In this episode, host David McKnight tackles a question about the tax bracket at which you should stop contributing to the Roth IRA and start contributing to the traditional IRA.

The inspiration for this episode was a recent episode of The Money Guy Show.

David believes that advice such as that shared on The Money Guy Show doesn’t consider most of the people asking questions like the one addressed in the episode.

Those are people whose combined marginal tax rates fall between 25% and 30%.

Generally, David likes the idea of having a rule of thumb tax bracket that helps you determine whether or not you should go Roth or traditional.

However, he warns against providing advice that ends up confusing a huge swath of investors. 

In fact, David sees the particular rule of thumb like the one shared on The Money Guy Show as something that isn’t going to be all that helpful to many Americans.

David breaks down the power of zero rule of thumb when it comes to deciding between Roth or traditional.

Your state tax in retirement is likely to be very similar to what your state tax is now.

David’s rule of thumb: if you’re in the 24% federal tax bracket or lower, then go Roth all day.

That’s because your current 24% bracket is still lower than the future version of the 22%, which is 25%...

Remember: if you’re in the 24% or lower in the federal marginal tax bracket, go Roth. If you’re in the 32% bracket or higher, then go tax deferred.

Generally, David DOESN’T recommend filling up your entire tax-free bucket and ignoring tax deferred altogether if you decide to go Roth.

Simply allocating your match to the tax deferred portion of your 401(k) is a great way to accumulate the required amount in your tax deferred bucket. 

David tends to like the Money Guy Show, but he feels that, in this instance, they should simply ignore state taxes in the Roth vs. traditional calculus and draw a red line at the 24% tax bracket.

 

 

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Brian Preston

Bo Hanson

The Money Guy Show