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Our Roth Regrets // The Roth IRA Strategy We Wish We’d Built

It’s fair to say there are several things we’d do differently if we were to go back and save for early retirement all over again, because we didn’t do this perfectly by any means. (Fast does not equal perfect. Fast mostly just means you have a high income, and anyone who tells you otherwise is selling something.) There are the things we’d do differently if we were starting right now, but the biggest thing we’d change no matter when we were saving and no matter what the markets were doing at that point is do a better job of saving money in Roth IRA accounts.

Yes, we have Roth regrets. Roth envy. Roth remorse.

And there’s not a damn thing we can do about it (mostly). But you can learn from our mistakes and do better!

The Roth IRA Strategy We Wish We'd Built -- Our Next Life // Early Retirement, Financial Independence, Work Optional Living

Quick primer on Roth rules for those whose memories are a little fuzzy. Unlike virtually all other tax-advantaged retirement accounts in the U.S., Roth IRAs (and Roth 401(k)s, for the rare employees whose companies offer them) are funded with post-tax dollars. So you don’t get an income tax break when you contribute like you do with your 401(k) and traditional IRA, but when you start taking distributions, both your contributions and all the glorious earnings come out tax-free, assuming you’re 59 1/2 or older. Roths are also the only tax-advantaged account that don’t have required minimum distributions, so if you intend to pass some of your money on to children or a charitable cause, Roths let you hold onto all that value for as long as you want, unlike others that require you to start taking money out and get taxed on it at age 70 1/2. But perhaps the best part about Roths is that you can take out the money you’ve contributed at any age with zero penalty. (Assuming you originally contributed it to your Roth and didn’t convert it from another account.) However, despite all this goodness, Roth IRAs are not directly available to higher earners.

I’ve been quite adamant in my belief that we should all be planning pretty conservatively for early retirement — much more conservatively than the 4% rule, in part because the rule may prove too aggressive in the future, and in part because our spending will almost certainly go up as we get older (ahem, health care costs are increasing at more than three times the rate of inflation currently, and that’s without any ACA repeals that could happen anytime and would drive premiums up even higher). That hasn’t changed. I’m still not a fan of the approach of thinking of your whole retirement as one big phase and using a big chunk of your traditional retirement funds before you get to traditional retirement age. That’s not looking out for future you.

But there’s no reason you can’t build a solid Roth strategy and look out for future you.

The Roth Strategy We Wish We’d Built for Early Retirement

We didn’t get serious about saving for retirement until after we were over the joint filing income limit for Roth IRAs. It’s not that we weren’t saving. We were both doing our 401(k)s at work, and outside of that we were saving a lot, actually. It was just to pay off my debt, and then to buy our first place, and then to buy our forever home. All savings goals that were very immediate, and therefore where investing that money didn’t make sense. For most of our adult life, in fact, our savings goals have been cash-focused. By the time we got focused on early retirement and started investing in earnest, we were long past the ability to contribute to Roth IRAs, directly at least. But if we could go back and do it over, here’s what we would do:

More contributions when we were under the income limit — When you’re saving for another goal, the last thing you want to do is divert funds to a purpose you won’t benefit from for years. But through most of our working lives, the Roth IRA limit was ~$4,000-5,000, and each of us saving that amount per year when we were eligible — at least after we got out of our entry-level jobs and weren’t living paycheck-to-paycheck anymore — wouldn’t have set back our other goals so massively as to significantly change our life trajectory. So we wish we’d done it! Even if we’d only saved the limit a few years each and then just left that money to grow through the bull market since the Great Recession, we’d be in a position to withdraw those original contributions and still have tons of gains that could sit and multiply for a few more decades before we touch them.

Backdoor Roth contributions when we were over the limit — In the years when we were over the limit, we never even seriously considered taking advantage of the backdoor Roth option: contributing after-tax dollars to a traditional IRA (and getting no tax benefit), and then converting those dollars to a Roth account. If we had, we’d again have all those contributions available to be withdrawn without penalty — at least the ones older than five years — and there’d be plenty of gains left to keep compounding.

The Benefits of Roth, Even Without a Ladder

When early retirement folks talk about Roths and Roth conversions, much of that conversation tends to focus around the idea of the Roth ladder — building a chain of Roth conversions each year so that you can eventually use Roth dollars to supplement your other sources of cash flow, turning traditional retirement dollars into early retirement dollars. When that strategy is used to the detriment of future you, I’m not a fan. But when you convert a few dollars here and there — or, better yet, you just contributed to Roths while working and have money already in those accounts — there are some solid benefits to be had.

Additional contingency or emergency fund — Because Roth contributions can be withdrawn without penalty (again, not the gains, only your original cost basis), Roth accounts essentially serve as an added contingency or emergency fund. If you fully fund your taxable accounts to cover your early retirement, but then something catastrophic happens, or you hit a horrible sequence of returns, those Roth funds can help bail you out. If your Roth funds came from a conversion, you have to wait five years, more or less, but then can withdraw your conversion cost basis without penalty.

Source of additional cash flow that doesn’t impact taxes or health care premiums — In early retirement, there’s a good chance you’ll be working to optimize your income to stay under a particular tax bracket or to stay within a particular range for health care premium purposes. And selling shares of taxable accounts, or taking a 401(k) distribution if you’re over 59 1/2 but under 65 and not yet on Medicare, both trigger taxable events. Taking your contributions out of a Roth account doesn’t trigger a thing. So Roth funds give you an added source of backup cash flow that doesn’t mess with your careful optimization.

Ad hoc donor advised fund (DAF) — If you care about giving charitably even without a job and also want to leave a charitable legacy, as we do, Roth accounts give you another tax-advantaged way to give outside of a formal donor advised fund. First, the fact that they can grow forever tax-free and without the need for required minimum distributions means you could fund a Roth account and get the de facto tax benefit of the free capital gains on money you intend to leave as a bequest when you pass on. (P.S. You can give charitable contributions from traditional IRAs in lieu of RMDs, too. That’s why it doesn’t make sense to convert IRA or 401(k) dollars to Roth specifically to give charitably in a short time frame.) And if you don’t mind paying the income tax on the money when you earn it and put it into your Roth (or when you convert it from a pretax retirement account), you can let it appreciate in your Roth and then, after 59 1/2, make a charitable contribution from it that’s much larger and also worth a larger tax write-off for you. I don’t think tax write-offs should be what motivates any of us to give, but if they help you give a little more, then great!

What We’re Doing Moving Forward

Just because we’re done with traditional retirement doesn’t mean that we’ll never save for retirement again. This year, in fact, we’ll almost certainly fund traditional IRAs for the first time in possibly forever, using book and side hustle money. But we’ll also have more taxable income than we’d planned, so we aren’t eager to trigger more taxable events by converting other dollars to Roth. (It would make more sense to just contribute to Roth accounts directly, given that we’re now well under the income cap.) But this December, we’ll do what will likely become an annual tradition:

End-of-year Roth conversion — Before the end of each calendar year, we’ll tally up all of our income — dividends, capital gains, rental income, any work we’ve done — and see where we net out. Adjusted gross income (AGI) and modified adjusted gross income (MAGI) are the most important numbers for tax and health care purposes (they’re essentially all income minus contributions to pretax retirement accounts and only a few other narrow categories like alimony), so based on our MAGI, we’ll decide whether we have room to convert some IRA dollars to Roth… or not. And then do the same thing again the following December. With any luck, we’ll end up with some dollars in Roth accounts one of these days!

What’s your take?

Are you a big Roth fan? Are you maxing out your Roths like you should? Contributing through the backdoor option if you’re over the limit? Converting in retirement? All of the above? None of the above? Let us know! I’m officially back and responding to all comments, so let’s chat!

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44 replies »

  1. I’m a huge fan of the Roth. In fact, I have two nephews who just graduated college and fortunately will be starting well paying jobs who I told to make funding the Roth a priority every year from now on. This can be direct or back-door but get it done. I would also tell parents with young kids who have some earnings to fund their kids Roth IRA’s to get them going. It is one of the greatest gifts they could receive!

  2. I’ve always been a fan of the Roth. I started doing the backdoor Roth as soon as my income put me out of traditional contribution range. Now that I’m semi-retired at my W2 job I’m well back under the income limit so I can contribute directly again and will. The fact that you can access the money if needed is a huge advantage over traditional IRA’s even though the latter gives you the tax benefit when you probably have a bigger salary.

  3. I’m such a Roth fan – I funded my kids’ Roths, letting them spend their earnings from their first jobs until I hit 10K. I told them I was giving them a million dollars, if they left it alone to grow. Did conversions for myself but can’t anymore due to ACA limits.

  4. Yes! Thank you! This is a really informative post, I wasn’t aware that there weren’t RMDs for roths. Also I so appreciate that you don’t write about tax optimization, I understand why people are motivated to do it, but I agree with you on this one.

  5. I’ve been contributing to a Roth since 2001. (Back then, you could only put in $2,500 a year.) I’ve contributed as much as allowed for the last 17 years — and I am so happy I make this transaction every month. I’ve never been a high earner so there were years when finding $5,500 was tough. Figure it out — and fund a Roth. Roths are the best retirement accounts if you qualify.

  6. I’m a big fan of Roths and have been contributing to them when they were limited to 2K (high school or college for me). We still do our best to max out contributions today.

    I didn’t learn about back-door Roths until quite a few years after PF blogging. It’s one of those topics that rarely come up.

    Despite the back-door option, I’ve never liked the idea of Roths being limited by a nationwide standard of income. There are people in Silicon Valley or NYC who might be “just getting by” (due to the cost of living) at the contribution limits (which I don’t think have been adjusted for inflation).

  7. Same here Lizzie. I’ve never been a high earner, but with the help of my spouse, I’ve contributed the maximum amount allowed to a Roth IRA for many years. And continue to do so. I’m over 50 now so I contribute $6,500 annually. When my daughter started working in high school, we opened a Roth IRA for her, and contributed to it for her during the years she earned money. She’s now a college graduate earning a good salary, and she contributes to that very same Roth IRA every month automatically. Such a great thing parents can do: jump start a retirement savings plan for your kids.

  8. We are still under the income limits and have been pumping Roth money in every year (both maxed out last year) and will continue to do so until we pass the income limits (still a few years out on that).

    Big fan of all the benefits and think most people would benefit from doing some 401k and Roth IRA if they can, never know what the tax laws will be so spread it out when you can!

  9. When I was 23, my uncle died of cancer and left me a couple thousand dollars. My mom handed me the check and said, “you’re going to a financial planner tomorrow and you’re putting AT LEAST half of this in a Roth IRA. You can do whatever you want with the rest, but AT LEAST half of this goes into a Roth.” I haven’t contributed to it since (I was working in retail for years and just put money in my 401k at work for now), but it is still one of the best decisions I’ve made. Once I pay off the debt I’m clearing up now, the first goal is to fully fund a Roth.

  10. I’ve been hesitant to contribute to Roth because I wasn’t really sure I could financially manage to contribute the max to my 457 & IRA without getting the tax break for the Traditional IRA. But with a raise last year, I split my contributions between the two IRAs this year, and now that I have a new job, I’ll probably just go Roth next year.

  11. We love Roths! My spouse and I have contributed the annual max in each year that we’ve worked full time. We’re also offering to match 1:1 or even 2:1 the money our 13 and 15 year old nephews will contribute (we want to teach them early the power of matching, compounding, and investing). My spouse has the option to contribute to a Roth 401k, but we’re right at the income limits for Roth IRAs and maxing out traditional 401k helps keep us under that limit.

  12. Solidly in the 24% tax bracket I was actually contemplating switch contributions from traditional 401K to Roth 401K and hedging our future tax situation. If I work for too many years, highly likely as I enjoy the income and what I do, I could end up in a RMD situation and a higher tax bracket many years down the road. There’s still quite a few variables to try and forecast, but right now our mix is ~50%/50% in pre/post-tax accounts, so we do easily have 5+ years of post-tax dollars available if we do pull the trigger in the near-future. We would then employ the Roth ladder process. We contributed to the backdoor Roth last year for the first time, many great resources out there to help with the process!

  13. I only missed one year of Roth IRA contributions for all the years I’ve been eligible, though most of them have been Backdoor contributions. My husband didn’t contribute until we were dating though – I joked to friends that I “stole” $5500 from his checking account to make sure he was funding his Roth IRA. I also contributed to a Mega Backdoor Roth IRA (aka after-tax 401(k) contributions and then withdrawn into my Roth IRA) with my last employer for two years. All of that means we have reasonably healthy Roth IRA balances at this point.

    I’m still not sure how we will end up using them in retirement. The principal will be tiny compared to the actual balances by the time we are 59-60 and then will need to balance that with Traditional IRA/401(k) withdrawals too, particularly to minimize RMDs in our 70s. My math has shown that it’s important to not do too much in Roth conversions too early or we would also end up with minimal balances in pre-tax accounts come 60s/70s. It almost feels like our Roth IRAs will be an emergency/contingency fund of sorts in our 60s, since all of the plans I’ve drawn up don’t involve touching them or running out of money. That’s what’s nice about them though – if you are saving as aggressively for early retirement as you and I did, the extra $5000ish per year is not going to be that noticeable then but will add up in a huge way by the time you’re in your 60s.

  14. I started putting money in a Roth IRA when I had just finished grad school in 2009 and could barely scrape together $50 a month. I’m so, SO glad that I started when I did. I’ve been maxing it out since about 2011 and got my husband on board in 2013. We’re not at the household limit so we’ll be maxing out our Roths every year as a priority until we are. I’m all about the Roth!

  15. I think there’s an error in your post concerning the 5-year rule. There are two 5-year rules, actually: 1) Roth *contributions* can be withdrawn at any time, there is no 5-year rule for *contributions*. This 5-year rule only applies to withdrawal of *earnings*. 2) Roth conversions can only be withdrawn after 5 years. Breaking either of these rules incurs a 10% penalty, and the age 59.5 rule also applies to both of these. So where it says above “you can take the money you’ve contributed out after it’s been in your account for five years…at any age with zero penalty”, that would be incorrect.

  16. Yes! This is the first retirement account I opened outside of my 401k, and I’m glad I was able to do that while I was under the income limits. Since I got married, the Roth is no longer an option for me, although I’ve been lazy about investigating the backdoor option. Especially since I have a ton of money in a traditional IRA already.

  17. My company offers a Roth 401k, but I think it makes more sense to contribute to a traditional 401k since in early retirement I’ll be able to convert those dollars at a lower tax bracket than I’m currently in. Since I’m over the earnings cap for a traditional IRA I do take advantage of the Roth IRA though.

    • One thing to keep in mind…who knows what tax rates will be when the money is eventually withdrawn. Could be better or could be worse, just a bit a of a gamble regardless.

      • Good point, this is all a personal thought but I do think that no matter who is in office the tax rates won’t go up drastically for the lower income earners. As I really am not planning to have much income at all, in early retirement, hopefully it’ll be low enough to stay in those lowest brackets. All a guessing game though to be fair.

  18. I’ve aleays been a user of Roth IRAs. This year I even started some contributions to a Roth 401k thanks to changes in the tax law impacting my wife’s income tax. For example the new tax law allows you to deduct qualified self employed business income by 20 percent. So in effect a traditional 401k contribution reduces the raw qbi number and thus your deduction. A Roth 401k however doesn’t reduce income…

  19. Keep in mind, If you are self employed you can pump much bigger dollars into Roth accounts (or traditional)… up to 55k/yr. it’s called a Solo 401k and pretty easy to setup.

  20. Diversification of investment distribution strategies is a key component to managing wealth. Roth’s are one of the cornerstones for to accomplish this task (aka Tax Arbitrage). Also, for ‘retired’ people managing their AGI, don’t forget about the Saver’s Credit on your tax return!

  21. roth money is the gold standard of money, the big kahuna. we’ve maxed ours since ’06. my work now allows split contributions to roth/traditional 401k so i went from 13% to 8/5 trad/roth. i don’t know about future tax rates and i’ve seen the math to argue against but i think my investments will do well and i want them doing well for a tax free withdrawal party! T$, back in the saddle. glad to see you back.

  22. Fan of the Roth IRA here too! Thanks to several pre-tax accounts, we have lowered our MAGI quite a bit and are able to max out two Roths. It is a back up plan for our pre 59.5 retirement years. The Roth contributions are there to use if 457b lump of money doesn’t make it to 59.5. My employer does offer a Roth 403(B) for after-tax earnings.

  23. I actually have very little in a Roth, just from a previous job, but currently contribute to a traditional IRA as we’re still under the joint amount to get a tax benefit there. At the point my company has a 401k option (fingers crossed later this year!), I might consider contributing to a Roth instead.

  24. I definitely have financial mistakes/regrets, too! It’s hard not to beat ourselves up for it but I’m trying to look at them as learning experiences, and we can give others a head up on them in their lives!
    Been maxing my Roth for over a decade (not at max yet for 401k, can ramp that up when we no longer have daycare expenses!) I only recently learned about the backdoor option (our combined income isn’t enough to trigger limit while I’m in part time).

    You made a very important point about healthcare! So much of my assumption is based on fact I will always be able to get insurance (through my work or husband’s work) but laws and job situations could change! And so could our health! I wonder how much early retirement folks think about (or worry about) the laws changing!

  25. My parents had me open a Roth IRA when I was in high school and earning a few hundred dollars each year. My regret there is that I didn’t actually invest it in anything before last year, but at least I’ve taken care of that now! I’ve never maxed it out. It’s my goal to do so this year for the first time, although I’m also prioritizing my EF at the moment so who knows if it’ll happen. But this is a good reminder to go send over an extra $100 or so since I haven’t done that in a while!

  26. I have been contributing the max to Roth IRAs since 1999 or 2000. I also fund the non-Roth 401k through work. I am trying to play both sides of the fence (Roth/non-Roth) and try to save on taxes while I am working. I do plan to (hopefully) do some Roth conversions after I retire in 6 years, but it all depends on my income levels and where I am living. Good post, Tanja!

  27. This point was likely already mentioned, but as a reminder just in case, a single spouse’s taxable income can be used to fully fund BOTH spouses ROTH accounts, and / or an their IRAs (applicable guidelines apply).

  28. My husband and I have been retired for four years. He turns 60 this year. We have a healthy after tax accounts and traditional IRAs. We know we will be hot hard with taxes in the future through RMDs. We have been converting IRA to Roth for the last several years. We are trying to figure out whether it continues to make sense to do Roth conversions after age 60. It could reduce our taxes later but should we really pay them early? I would appreciate any advice or experience out there.

    • i’m not tax expert lynn but it seems to me you would want to at least convert up to the 24k for standard deductions every year. want to take advantage of every cent of that tax free portion of income. that’s my 2 cents if you want to look closer at it.

  29. Hi Lynn, it sounds like you and your husband are taking advantage of a useful tactic, so continue onwards, especially considering that the new tax bracket taxes have been lessened.

  30. For those of us who did not have double barreled, high powered salaries, Roth works well. I was the primary earner, and we both contributed to Roth IRAs, though somewhat irregularly, plus my 401k. We never exceeded the income limits. Our portfolio is about 25% taxable, 25% Roth, and 50% tIRA/401k. Now that I am thinking through qualifying for ACA subsidies, I see the advantage of having different pots of money. Our desired spending is near the ACA income limit, but by using taxable accounts with modest gains and Roth money, we can set our spending and taxable income almost independently of each other. We may need to do Roth conversions just to get over the 200% poverty limit to stay out of Medicaid for some years. I will have to wait until the last week of the year to see what our uncontrolled dividends and capital gains are, then make a final withdrawal from the right account to get to the taxable income we need to meet.

  31. I love that you talk about your money regrets. Your choices weren’t wrong, but now you know more. It’s great to see smart people talk like this.

    Roth is currently the only thing I have access to, other than my taxable account. I’m glad it’s such a great vehicle. Once my business is profitable, I’m also going to open a SEP. If I keep the day gig and get the business going well, I can maintain access to the Roth as long as I stay under the income limits. It feels like that could be the best of all worlds.

  32. I love the Roth and I know it isn’t as popular in the FI world, but I will continue to max it out yearly for my wife and myself for as long as we can.

    There is so much flexibility to it and I feel like the flexibility is more important to me than the tax advantage if I were to take that money and use it towards a 401(k). The math may not add up, but the flexibility is worth it.

  33. I’ve never done Roths.

    And yes, I’m sure that’s probably a mistake. But (a) we’ve never been below the cutoff, so we’d have to do backdoor Roths, and (b) these were complicated because we had traditional IRAs that (until recently) we couldn’t roll into our employer 401ks. Throw in still having student loan debt/having kids with huge daycare costs/wanting more cash flow, and it hasn’t been a huge priority.

    We’ll address this soon, I’m sure — I’m admittedly lazy on setting things up to do the backdoor Roth because while I know it might help a bit, I’m happy with just maxing out those traditional 401k accounts. We just started out both maxing our traditional 401ks last year; at some point I’ll get my (and my spouse’s) rollover IRAs into our 401k plans so that we can both start doing backdoor Roths. It’s just not been a priority, and given our high tax bracket we’ve focused on traditional accounts to reduce our taxes/increase our current cash flow, and when we had extra it went toward debt paydowns/taxable accounts/emergency funds. We’ll probably have way more traditional 401k/IRAs than we need, but if we retire early and our taxable accounts grow well, we’ll have the chance to do some Roth conversions then (and, ideally, at some point, might start putting some of our traditional 401k contributions into Roth 401ks, when we’re certain we’ll have more than enough in traditional 401ks to fill our lower tax brackets in retirement)

  34. This is an example of where i feel lucky to have had an overbearing financial advisor for a mother. She opened my Roth IRA for me when I turned 18 and pushed me to start funding. She also encouraged me to roll some of my early 401ks from employers I left into my Roth and take the tax hit back then when i was making very little. I had forgotten about the account for a while and then last year when i started revisiting my retirement calculations, i realized its more than tripled in the last 10 years. Thank goodness for starting early!

    Now that I no longer meet the income limit, I have to do some research about how the backdoors work, its still very gray to me. I appreciate you taking the time to write such a thoughtful reflection about your “lessons learned”. Its the gift you give to those of us still “in it” of hindsight and reflection, so thank you!

  35. I am definitely a fan of the Roth IRA. Although I don’t have as much as I would like in ours we are planning on tapping the contributions during those first 5 years of FIRE to help bridge the gap of when we can access Roth conversion money and also to help keep our taxes low as we will likely have some part time income.

  36. FYI…once you turn 59-1/2 the 5-year waiting period to withdraw converted funds penalty-free no longer applies. Although IRS Pub 590-A is fuzzy on this point I contacted the the folks at the Ed Slott Report and was assured the penalty no longer applies after that age. I’ll be putting their opinion to the test soon enough.

  37. Yes, the Roth IRA is amazing. I retired at 40 and in a couple of months will be 59 1/2. Another pro aspect is, as the post says, Roth withdrawls do not count toward “anything,” including the ACA.

    Two points I’d like to add. 1) it is possible to blow up a lot of myths, including the 4% rule, Social Security etc. at 67 etc. with good investing and financial literacy (e.g., over 10%) and I have done it through good mutual fund families.

    I don’t agree that spending will increase in “retirement” especially if you own (most of) your home, cars, furniture, etc. Aside from essentials, a lot of it can be just for fun. And if you are active and engaged, perhaps, you’ll earn a few buck here or there.

    But #2, it is an incredible time in terms of simplicity, such as withdrawing no questions asked from a from a Roth IRA from a cell phone anywhere. Everything is set to autopay; no checks, savings accounts, forms to fill out, or even tax returns. Many of these things are a whole lot easier than they were 40 or even 20 years ago.

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