Best Retirement Savings Percentages: Roth vs Traditional Accounts with Tax and Social Security Considerations

When planning for retirement, choosing the optimal savings percentage and account types requires careful consideration of tax implications, Social Security benefits, and pension income. Here’s a comprehensive guide to help you make informed decisions about Roth and traditional retirement accounts.

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Recommended Savings Percentages

Overall Retirement Savings Target

Most financial experts recommend saving at least 15% of your pre-tax income annually for retirement . This guideline assumes a 40–45 year working career and includes any employer matching contributions 1. The 15% target is designed to help you maintain approximately 55–80% of your pre-retirement income during retirement .

Age-Based Adjustments

Your savings percentage should increase with age if you start later:

Starting at age 20: 12% of income
Starting at age 25: 15% of income
Starting at age 30: 20% of income
Starting at age 35: 26% of income
Starting at age 40: 34% of income

Roth vs Traditional IRA: Tax Considerations

Traditional IRA Benefits

Traditional IRAs offer immediate tax advantages that can be particularly beneficial in certain situations :

Tax deduction: Contributions are tax-deductible, reducing your current taxable income
Tax-deferred growth: Your investments grow without annual tax implications
Lower current tax burden: Ideal if you’re currently in a higher tax bracket than you expect to be in retirement

Roth IRA Advantages

Roth IRAs provide significant long-term tax benefits :

Tax-free withdrawals: Qualified distributions in retirement are completely tax-free
No required minimum distributions (RMDs): Unlike traditional IRAs, you’re not forced to withdraw funds at age 73
Tax-free growth: All earnings grow tax-free once contributed
Flexible early access: You can withdraw contributions (not earnings) penalty-free at any time

2025 Contribution Limits and Income Restrictions

For 2025, both account types have the same contribution limits :

Standard limit: $7,000 annually
Catch-up contributions: Additional $1,000 for those 50 and older (total of $8,000)

Roth IRA Income Limits for 2025 :

Single filers: Full contribution allowed with MAGI below $150,000; phased out between $150,000-$165,000
Married filing jointly: Full contribution allowed with MAGI below $236,000; phased out between $236,000-$246,000

Social Security Tax Implications

How Retirement Withdrawals Affect Social Security Taxation

Your retirement account withdrawals directly impact how much of your Social Security benefits are taxed . The IRS uses “combined income” to determine taxation:

Combined Income = Adjusted Gross Income + Nontaxable Interest + Half of Social Security Benefits

Social Security Tax Thresholds for 2025

Single Filers:

Combined income under $25,000: No tax on Social Security benefits
Combined income $25,000-$34,000: Up to 50% of benefits may be taxed
Combined income over $34,000: Up to 85% of benefits may be taxed

Married Filing Jointly:

Combined income under $32,000: No tax on Social Security benefits
Combined income $32,000-$44,000: Up to 50% of benefits may be taxed
Combined income over $44,000: Up to 85% of benefits may be taxed

Strategic Implications

Traditional IRA withdrawals increase your taxable income and can push you into higher Social Security taxation brackets . Roth IRA withdrawals do not count as taxable income, helping you avoid or minimize Social Security benefit taxation .

Pension Considerations

Impact on Account Selection

If you have a pension, your target savings rate may be lower than the standard 15% recommendation . However, pension income affects your overall retirement tax planning:

Pension payments are typically fully taxable as ordinary income
Combined with Social Security and IRA withdrawals, pension income can push you into higher tax brackets
Roth accounts become more valuable when you have substantial pension income, as they don’t add to your taxable income in retirement

Required Minimum Distributions (RMDs) and Tax Planning

RMD Timeline and Impact

Starting at age 73 (for those born between 1951–1959) or age 75 (for those born in 1960 or later), traditional IRAs require mandatory withdrawals 5 12. These RMDs:

Increase your taxable income regardless of whether you need the money
Can trigger higher Social Security taxation
May increase Medicare premiums through IRMAA (Income-Related Monthly Adjustment Amount)

Roth IRA Advantage

Roth IRAs have no RMDs during your lifetime , providing greater control over your retirement income and tax planning.

Optimal Allocation Strategy

Tax Diversification Approach

The most effective strategy involves tax diversification across multiple account types :

Traditional 401(k)/IRA: 40–50% of retirement savings
Roth 401(k)/IRA: 30–40% of retirement savings
Taxable accounts: 10–20% of retirement savings
HSA (if available): Maximum contributions for triple tax advantage

Account Priority Order

Step 1: Contribute enough to your employer 401(k) to get the full company match
Step 2: Maximize Roth IRA contributions (if income eligible)
Step 3: Return to 401(k) to reach the 15% total savings target
Step 4: Consider additional taxable investment accounts

Withdrawal Strategies in Retirement

Tax-Efficient Withdrawal Sequence

Research suggests the most tax-efficient withdrawal strategy follows this order :

Tax-deferred assets up to standard deduction amount
Taxable accounts (to deplete these first)
Tax-free accounts (Roth IRAs)
Remaining tax-deferred assets

Dynamic Withdrawal Approach

Rather than following a fixed 4% rule, consider a dynamic withdrawal strategy that adjusts based on market performance and tax implications 19 20. This approach can help preserve your portfolio during market downturns while allowing for higher withdrawals during strong market years.

Special Considerations

Health Savings Accounts (HSAs)

If eligible, HSAs offer the best tax advantages for retirement:

Tax-deductible contributions
Tax-free growth
Tax-free withdrawals for qualified medical expenses
No RMDs ever
After age 65, withdrawals for non-medical expenses are taxed as ordinary income (but no penalty)

Medicare Impact

Higher retirement income from traditional account withdrawals can increase Medicare premiums through IRMAA . This makes Roth accounts even more valuable for managing healthcare costs in retirement.

Conclusion

The optimal retirement savings strategy typically involves:

Saving 15% of pre-tax income annually
Diversifying across account types with emphasis on Roth accounts if you expect higher future tax rates
Prioritizing employer matches before maximizing other contributions
Considering Social Security and pension income when determining account allocation
Planning withdrawal strategies that minimize lifetime tax burden

Your specific situation — including current income, expected retirement lifestyle, Social Security benefits, and pension income — should guide your exact allocation between Roth and traditional accounts. Consider consulting with a tax professional or financial advisor to optimize your strategy based on your unique circumstances.

Disclaimer:
The content provided is for informational and entertainment purposes only and does not constitute financial, investment, or legal advice. Always do your own research or consult a qualified financial advisor before making any financial decisions. The author or publisher assumes no responsibility for any actions taken based on the information presented.

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