• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Evergreen Small Business

Actionable Insights from Small Business CPAs

  • Home
  • Small Business FAQ
  • Monographs
    • Business Planning Workbook
    • Download Your Free Copy of the Thirteen Word Retirement Plan
    • Five Minute Payroll Monograph (2019 Edition)
    • LLC Operating Agreement
    • Maximizing PPP Loan Forgiveness
    • Maximizing Sec. 199A Deductions Monograph
    • Preparing Form 3115 for the Tangible Property Regulations
    • Preparing U.S. Tax Returns for International Taxpayers
    • Real Estate Tax Loopholes & Secrets
    • Red Portfolio Black Portfolio FAQ and Download
    • Sample Corporate Bylaws
    • Setting Low Salaries for S Corporations
    • Small Business Tax Deduction Secrets
    • Small Businesses and the Affordable Care Act (Obamacare)
    • Joining Our Affiliate Program
  • Our Bloggers
  • Free LLC Formation Kits
    • Alabama LLC
    • Alaska LLC
    • Arizona LLC
    • Arkansas LLC
    • California LLC
    • Colorado LLC
    • Connecticut LLC
    • Delaware LLC
    • Florida LLC
    • Georgia LLC
    • Hawaii LLC
    • Idaho LLC
    • Illinois LLC
    • Indiana LLC
    • Iowa LLC
    • Kansas LLC
    • Kentucky LLC
    • Louisiana LLC
    • Maine LLC
    • Maryland LLC
    • Massachusetts LLC
    • Michigan LLC
    • Minnesota LLC
    • Mississippi LLC
    • Missouri LLC
    • Montana LLC
    • Nebraska LLC
    • Nevada LLC
    • New Hampshire LLC
    • New Jersey LLC
    • New Mexico LLC
    • New York LLC
    • North Carolina LLC
    • North Dakota LLC
    • Ohio LLC
    • Oklahoma LLC
    • Oregon LLC
    • Pennsylvania LLC
    • Rhode Island LLC
    • South Carolina LLC
    • South Dakota LLC
    • Tennessee LLC
    • Texas LLC
    • Utah LLC
    • Vermont LLC
    • Virginia LLC
    • Washington LLC
    • West Virginia LLC
    • Wisconsin LLC
    • Wyoming LLC
  • S Corporation Kits
    • Alabama S Corporation
    • Alaska S Corporation
    • Arizona S Corporation
    • Arkansas S Corporation
    • California S Corporation
    • Colorado S Corporation
    • Connecticut S Corporation
    • Delaware S Corporation
    • Florida S Corporation
    • Georgia S Corporation
    • Hawaii S Corporation
    • Idaho S Corporation
    • Illinois S Corporation
    • Indiana S Corporation
    • Iowa S Corporation
    • Kansas S Corporation
    • Kentucky S Corporation
    • Louisiana S Corporation
    • Maine S Corporation
    • Maryland S Corporation
    • Massachusetts S Corporation
    • Michigan S Corporation
    • Minnesota S Corporation
    • Mississippi S Corporation
    • Missouri S Corporation
    • Montana S Corporation
    • Nebraska S Corporation
    • Nevada S Corporation
    • New Hampshire S Corporation
    • New Jersey S Corporation
    • New Mexico S Corporation
    • New York S Corporation
    • North Carolina S Corporation
    • North Dakota S Corporation
    • Ohio S Corporation
    • Oklahoma S Corporation
    • Oregon S Corporation
    • Pennsylvania S Corporation
    • Rhode Island S Corporation
    • South Carolina S Corporation
    • South Dakota S Corporation
    • Tennessee S Corporation
    • Texas S Corporation
    • Utah S Corporation
    • Vermont S Corporation
    • Virginia S Corporation
    • Washington S Corporation
    • West Virgina S Corporation
    • Wisconsin S Corporation
    • Wyoming S Corporation
  • Contact Nelson CPA
You are here: Home / personal finance / Worst-case Scenarios for Roth-style Accounts

Worst-case Scenarios for Roth-style Accounts

May 26, 2014 By Stephen Nelson CPA

Picture of stressed out man holding head in his hands
Roth-style accounts sometimes produce terrible results of investors.

In my last blog post, I argued that Roth-IRAs and Roth-401(k)s don’t actually save most people money.

That argument boils down to a single point: A taxpayer’s top “working years” tax rate is usually a lot higher than his or her “retirement years” tax rate.

And what you want to do is calculate your taxes using the lower rate and not the higher rate. Obvious, right?

But three common “worst-case” scenarios, I am sorry to have to report, make the Roth-style option even worse than the simple tax rate comparisons suggest. And you and I ought to consider these scenarios if we’re still attracted to Roth-style accounts.

Roth Worst-case Scenario #1: Savings Shortfall

A first thing to consider: If you come up short on your retirement savings, you are not going to need to worry about paying taxes on the money that comes out of your IRA or 401(k). Heavens no.

Say for example that either a late start or adverse circumstances mean you and your spouse retire with annual Social Security benefits of $30,000 and a $250,000 IRA nest egg from which you’ll draw $20,000 a year.

In this scenario—and any that are less optimistic—you won’t pay any federal income taxes. And you probably won’t pay any state income taxes either.

By the way? The overwhelming majority of people don’t retire with $250,000 in their IRA.

In fact, some studies indicate that the average savings for someone at retirement is not much over $10,000, and maybe only ten percent of the population retires with more than $250,000.

Given this, you probably aren’t crazy to say to yourself, “Hey I’m first going to worry about stuffing as much money into my IRA as I can, and I just hope I have the problem of paying income taxes in retirement.”

Roth Worst-case Scenario #2: Long-term Care Costs

Let me point out another worst-case scenario that affects the Roth-style account versus a traditional IRA account analysis: long-term and nursing home care.

Here’s the deal: Because long-term care costs count as an itemized deduction, if you or your spouse end up requiring long-term care, funding that expense out of a traditional IRA or tax-deferred investment account should be pretty tax efficient. And so for this stuff, there’s not reason to worry about the Roth-stuff. Seriously.

For example, say you’ve accumulated a $2,000,000 IRA or 401(k) balance. That sounds like a sure-fire recipe for a big tax hit if you need to start taking big taxable distributions, right?

Maybe.

But if you draw $10,000 a month to pay for a nursing home, you’ll actually accumulate a $10,000 medical expense itemized deduction each month. In such a scenario–and even though 85% of any Social Security benefits will be taxable–you may actually pay only one or two percent of your income in taxes.

Note: You can use most other big itemized deductions to shelter income from an IRA, too. For example, if you make large charitable contributions, those donations effectively shelter IRA distribution income. If you pay large property taxes, those taxes effectively shelter IRA distribution income. Ditto for mortgage interest and other Schedule A itemized deductions, too.

Roth Worst-case Scenario #3: Short or Shorter-than-expected Retirement

A final worst case scenario to at least mention in passing. (Sorry.)

Any IRA balances you hold when you die are untaxed to you. So you may be worrying about taxes you won’t ever have to pay.

By the way, yes, your heirs may need to pay taxes on the balances. But you by definition won’t. So you want to recognize this.

The logic of you paying taxes while you’re alive so your heirs won’t have to pay taxes after you’re gone isn’t very rewarding.

And a couple of notes: If you are interested in gifting money to your heirs, you have options that work better than using Roth-style accounts. (Talk to your accountant.)

Further, note that an heir should be able to stretch out withdrawals from your IRA over a very long time. And that means that the tax rate heirs ultimately pay will very possibly be very low.

A thirty something heir who stretches out a $1,000,000 inherited IRA might, if they have a mortgage and children, pay no income taxes on the roughly $50,000 annual distribution they draw from their inherited IRA. (This scenario would assume they don’t have other income bumping them into higher tax brackets.)

Tying Things Up with a Bow

So let me tie up this blog post with nice little bow by suggesting the following take-away: While a best-guess scenario concerning a Roth-style account is that the accounts don’t make financial sense (this is point of my earlier post), in any of the common worst-case scenarios (like those described here in this post) a Roth-style account really, really doesn’t make sense.

That’s my point.

And maybe just a final postscript: I would not be bummed out that the Roth-style account delivers less than it promises.

Rather, I would suggest you focus on fact that the traditional tax deferral benefit built into a regular old IRA and 401(k) accounts actually works pretty darn well for most people.

Filed Under: personal finance

Primary Sidebar

Welcome

Nelson CPA publishes this blog to help and encourage small business owners. Click here to learn more about our firm.

S corporation Tools

Use our S corporation tax savings calculator to make a quick estimate of the annual tax savings per owner.

Use our S corporation reasonable compensation calculator to estimate appropriate shareholder-employee salaries.

Featured Posts

Washington state estate tax pushes wealthy residents to consider estate planning options.

Planning for the 35% Washington State Estate Tax

Washington state levies an estate tax of up to 35% on estates of decedents dying on or after July 1 2025. That new rate is by far the highest estate … [Read More...] about Planning for the 35% Washington State Estate Tax

the new Washington state professional services sales tax starts October 1, 2025.

Washington State Professional Services Sales Tax

Starting October 1, 2025, Washington State levies a sales tax on many, maybe most, business professional services. Thus, if you’re a business … [Read More...] about Washington State Professional Services Sales Tax

Washington state qualified family-owned business interest deduction

Washington’s Qualified Family-Owned Business Interest Estate Tax Deduction: Updated for 2025

Washington state taxes the estates of high-net-worth residents and high-net-worth nonresidents who own property in the state. The tax rates start at … [Read More...] about Washington’s Qualified Family-Owned Business Interest Estate Tax Deduction: Updated for 2025

International tax issues?

Preparing US tax returns for international taxpayers

Maximize S corporation tax savings

Setting Low S Corporation Salaries

Updated for 2019 tax year changes and now available in print from Amazon!!

Maximizing Sec. 199A Deductions

Free retirement planning help

Picture of Thirteen Word Retirement Plan book

Need to help clients with their PPP loan forgiveness applications?

Recent Comments

  • Stephen Nelson CPA on Washington State Professional Services Sales Tax
  • Mark Freeman on Washington State Professional Services Sales Tax
  • Washington State Professional Services Sales Tax - Evergreen Small Business on Washington’s Qualified Family-Owned Business Interest Estate Tax Deduction: Updated for 2025
  • The New Big Beautiful Section 199A Deduction - Evergreen Small Business on Big Beautiful Section 199A Calculator
  • Big Beautiful Section 199A Calculator - Evergreen Small Business on The New Big Beautiful Section 199A Deduction

Archives

Copyright © 2025 Stephen L. Nelson, Inc. · News Pro On Genesis Framework · WordPress