Welcome to Part three of our introduction to Roth. Today we wrap it up and look at some things to consider before you pop the question to a Roth. The fundamental question to ask yourself is “Will I make more income in retirement than I do now?” With Roth you pay income taxes now. Then you don’t pay any tax on what that money earns, forever. General wisdom is that most people have less income and will be in a lower tax bracket in retirement. If this is you, investing in a Traditional account now is better, not Roth. Overall, you pay less income tax and have more savings left to live your best retirement life. So let’s do some brainstorming and see if this fits you.

Are you new to the work force? You're probably not earning much. If you stay in until you are eligible for a pension, your retirement pay will be a percentage of the salary you earn in last few years of your career. You will also be getting Social Security, and have Traditional TSP withdrawals to pay tax on as well. So less income now than in retirement is a good candidate for a Roth. But if money is tight, you may not have the cash to pay the higher tax bill. If you are a FERS employee or BRS military you get a TSP matching contributions of up to 5% of your pay. Prioritize getting to that full match first.

What if you think you will make less later in your career? Or you are unsure. A lower or no pension at all, less Social Security, and less TSP, 401k, or IRA distributions to take might put you in a lower tax bracket in retirement. Better NOT to make that commitment to Roth and pay the income taxes now. Make Traditional contributions and pay that lower tax later.

As you get closer to retirement age and your future looks clearer. You can go to the Social Security website and get an estimate of your Social Security benefits. If you are eligible for a military or government pension, you can estimate that. If you'll work part time in retirement, add in that income.along with what you will need to withdraw from Traditional retirement accounts for living expenses. How does your current income compare to your retirement income estimate? If you’ll be in a lower tax bracket in retirement, you don’t want to pay more tax now with a Roth contribution. Give Roth a pass and stick with Traditional.

Don’t forget that if you have or a Traditional TSP, 401k, or IRA you will have to take Required Minimum Distributions, and pay taxes on them, each year beginning at age 72. Even if you do not need all that money for living expenses right away, you are required to take out a certain amount from your Traditional retirement savings (called distributions) and pay taxes on those distributions each year. If you were a good saver and your investments grew well, these required distributions may bump you up into a higher tax bracket.

It might pay to convert or rollover some of those Traditional funds into a Roth account during that lull in income from when you retire to age 72. You could move enough to “fill up” your tax bracket. You pay less taxes on what you move each year until 72 while in that temporary lower tax bracket, than you would after 72 when you have to start those Required Minimum Distributions. If you’re already maxing out your yearly contributions and you go through a period at some point where your income will dip down into a lower tax bracket, then back up, it may be worthwhile to convert or rollover some of your existing Traditional account to a Roth account.

But beware there are A LOT of rules and possible tax consequences when moving money between the 401k/TSP and IRAs and within the IRA family. Honestly, it’s not a good time to go it alone. It is a great opportunity to tap into the expertise of a financial planning or tax professional.