Traditional vs Roth IRA

There is other good stuff in here. I think it boils down to whether or not you think taxes will go down or up for you. If you are confident that you can be FI by staying in the 10% and 12% marginal bracket then go for pre tax. However, if you expect a big pension or social security or plan on having some type of business in FI it can make a lot of sense to just pay the tax now and go Roth. This one is very situational.

I am self employed and have a self employed traditional and roth 401k and I was reading that self employed may be able to avoid the pro-rata rules by rolling over traditional IRA to SE 401k

Since you're just getting started, I'd note that Roth conversion ladders are a much more advanced consideration, and not necessarily where you need to put focus at this point. Since you have the 401k options through your company, I'd suggest that's a nudge toward looking more into your Roth IRA over traditional. Weighing the tax considerations both personally and for your business (depending on entity and such) are a key factor.

My wife and I run our own company, and we have a 401k through it. We don't bother with traditional IRA and prefer the Roth IRA. Since Roth contributions are available penalty-free, we know that we can use them with a priority on long-term outlook, but they're in our back pocket for a major emergency.

Plus, once you hit the yearly max or the contribution period closes, you're set for that window, can move on, and let compounding get to work.

The tax considerations are important, but there's a big plus of the Roth IRA that often gets left out.

The Roth IRA comes in handy since you aren't limited to funds tied in with your business or compensation.

Pay off a debt, sell a vehicle, have random cash, receive a cash gift, etc., that you want to put into long-term investing? A Roth IRA can be a great vehicle. It's not uncommon for people to fully fund their Roth for the year, then redirect contributions to a taxable brokerage account as needed to continue building out net worth.

I found this episode particularly helpful on the topic. The idea of how much we pay in taxes as a red herring was a new perspective.

The Ultimate Traditional vs. Roth 401(k) Strategy - Money with Katie

Money with Katie

Money with Katie

Roberto hit the nail on the head, but missed two critical elements. You need to keep in mind your standard deduction (and for those over 65 currently, for the next few years the bonus deduction) in your retirement years. This is a tax free amount of spending/withdrawal that you will take. The other is any Social Security payments that you will receive. These payments are taxed at lower than full tax rate (depending on your actual income can be 0%, 50%, or 85% of actual tax rate). Thus, a good portion of your annual spending will be at a tax rate lower than an equivalent amount of spend pre-retirement.

The comments about having access to cash would mean NOT contributing to IRA OR 401k and investing in a brokerage account instead. On your current job, look into the rule of 55, which says you won't have the early withdrawal on your work 401k if you quit/got laid off after age 55. You would need to read your plan documents to see if they have it and what the conditions are. This NEVER applies to IRA, so don't roll any funds into IRA if you can access this. When reading the tax code, "qualified plan" means a traditional 401k/403B (=NOT IRA). Non qualified means you didn't get a tax break, could be Roth or excess contributions You also need to pay attention to if they are talking about income or principal. The 5 year rule (there are two) generally applies to income, not principal. Because withdrawal of principal is not taxed, there is no income to be penalized. (depending on what you are withdrawing from, it can be confusing). The Roth 401k may require a split distribution of income and principal, while you can take principal first on the Roth IRA. There may be a distinction between converted from 401k Roths and original Roths IRA (I don't think there is, Bob Berger does).

Roth vs Traditional IRA does involve knowing your personal expenses and situation. From a 20,000 foot view, Craig Wear, CPA wrote a great digital book and audiobook about this topic.

Think about it through this hypothetical way:

Traditional IRA: The seed the farmer plants

Roth IRA: The plant from the seed near full bloom

Which one of these 2 options would you rather pay taxes on? The seed or the nearly fully bloomed plant?

Do more studying on your own and, if helpful, get Craig Wear’s CPA material about this topic:

The more extra money you have to spend, the more sense a Roth makes. If you will be using every penny of your budget, there is less reason to convert. About one half of retirees pay no income tax, so if you will be one of them it would be a bad idea to convert now (in general). Some exceptions: Having money in a Roth allows you to set aside retirement money that doesn't have to be touched when you hit the RMD age (and can allow you to buy a big ticket item without the tax bite or have savings for when a spouse dies and social security income drops); Having money in a Roth allows it to go tax free to heirs. Even if you are spending all your allowed budget, there "may" be 10-20% left over as distributions are designed -to never run out. If you can cheaply do conversions, heirs would appreciate it (but take care of yourself first). PITFALLS: not taking the tax break now will mean your income is higher. If you have kids in or near college, this could affect if you qualify for the education credit or scholarships/loans (FAFSA looks at income 2 years prior to school year). I'd suggest going to youtube and looking at Roth Conversion Pitfalls videos for other reasons "this year" may not be a good time to convert. I'm generally a fan of converting, but how much and when is a big part of the question.

I can't speak to the self employed side of things but if you have access to both I personally would max out the Roth first.

One of the things the recent episode missed (that I think a bunch of us in the FI community like about the ROTH) is that your contributions (meaning the amount you put in) are yours to take out, penalty free, at any point.

• That means you could use them in the future for an early retirement, mini retirement, or other.
• You're growth (returns, gains, etc) and Traditional accounts are "locked" (behind heavy penalties) until a retirement age.
• It also helps to have a bit of both when you start considering draw down sequencing.

Lots of details you can look into but at the end of the day if you're just starting the FI journey, the important thing is to focus on is time in the market. That means saving what you can, and getting it invested. Focus on growing that gap (savings) and deciding what you want to invest in (Mutual funds etc) first and then dive into the accounts its in, which like you pointed out, you have some future flexibility. Hope that helps, even if you were more interested in the details of the roll overs. I think Roberto summed it up well. Hopefully someone can provide more context on the self employment and roll over details if you're already deeper than my simple answer.

The question to you is, are you in a higher tax bracket now or when you retire? If currently in 22%+ and you plan to early retire, chances are the guaranteed 22%+ tax deduction today is better than the future.

Whether Traditional is "better" or whether Roth is "better" is largely a function of several things.

• how much you earn today (the more you earn, the higher your tax bracket, the more you save on tax because you avoid a high marginal rate today in favor of a low marginal rate in retirement)
• when you plan to retire (the sooner you plan to retire, the more of a pain it could be to get access to funds in retirement accounts, though between Roth conversions and 72t it's certainly doable)
• closely related to the last one, how much you value flexibility (Roth IRA gives you more flexibility since the contributions are always available to you, and a taxable brokerage provides by far the most flexibility)
• how much you will need/want to control your taxable income in retirement (the more control you need, e.g., to obtain ACA subsidies or other income-based things, the more carefully you need to make sure that you are managing things like how much money goes into which type of account and when and how much you withdraw/convert/etc.)

Without more information on your particular circumstances it is difficult to provide more concrete feedback.