This Family Went All in on Roth Savings. Should You?
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Here's your Money Briefing for Monday, April 28th. I'm Jana Herrin for The Wall Street Journal. If you're dreaming of tapping your retirement savings tax-free in your golden years, this episode is for you. A growing number of workers are funding Roth accounts with after-tax money, and they plan to withdraw it later without paying a dime.

The share of people in all generations who are saving in these accounts has increased over the last five years. Nearly one in five millennials and Gen Z workers saved in Roth workplace plans in 2024, according to Fidelity Investments. But how much should you put into Roths? Wall Street Journal reporter Ashley Ebling spoke to one man who took it to the max. He put all of his retirement savings into these accounts.

I believe tax rates really have nowhere to go but up in the future. And a Roth is the best hedge, I think, in the tax code against that. We'll hear more from him later. But first, Ashley joins me to break down the ins and outs of the all-Roth strategy. Ashley, thanks for being here. Thanks for having me on the show. Ashley, a lot of us are familiar with the 401ks and individual retirement accounts or IRAs.

But what are their Roth cousins and what extra advantages do these accounts provide? The advantage is the money in the Roth grows tax-free and comes out tax-free. And that's like a great deal for people who think they'll be in a higher tax bracket when they're in retirement. They're also really a good legacy play because most heirs can keep Roths growing tax-free for another 10 years or

after they inherit them. And they won't owe income taxes when they take the money out either. So if I want to convert my retirement accounts that I have now to Roths, how do I go about doing that? There are multiple ways to get Roths. And the one is contributing directly, which a lot of young people are doing now, just maxing out a Roth IRA contribution. Their income limits

for that. But for people who already have a lot of money in traditional retirement accounts, they might want to consider converting some of those over to a Roth account. And you basically just take the money out of one into the other. The catch is you pay income taxes on the amount you convert. So it's not a decision to be made lightly. And some employer 401ks let you do this in the workplace plan so you could take traditional 401k money and move it into the Roth bucket.

So how does Paul Ross make putting all of his retirement savings in a Roth account work? I'll chat with him after the break.

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Paul Ross is a chief financial officer in Los Angeles. Paul's not shy to preach to his family, friends, or anyone who will listen about the advantages of Roth accounts. And he joins me now. Thanks for being here, Paul. Jenna, thanks for having me.

To start off, why Roth accounts? Why do you love them so much? For quite a handful of reasons, Jana. Aside from the dollars not being taxable, Roths have other features that regular IRAs and regular 401ks don't have.

One can always withdraw their contributions, you know, say in an emergency, and that can be done with no tax or penalty. Roths don't have any RMD requirements, so those investments can compound longer if we don't need them. And I don't think we'll be in a lower tax bracket later in life, and so there's really no reason to not go all in on Roths. I do believe that the old paradigm of retiring in a lower tax bracket really isn't applicable anymore.

And so I think people will likely work longer and be in a higher tax bracket for longer. And so I believe tax rates really have nowhere to go but up in the future. And a Roth is the best hedge, I think, in the tax code against that. And when did the light bulb go off for you and your wife, Emily, about Roths?

I would say it was at least 15 years ago. My parents were not financially savvy, and I would say my first exposure to the concept of long-term compounding investment was when I was in college. But that timing was very fortuitous because I did start saving for retirement with my very first job out of college into the company 401 plan at the time.

As far as the decision to go all Roth was concerned, I think that timing was probably related to two things happening at the same time. I think the first was that I was at a point in my career where

where I could afford to max out retirement savings. And the second one was the law that Congress passed, I think it was in 2010, that allowed the tax bill for Roth conversions to be spread out over a couple of years. And that's when we made the decision to go all in and be all Roth ever after.

What steps did you take and have you taken to get to the all Roth? You had that change that Congress made in 2010. And from there, what else did you do? Several things. One, of course, we made the Roth IRA contributions. We made the Roth 401k contributions. Once we were in a position where we weren't able to contribute to a Roth, we would do the

non-deductible regular IRA contribution and convert it to Roth through the backdoor method. Then when I got a company match on my 401k, which was regular pre-tax dollars, I converted that to Roth as well. And then as the mega Roth option began to pop into 401ks where you could make additional after-tax contributions above and beyond the statutory limit and convert those to Roth, I started doing that as well. One of the things I think that's

scares me about converting would be the tax bill. Can you tell me a little bit about the tax bill that you faced when you did that first conversion over a couple of years after Congress changed the rule in 2010?

And then going forward, how do you prepare for the tax hit every year? So we've got about $2 million now saved in Roth accounts. Wow. And we didn't pay tax on $2 million. We paid tax on something substantially less because that represents years and years and years of compounding. And so the tax bills that we paid were probably in...

the tens of thousands of dollars each year. And since then, of course, all of that money has compounded for so long. And as I think about that now, you know, I'm 51 years old. If I don't need that money, that money can compound for a number of years, probably decades into the future. And then if I don't need it, my kids can get it tax-free as well. And so there's

a legacy element there. But the tax bill is what I consider a short-term sacrifice at the time of conversion or at the time of foregoing the tax deduction. And in exchange, you're going to be able to let these dollars compound tax-free for years and decades. And so now I'm thinking about how you have over $2 million saved. All that is tax-free when you take it out.

What's your retirement plan? You know what? I wish I knew. The short answer is that I don't know. But I think my plan for now is to contribute as much as possible to the Roth accounts going forward. If we need it, it's there and it's tax free. If we don't need it, it'll continue to compound and hopefully be a financial legacy for the kids and grandkids. I don't have any grandkids yet, by the way.

But without the RMD requirement, and especially with my wife's likely longevity that she gets from her side of the family, these Roth balances might compound for another 30, 40 years.

And then the kids will get them tax-free, and they can allow them to compound for another 10 years before they're required to withdraw the balances. And so it could be a legacy well into the high, tens of millions of tax-free dollars. But in the future or in the near future, I like working. It's fun. I like the Roth. So I'll keep doing that. I've got some crazy dogs that keep me busy. Our youngest kid is a senior in high school, so we're going to be empty nesting beginning this fall. Oh, congratulations.

Yeah, thank you. I'm very excited. It's August 25th, but who's counting? We'll get through that first and then see. Thank you so much for being here. Thank you, Jenna. We're joined again by Wall Street Journal reporter Ashley Ebling. Ashley, before you reported on this particular story, had you heard about other people who had gone 100% Roth?

So I'd heard some financial advisors who back in 2010, when they first took off the income limits and allowed Roth conversions for everybody, some people going all in then, saying,

Some people will take these huge amounts and convert them all at once. Others will go over a little bit every year just to keep under the certain tax bracket they want to stay in. Again, like they're different methods. But this idea of going all Roth seems to be picking up steam. When you spoke to financial advisors, what was their guidance when it came to Roths and how much you should convert your savings into Roth accounts?

So there are some advisors who are gung ho on Roths. Others are a little skeptical, but most of the advisors said you really want some Roth money. You would want to have at least a third of your money in Roth, a third in traditional pre-tax retirement accounts, and then a third in a regular taxable account.

for emergencies. That's one way to break it down. But again, they're the Roth evangelists like Paul Ross that I talked to who are all in 100%. Advisors say Roth IRAs and Roth 401ks are the way to go for especially for young savers.

In the middle years, once people get into a higher income tax bracket, they might want to still do pre-tax contributions up to a certain elective deferral limit. And then on top of that, consider to get more money into Roth by 2020.

putting after-tax money in and then converting it right to Roth. And there's no tax bill when you do that, just on any earnings. Then conversions can make sense for younger people too, but the really good sweet spot for doing conversions is right after retirement before you have to start taking money out of the individual traditional retirement accounts because those are like low-income years. So you can take the tax hit to get the money into Roth at that point.

That's WSJ reporter Ashley Ebling. And that's it for your Money Briefing. This episode was produced by Ariana Osberu with supervising producer Melanie Roy. I'm Jana Herron for The Wall Street Journal. Thanks for listening. ♪