Roth IRA | Notion

A Roth IRA is a wonderful thing. Even though it does not give you a tax break when you make a contribution, you never have to pay a dollar of taxes on it ever gain.

The money inside the account grows and compounds with no taxes. There are no taxes when you withdraw dollars in retirement either… and as a bonus, you can pull out your contributions at literally any time with no penalties.

In fact, a Roth IRA is such a good deal for you (and such a bad deal for the IRS) that the government has tried to limit who even has access to one.

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To Roth or Not to Roth

One of the most common questions I get: “Should I make pre-tax or Roth contributions to my retirement accounts?”

The conventional narrative pedaled by most financial gurus is to opt for pre-tax contributions when you are in a higher tax bracket, and Roth contributions when you are in a lower tax bracket.

While this is perfectly fine as a general maxim, I believe most people should diversify into both buckets… and Roth contributions should be a meaningful part of most peoples playbook.

Here are four reasons why having a Roth allocation is useful:

We don’t know how high tax rates will be in the future

A Roth IRA is a form of insurance against tax rate policy. When you look at the history of top marginal tax rates in America, we’re at a relatively low point with a top marginal rate of 37% (as opposed to 90%+ historically).

I cannot predict where we will be in the future, but having a healthy amount of dollars in a Roth IRA protects you from this uncertainty.
You can access your contributions at any time

The downside of retirement accounts is that you typically lock up your money until you retire.

But with a Roth IRA, you can access your original contributions at any time with no penalties at all. If you convert dollars into a Roth IRA, there’s a 5-year vesting rule, but you still don’t need to wait for retirement.
No required minimum distributions (RMD’s)

If you have a pre-tax retirement account, you have to mandatorily take distributions after you turn 72 years old. No such restriction applies to Roth IRA’s and it’s entirely up to you when you want to take money out of the account.
A Roth IRA is a fantastic playground for investments with asymmetric upside

You’ve likely heard about how Peter Thiel and Mitt Romney were able to grow their Roth IRA to billions of dollars on which they will owe 0 taxes. (Caveat: This isn’t an outcome most people can expect with a Roth but with the right structure it is possible.)

Since there are no taxes inside a Roth account, it can be a powerful place to put investments that have asymmetric upside — if any of them “hit”, you could build a massive tax-free retirement nest egg.

Personally, I also hope to still be in a higher tax bracket even when I retire so there’s less of an arbitrage play for me.

I share more in the last section on how I invest dollars in my Roth IRA — but my strategy is to diversify into both pre-tax contributions and Roth contributions despite being in the top marginal tax bracket today.

How High Earners Can Still Leverage a Roth IRA

You make too much money to directly contribute to a Roth IRA… now what?