What Percentage of Your Retirement Savings Should You Have in Traditional IRA vs. Roth?
Release Date: 04/23/2025
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What Percentage of Your Retirement Savings Should You Have in Traditional IRA vs. Roth?
The Power Of Zero Show
What percentage of your retirement savings should you allocate toward traditional IRAs and 401(k)s vs. Roth IRAs and Roth 401(k)s? That’s what this episode explores. Traditional financial guru advice says that it’s impossible to predict where tax rates are going down the road. Therefore, you may hear that your best bet is to simply have 50% of your money in tax-deferred and 50% of your money tax-free. David is somehow perplexed by the guru’s point of view about the future of tax rates being an unknown. However, signs that things won’t be the same appear to be evident. The current...
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How to Take Advantage of the Retirement Income Valley for Roth Conversions
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Wondering when you should start thinking about a Roth conversion? That’s exactly what David McKnight dives into in this episode of The Power of Zero Show. The retirement valley is that dip in taxable income that happens after you retire but before RMDs kick in – at age 73 or 75, depending on your birth year. David walks through an example: you’ve got $2 million in your IRA and want to convert all of it to Roth. If you take action during that valley, you can convert more while staying in the 24% tax bracket the whole time. Not taking action now? Think of 2035 as the year tax rates are set...
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The Power Of Zero Show
David McKnight addresses the most efficient order in which to spend your assets in retirement. Online programs and algorithms that forecast and run calculations related to your retirement assets suggest starting with your tax-deferred assets like 401(k)s or IRAs. Such tools recommend spending down your tax-deferred assets now, when tax rates are low, and your tax-free assets later – when tax rates are likely to be higher than they are today. Reminder: regardless of the distribution strategy you choose, it should aim to maximize the likelihood that your money lasts as long as you do....
info_outlineWhat percentage of your retirement savings should you allocate toward traditional IRAs and 401(k)s vs. Roth IRAs and Roth 401(k)s? That’s what this episode explores.
Traditional financial guru advice says that it’s impossible to predict where tax rates are going down the road.
Therefore, you may hear that your best bet is to simply have 50% of your money in tax-deferred and 50% of your money tax-free.
David is somehow perplexed by the guru’s point of view about the future of tax rates being an unknown.
However, signs that things won’t be the same appear to be evident.
The current national debt is at $37 trillion and the U.S. will be layering another $2 trillion per year over the next 10 years – excluding the $4.6 trillion that will be added to the debt if the Trump Tax Cuts get extended.
That means the debt could grow to over $60 trillion by the time 2035 rolls around!
Former Comptroller General of the Federal Government David Walker has stated that tax rates would have to double to keep the country solvent.
And if the American fiscal ship doesn’t get right by 2040, no combination of raising taxes or reducing spending will arrest the financial collapse of the nation (source: Penn-Wharton).
Experts have already weighed in, and there seems to be general unanimity on the subject: in 10-15 years, tax rates are likely to be higher than they are today.
David believes that, if tax rates are likely to double in the near future, allocating the vast majority of your retirement savings to tax-free is the way to go.
Why not put 100% of your retirement savings into tax-free accounts? Because you’ll still have a standard deduction available to you in retirement.
That’s $30,000 if you’re married and retired today, half that amount if you’re single.
Remember: if you don’t have a pension, employment, or other residual income in retirement, the ideal amount is $400,000 if you’re married and about half if you’re single.
Have a sizable pension? In that case, the ideal amount goes all the way down to zero.
David suggests moving your money slowly enough that you don’t rise into a tax bracket that gives you heartburn, but quickly enough to get the heavy lifting done before tax rates increase in 2034.
The goal? To stretch that tax obligation out over as many years as possible, so you can stay in as low a tax bracket as you can.
Generally, David recommends never bumping into a higher tax bracket than 24% as you execute your Roth Conversion strategy.
Instead of reflexively allocating money in a 50-50 split between traditional IRAs and Roth IRAs, David encourages a more surgical approach.
This will shield you from the impact of higher taxes down the road and increase the likelihood that your money will last as long as you do.
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
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