I’m 58 and have $1 million in my 401(k). Should I switch to Roth contributions?
Whether you should switch from a tax-advantaged company pension plan to a Roth pension plan is not a question of “should,” but rather “what is best for you?” Some of the points to consider include:
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How much do you want to save for retirement?
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Your current vs. future tax situation
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The details of your Roth option
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Whether you leave money to your heirs
You can speak to a financial advisor to help you understand the trade-offs, as it is important to make retirement planning decisions early.
A brief overview
With a 401(k) plan, your contributions are not taxed at the time you deposit them, but only when you withdraw them—along with any investment gains. In many cases, you’ll also receive an employer match on your contribution, which is free money. For example, if your employer matches 50% of your contribution up to 5% of your salary, you’ll automatically receive 50% gain on that money every time you deposit. That kind of return is hard to beat.
But like any other tax-free plan, you must begin taking required minimum distributions at age 73 (or 75 for those born after 1960), which will result in taxes and could very likely result in up to 85% of your Social Security benefits being taxable.
With a Roth IRA, you get no tax break when you make contributions, but you never pay taxes on withdrawals — including all of your capital gains — as long as you are at least 59 1/2 years old and the account has been open for five years.
Consider taxes
The younger you are, the more sense a Roth account makes because you’ll have decades of compound interest on your investments, protected from taxation. Common advice for young workers is to contribute to a 401(k) plan up to the employer match limit and put all other retirement savings into a Roth IRA account.
Some of this advice applies to older workers, too. Even at age 58, you still have decades of investing ahead of you—nine years until you reach your full retirement age of 67, and up to 30 years in retirement. So keeping at least some of your assets in tax-free accounts is a smart move.
But unlike young people, older, well-paid workers are likely to run into the contribution limits of a Roth IRA. For 2024, you can’t contribute more than $7,000 to a Roth, plus another $1,000 if you’re over age 50. In addition, your modified adjusted gross income must be less than $146,000 to $161,000 (for those filing individually) or $230,000 to $240,000 (filing jointly) to be eligible for Roth contributions. Anything between those ranges will result in the contribution limit being phased out.
However, your 401(k) plan has no income limits and allows you to invest up to $23,000 of your pre-tax salary in your account, plus an additional $7,500 if you are at least 50 years old and your plan allows it.
A financial advisor can help you create hypothetical projections to evaluate your options for financing your retirement.
What type of Roth account?
Another consideration is the type of Roth account: Is it a Roth IRA or a Roth 401(k) plan? The Roth 401(k) is newer, but more employers are offering it. Like a Roth IRA, your contributions are taxed and any withdrawals are tax-free. In most cases, however, the employer contribution is made with tax-free money, making your retirement withdrawal strategy a bit more complex.
The good news is that starting in 2024, neither the Roth IRA nor the Roth 401(k) will require a minimum distribution, so you can continue to earn interest on your entire Roth investment throughout your retirement. The money left to your heirs is also not taxed, and the restrictions on liquidating an inherited Roth account are much looser.
Further considerations
A few other points to consider with a 401(k) plan are that most plans allow you to borrow against your account while you’re working, forcing you to pay yourself back (with interest). In comparison, you can withdraw contributions without penalty (but no gains) from a Roth account, even before age 59 1/2 — but there’s no mechanism forcing you to repay the money withdrawn from what’s supposed to be a retirement account.
Another reason to keep a 401(k) account current is that if you work for the employer, you are not required to take required minimum distributions until you retire.
By combining taxable and tax-free retirement accounts, you ultimately have multiple options when it comes to choosing when to retire, deciding when to take Social Security benefits, dealing with taxes and required minimum distributions, what to leave to heirs, and more.
It doesn’t hurt to get a second opinion when making important financial decisions. Get set up and talk to a financial advisor for free.
Bottom line
A tax-advantaged 401(k) account at work and a Roth account, which allows you to make tax-free withdrawals, both have advantages and disadvantages. Think about your long-term retirement goals and strategy to determine which types of accounts — or combinations of accounts — are best for you.
Tips
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Structuring pension payments, tax strategies, investment approaches and estate planning means financial matters become more complicated as you retire, and a good financial planner can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now. You can also read SmartAsset reviews.
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Have an emergency fund ready in case unexpected expenses arise. An emergency fund should be liquid – in an account that is not exposed to the risk of large fluctuations like the stock market. The downside is that the value of liquid cash can be eroded by inflation. However, a high-yield account allows you to earn compound interest. Compare savings accounts from these banks.
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