRS limits how much money can go into IRAs in any one year, but how much goes where is up to you. For 2024, total IRA contributions can’t be more than $7,000 if you’re under age 50, and $8,000 if 50 or older. In addition, to contribute the full amount to a Roth IRA, your modified adjusted gross income can’t be more than $146,000 if you file taxes as a single filer, or $230,000 for married couples filing jointly.

Clients who earn more than that may want to consider a strategy known as the “backdoor Roth,” advisors say. In essence, they can maximize their Roth contributions by converting or rolling over their traditional IRAs to Roths, regardless of how much they earn. This strategy will generate higher current taxes but, the argument goes, shield funds from future taxes.

Some employer plans allow workers to divide contributions between traditional and Roth 401(k)s. If that’s available, Dix says she often recommends that clients contribute as much as possible to the traditional 401(k) option first “to help maximize the employer match or to keep clients within a certain tax bracket.” The rest, she said, should go to the Roth option.

Overall, it’s clear that who should put how much into one type of retirement account versus another, and how that might change over time, can depend on many factors. “I wish there were a simple rule of thumb for income thresholds that determines whether Roth or traditional accounts make more sense,” said Eric Ludwig, director of the Center for Retirement Income at the American College of Financial Services. “Helping clients find tax deductions [while] in their top earning years often makes sense, but not without accounting for their complete retirement picture.”

For instance, he said, a 50-year-old executive who earns $185,000 a year and has stashed $1 million in a traditional 401(k) might feel compelled to maximize pretax contributions to gain current-year tax savings. But if all of the executive’s retirement savings are in pretax accounts, such as traditional 401(k)s and traditional IRAs, he or she is “essentially creating a future tax powder keg,” said Ludwig. “The lack of tax diversification could leave them with limited flexibility to manage their tax situation in retirement.”

Rather than looking for arbitrary benchmarks, he said, advisors should be opportunistic about when they recommend Roth conversions. If clients have a bad year, one in which they receive a smaller bonus than usual, or they or their spouse have taken unpaid leave and their income dips, that’s an ideal time to consider Roths.

“Similarly, market downturns present opportunities to convert depreciated assets [to a Roth], effectively lowering the conversion tax cost while capturing future recovery in a tax-free account,” he said.