Roth IRA vs Traditional IRA for FIRE at 40: The Real Decision Framework

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title: "Roth IRA vs Traditional IRA for FIRE at 40: The Real Decision Framework" description: "Comprehensive tax analysis, real scenarios, and decision framework for choosing between Roth and Traditional IRAs when pursuing FIRE starting at age 40." date: "2025-12-09" author: "Jonathan" category: "Taxes" readingTime: "14 min"

When I turned 40 and started seriously pursuing FIRE, the Roth vs. Traditional IRA question felt way more urgent than it did in my 20s.

Back then, I just listened to whatever my buddy's financial advisor said. Now? Every dollar I contribute and every tax decision I make has a measurable impact on my timeline to financial independence.

Here's what I wish someone had explained to me: the Roth vs. Traditional decision isn't about which account is "better" — it's about tax arbitrage, timing, and flexibility.

This post breaks down the real math, the tax scenarios that matter for late-starters, and the decision framework I use to optimize my retirement contributions.

The Core Concept: Pay Taxes Now or Pay Taxes Later

Traditional IRA/401(k)

• Contribute pre-tax dollars (lowers your taxable income today)
• Money grows tax-deferred
• Pay ordinary income tax on withdrawals in retirement

Example: You earn $100,000. Contribute $7,000 to Traditional IRA. Your taxable income drops to $93,000. You save $1,540 in taxes today (22% bracket). That $7,000 grows tax-deferred until you withdraw it, at which point you pay ordinary income tax on the full amount.

Roth IRA/401(k)

• Contribute after-tax dollars (no tax deduction today)
• Money grows tax-free
• Withdraw contributions AND earnings tax-free in retirement (if you follow the rules)

Example: You earn $100,000. Contribute $7,000 to Roth IRA. Your taxable income stays at $100,000. You don't save any taxes today. That $7,000 grows tax-free and you never pay taxes on the gains or withdrawals.

The Simple Decision Rule (That's Actually Too Simple)

Most advice boils down to this:

If you expect your tax rate to be higher in retirement → Roth
If you expect your tax rate to be lower in retirement → Traditional

This makes intuitive sense. Pay taxes when rates are lowest.

But it's incomplete for people pursuing FIRE at 40 because:

1. You have a much shorter accumulation phase (10-15 years vs. 30-40 years)
2. You'll likely have years of very low taxable income in early retirement
3. You need access to money before age 59½
4. You're juggling business income, investment income, and potential side hustles

The real decision involves tax rate arbitrage, flexibility, and sequencing strategy.

My Framework: The 4-Factor Analysis

Factor 1: Current vs. Expected Retirement Tax Rate

This is the foundation. You need to estimate:

1. Your current marginal tax rate (the rate on your last dollar earned)
2. Your expected retirement tax rate (the rate on your first dollars withdrawn)

Key insight for late-starters: Most FIRE pursuers will have very low taxable income in early retirement years because:

• No W-2 or business income
• Living off Roth contributions, taxable brokerage (qualified dividends/long-term capital gains), or cash reserves
• Delaying Social Security
• Not taking Traditional IRA distributions yet (before RMDs kick in at 73)

My scenario:

Today (age 40, self-employed):

• Gross business income: ~$120,000
• After deductions: ~$95,000 taxable
• Marginal tax rate: 24% federal (22% bracket + self-employment tax portion)

Early retirement (age 52-65):

• W-2/business income: $0-$15,000 (part-time roofing gigs)
• Qualified dividends/LT capital gains: ~$30,000
• Total taxable income: ~$45,000
• Marginal tax rate: 15% federal (most income is qualified div/LTCG at 15% rate)

The arbitrage: If I contribute to Traditional IRA/SEP today, I save 24% in taxes. If I withdraw in early retirement at 15% rate, I win. That's a 9% tax arbitrage on every dollar.

Factor 2: Access to Contributions Before 59½

Here's where Roth has a huge advantage for early retirement:

Roth IRA:

• You can withdraw contributions (not earnings) at any time, tax- and penalty-free
• No age restrictions
• No need to justify the withdrawal

Traditional IRA:

• Withdrawals before 59½ trigger 10% early withdrawal penalty (plus ordinary income tax)
• Exceptions exist (72(t) SEPP, Roth conversion ladder) but require planning

My use case:

I treat my Roth IRA as a flexible emergency fund + early retirement bridge. I have $45K in Roth contributions (not earnings) that I can access penalty-free if I need cash between age 50-59.

This gives me optionality. If I hit my FIRE number at 52 but the market crashes and I need liquidity, I can tap Roth contributions without penalty.

Factor 3: Roth Conversion Ladder Strategy

This is the strategy that makes early FIRE work with Traditional accounts.

How it works:

1. Contribute to Traditional IRA/401(k) during high-income years (get the tax deduction)
2. In early retirement (low-income years), convert Traditional to Roth
3. Pay taxes on the conversion at your low early-retirement rate
4. Wait 5 years
5. Withdraw the converted amount tax- and penalty-free

Example:

• Age 40-50: Max SEP IRA ($69K/year). Save 24% in taxes = $16,560/year tax savings.
• Age 52-56 (early retirement): Convert $40K/year from SEP to Roth. Pay ~12-15% tax on conversions (low income years).
• Age 57+: Withdraw converted Roth principal penalty-free.

The math: I saved 24% going in, paid 12-15% coming out. Net tax arbitrage: 9-12%.

Why this matters for late-starters:

You have a shorter window to execute conversions before RMDs kick in at age 73. If you retire at 52, you have 21 years of low-income conversion opportunities. If you retire at 65, you only have 8 years.

Factor 4: Flexibility and Tax Diversification

Having money in both Roth and Traditional accounts gives you flexibility to manage taxable income in retirement.

Example scenario:

It's 2035. I'm 50 and semi-retired. I need $60,000 to live on.

Option A (all from Traditional IRA): Withdraw $60K, pay ordinary income tax (~$7,200 in fed taxes). Taxable income: $60K.

Option B (tax-optimized mix):

• Withdraw $20K from Roth (tax-free)
• Withdraw $20K from taxable brokerage as LTCG (tax-free, below 0% LTCG threshold)
• Withdraw $20K from Traditional IRA (taxed as ordinary income, ~$2,000 fed taxes)
• Total taxes: ~$2,000
• Taxable income: $20K (stays below ACA subsidy cliff)

Option B saves $5,200/year in taxes and keeps me eligible for ACA healthcare subsidies.

This is why I contribute to both account types.

Real Tax Scenarios: Running the Numbers

Let me show you actual scenarios with real tax math.

Scenario 1: High-Income Self-Employed (My Situation)

Profile:

• Age: 40
• Status: Single, self-employed
• Gross income: $120,000
• After deductions: $95,000 taxable
• Current bracket: 24% federal
• State: No state income tax (WA)

Contribution decision:

| Account Type | Contribution | Tax Savings Today | Future Tax Cost | Net Benefit | |--------------|--------------|-------------------|-----------------|-------------| | SEP IRA (Traditional) | $69,000 | $16,560 (24%) | ~$10,350 (15% in retirement) | +$6,210 | | Roth IRA | $7,000 | $0 | $0 | $0 (but tax-free growth) |

My strategy: Max SEP IRA first (traditional), then Roth IRA, then taxable brokerage.

Why: The $6,210 annual tax arbitrage compounds over 10-15 years. If I invest that $6,210 tax savings, it grows to $80K+ by retirement.

Scenario 2: W-2 Employee Expecting Big Income Drop

Profile:

• Age: 38
• Status: Married filing jointly
• Combined W-2 income: $180,000
• Current bracket: 24% federal
• Expected retirement income: $60,000 (mostly LTCG/qual div)
• Expected retirement bracket: 12% federal

Contribution decision:

| Account Type | Contribution | Tax Savings Today | Future Tax Cost | Net Benefit | |--------------|--------------|-------------------|-----------------|-------------| | 401(k) Traditional | $23,000 each ($46K total) | $11,040 (24%) | ~$5,520 (12% in retirement) | +$5,520 | | Roth 401(k) | $23,000 each ($46K total) | $0 | $0 | $0 (but tax-free growth) |

Optimal strategy: Max Traditional 401(k), then add Roth IRA contributions ($7K each if under income limits).

Why: 12% tax arbitrage (24% today vs. 12% in retirement). Plus, they can do Roth conversions in early retirement to optimize.

Scenario 3: Late-Starter with Pension Income

Profile:

• Age: 45
• Status: Single
• W-2 income: $85,000
• Current bracket: 22% federal
• Expected retirement: Pension $35K/year + Social Security $25K/year = $60K total
• Expected retirement bracket: 22% federal (same as now)

Contribution decision:

| Account Type | Tax Impact | Best Choice | |--------------|------------|-------------| | Traditional IRA | Save 22% today, pay 22% later | No benefit | | Roth IRA | Pay 22% today, $0 later | Roth wins (tax-free growth) |

Optimal strategy: Roth IRA or Roth 401(k) exclusively.

Why: If your tax rate is the same now and later, Roth wins because of tax-free growth. You pay the same tax bill either way, but Roth never taxes the gains.

Special Considerations for Self-Employed FIRE Seekers

If you're self-employed like me, you have more options and more complexity:

1. Solo 401(k) Lets You Do Both

With a Solo 401(k), you can make:

• Employee deferrals as Roth or Traditional ($23,000 limit for 2024)
• Employer profit-sharing as Traditional only (up to 25% of net SE income)

My strategy:

• Employee deferral: $23,000 as Roth (locks in tax-free growth on the portion I control)
• Employer contribution: $40,000+ as Traditional (get the tax deduction on the profit-sharing portion)

This gives me both tax arbitrage (Traditional) and tax-free growth (Roth).

2. SEP IRA is Traditional Only

If you're using a SEP IRA (simpler than Solo 401k), you can only contribute Traditional (pre-tax). Max contribution: $69,000 or 25% of net SE income, whichever is less.

Trade-off: You get the tax deduction, but you lose the option to contribute Roth.

When it's worth it: If you're in the 24%+ bracket and expect to be in 15% or lower bracket in retirement, the tax arbitrage justifies losing the Roth option.

3. Mega Backdoor Roth (If Your Plan Allows)

Some Solo 401(k) plans allow after-tax contributions (separate from Roth employee deferrals) up to the $69,000 total limit. You can then convert those after-tax contributions to Roth immediately.

Example:

• Employee deferral (Roth): $23,000
• Employer profit-sharing (Traditional): $30,000
• After-tax employee contribution: $16,000
• Immediately convert the $16,000 to Roth

Result: You stuff $39,000 into Roth accounts in a single year ($23K + $16K).

This is advanced, requires a Solo 401(k) provider that allows it (Fidelity, E-Trade, some others), and requires careful execution. But it's powerful for high-income self-employed people.

Backdoor Roth IRA: When Your Income Is "Too High"

Roth IRA has income limits:

• 2024: Phase-out starts at $146,000 (single), $230,000 (married)
• Above those limits, you can't contribute directly to Roth IRA

Solution: Backdoor Roth IRA

1. Contribute $7,000 to Traditional IRA (non-deductible)
2. Immediately convert to Roth IRA
3. Pay taxes only on earnings (usually $0-$50 if you convert immediately)

Catch: The Pro-Rata Rule

If you have existing Traditional IRA balances (SEP IRA, rollover IRA), the conversion is taxed proportionally. This can make backdoor Roth less attractive.

Example of pro-rata problem:

You have $100,000 in a SEP IRA. You contribute $7,000 to a non-deductible Traditional IRA and try to convert it to Roth.

The IRS treats this as converting 6.5% of your total IRA balance ($7K / $107K). So 93.5% of your conversion is taxable.

Workaround: Roll your Traditional IRA/SEP balances into a Solo 401(k) or employer 401(k) to isolate the non-deductible contribution, then convert cleanly.

This is complex. I'm working through this myself with my SEP IRA balance. It's a pain, but the long-term tax-free growth is worth it.

My Actual Strategy (What I'm Doing)

Current situation:

• Age 40, self-employed, single
• Income: ~$120K/year (variable)
• Tax bracket: 24% federal
• Portfolio: $285K ($180K in SEP IRA/Traditional, $60K in Roth IRA, $45K taxable brokerage)

Contribution priority:

1. Max SEP IRA ($69K in high-income years): Get 24% tax deduction today, pay ~12-15% in retirement via Roth conversion ladder. Tax arbitrage: ~9-12%.

2. Roth IRA ($7K/year via backdoor): Tax-free growth, flexibility to access contributions.

3. HSA ($4,150/year): Triple tax advantage (deduction, growth, tax-free medical withdrawals). Treated as a stealth IRA.

4. Taxable brokerage (remaining cash flow): Flexibility, access before 59½, qualified dividend/LTCG tax treatment.

Transition plan (age 50-60):

• Stop taking business income (or reduce to $10-15K/year part-time)
• Live off taxable brokerage and Roth contributions (years 1-5)
• Start Roth conversions ($30-50K/year) during low-income years, pay 10-12% tax
• At age 55+, access converted Roth principal penalty-free
• At age 60, access Traditional IRA penalty-free (59½ rule)
• At age 65, qualify for Medicare (reduce healthcare costs)
• At age 70, consider delaying Social Security to 70 for max benefit

Why this works:

I get the tax deduction today (24%), pay lower taxes in early retirement (10-15% on conversions), and have flexibility to access money at every stage.

The Decision Checklist

Use this checklist to decide between Roth and Traditional:

Choose Traditional if:

• ✅ You're in the 22% or higher federal tax bracket today
• ✅ You expect your retirement income to be significantly lower than today
• ✅ You're self-employed and can max out SEP/Solo 401(k) for big deductions
• ✅ You plan to execute Roth conversion ladder in early retirement
• ✅ You're okay with RMDs (required minimum distributions) starting at age 73

Choose Roth if:

• ✅ You're in the 12% or lower federal tax bracket today
• ✅ You expect similar or higher income in retirement (pension, real estate, etc.)
• ✅ You want flexibility to access contributions before 59½
• ✅ You want to avoid RMDs (Roth IRAs have no RMDs)
• ✅ You want to leave tax-free money to heirs

Do Both if:

• ✅ You want tax diversification (flexibility to manage taxable income in retirement)
• ✅ You have access to Solo 401(k) (employee deferral as Roth, employer as Traditional)
• ✅ You're uncertain about future tax rates and want to hedge

Common Mistakes to Avoid

1. Blindly Following "Always Roth" Advice

I see this constantly in FIRE communities. People in the 24-32% bracket contributing to Roth 401(k) instead of Traditional.

The cost: Giving up a 24% tax deduction today to avoid 10-15% tax in retirement. That's backwards.

Exception: If you genuinely expect higher taxes in retirement (massive pension, real estate income, etc.), Roth makes sense.

2. Forgetting About State Taxes

If you live in a high-tax state now (CA, NY, NJ) and plan to retire in a no-tax state (FL, TX, WA, NV), Traditional contributions save state taxes too.

Example: 24% federal + 6% state = 30% total tax savings on Traditional contribution today. Retire in Florida (0% state tax), pay only 12% federal on withdrawals. Tax arbitrage: 18%.

3. Not Planning for Healthcare Subsidies (ACA)

If you retire before 65, you'll likely buy health insurance on the ACA marketplace. Premium subsidies are based on Modified Adjusted Gross Income (MAGI).

Key thresholds (2024):

• Under 400% FPL (~$58,000 single): Qualify for premium subsidies
• Over 400% FPL: Full-price premiums ($700-$1,000/month)

Strategy: Use Roth withdrawals and LTCG harvesting to keep MAGI low and preserve subsidies. This can save $6,000-$12,000/year in healthcare costs.

4. Ignoring the 5-Year Rule for Conversions

Roth conversions have a 5-year waiting period before you can access the converted principal penalty-free (even if you're over 59½).

What this means: If you're retiring at 52 and want to access converted Roth money at 57, you need to start conversions no later than age 52.

Planning tip: Start Roth conversions 5 years before you need the money.

Tools and Resources

Calculators I Use:

• Case Study Spreadsheet (I built this in Google Sheets): Models Roth vs. Traditional over 30 years with different tax scenarios
• Fidelity Tax Calculator: Estimates current and retirement tax brackets
• Boldin (formerly NewRetirement): Comprehensive retirement planning tool (paid)

Further Reading:

• Go Curry Cracker: Roth Conversion Ladder — Controversial but well-researched
• Mad Fientist: Traditional vs. Roth — Deep dive on tax optimization
• White Coat Investor: Backdoor Roth Tutorial — Step-by-step guide

My Take: There's No Universal Answer

The "right" choice depends on:

• Your current tax bracket
• Your expected retirement bracket
• Your FIRE timeline
• Your need for flexibility
• Your state tax situation
• Your estate planning goals

For me, the answer is both: max Traditional/SEP to get the tax deduction during high-income years, then convert to Roth during low-income early retirement years.

This gives me tax arbitrage, flexibility, and control over my taxable income throughout retirement.

If you're starting late like me, you don't have 30 years for compound growth to bail you out. You need to be strategic about every tax decision. The difference between optimizing Roth vs. Traditional can easily be $50,000-$100,000 over 10-15 years.

That's real money. That's 1-2 extra years of freedom.

Action Steps

1. Calculate your current marginal tax rate (federal + state)
2. Estimate your retirement tax rate based on expected income sources
3. Run scenarios with a spreadsheet or calculator comparing Roth vs. Traditional over 10-20 years
4. Set contribution priority based on your tax arbitrage opportunity
5. Plan your Roth conversion ladder if using Traditional accounts
6. Review annually — tax laws change, income changes, strategies should adapt

Related Resources

• How to Calculate Your FIRE Number (Late Starter Edition) — Foundation for retirement planning
• Solo 401(k) Guide for Self-Employed FIRE Seekers — Maximizing self-employed retirement contributions
• Tax-Loss Harvesting for Self-Employed Investors — Additional tax optimization strategies

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Disclaimer: I'm not a CPA, tax advisor, or financial professional. I'm a 40-year-old self-employed business owner researching and implementing these strategies in real-time. Tax laws are complex and change frequently. This post shares my personal research and strategy, but your situation is different. Consult a qualified tax professional or CPA before making tax-related decisions. For full legal disclaimers, see our disclaimer page.