How Much to Save in a Roth Account?

by Joe on March 29, 2012

Today, we have a question, and our first winner of Ed Slott’s The Retirement Savings Time Bomb.

Dave asks “Is there a rule of thumb about what percentage of your savings should be in Roth accounts to minimize your lifetime tax bill (assuming rates stay the same throughout your lifetime)?”

Excellent question. It’s a balancing act, and the percentage itself may only be discoverable in hindsight. Most people will not come close to saving their way to a higher bracket. At My Net Worth Blog, an article titled Net Worth Percentiles Rich-O-Meter was recently published. It showed that in 2004 net worth at the top 10th percentile was ‘only’ $827,000. Inflate this to 2012 dollars and you’re just over a million dollars. The original WSJ story he pulled the data from says this includes home value. So on a $1M net worth, how about I pull out $200K for the house? This leaves $800,000. With a 4% withdrawal rate, that’s $32,000 per year. The 15% bracket. If one is destined to retire in the 15% bracket, any income they had while working at a higher bracket income would be best invested in pretax retirement accounts.

In December, Money Magazine listed US income by quintiles (i.e. 20% bands) – The group from 20%-40% had an income range from $16,359 to $32,188, and the next group, 40%-60% from $32,189 to $57,212. If you review my article on marginal rates, you find that the 15% bracket for couples spans from $17,400 to $70,700, and after deductions, most of this 40% band of earners lands in the 15% bracket.

In the end, I decided on the 15% approach. As new earners are likely to start in the 15% bracket, they should judge their future prospects. If they have a good chance to grow their careers to the higher level and land in the 25% bracket, this strategy is to go Roth or Roth 401(k) while in the 15% bracket, and slowly use pretax accounts as they creep beyond the 15% into the 25% bracket.

I hope this helped, Dave. You copy of Ed’s book should arrive next week. Thanks, and Congrats!

{ 1 comment… read it below or add one }

Brian April 4, 2012 at 12:16 am

Joe –

Good analysis here. It provides me with a partial answer to my question too ( — looking forward to Thursday’s post!


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