Roth vs. traditional - Need help on which strategy is best

[Virginia Jones]

I've been listening to the "FIRE" community stating that it's best to max out pre-tax accounts and when you retire early, doing the conversions over to a Roth. This is assuming you will have a low enough income to be in a low tax bracket.

My question is how owning rental real estate can affect this strategy. I've been contributing to a Roth IRA since I was 18 (24 now). My husband has a Roth IRA and we both have Roth 401k's as well.

We also have 3 rental units and plan to acquire more in the future.

Is the FIRE community's conversion strategy for non-real estate people? Am I focusing too much on the Roth and maybe do some pre-tax saving as well?

[Brian Schmelzlen]

What I generally tell my clients is that in making this decision you need to consider what tax bracket you are in now (biggest factor) and what tax bracket you expect to be in when you retire.

If you are in a very low tax bracket now, you don't get much of a benefit from contributing pre-tax (401(k) or Traditional IRA). This is especially true if you are in a low tax bracket now and expect to be in a higher tax bracket when you retire. In that situation, I would strongly recommend contributing to a Roth IRA.

If you are in a high tax bracket now, there is a much stronger case for contributing to a pre-tax retirement account (401(k) or Traditional IRA being the most common). That is because your immediate tax savings will be much greater.

Of course, there is always the middle ground strategy if you are not maxing out your retirement contributions but are in a position to do so. In that case (especially if you are in moderate to high income tax bracket), you can make a max contribution to a Traditional IRA and then a max contribution to a Roth IRA (or, depending upon your situation, a non-deductible Traditional IRA that you will immediately convert to a Roth IRA).

In my opinion, owning rental real estate does affect your overall investment strategy but does not directly impact whether you should contribute to a retirement account pre-tax or post-tax.

I would recommend talking to a CPA and/or financial advisor who knows your situation better.