I’m 58 with $1 million in my 401(k). Should I Switch to Roth Contributions?
Whether you make the switch from contributing to a tax-exempt plan or switching to a Roth is not a matter of “should,” but a matter of, “What works best for you?” Just some of the considerations include:
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How much you plan to save for your retirement
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Your current versus future tax situation
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The details of your Roth option
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Whether you leave money for heirs
You can speak to a financial advisor to help you understand the tradeoffs, as retirement decisions made early in your journey are important.
A short review
With a 401(k) plan, your contributions aren’t taxed when you make them, but they are taxed when you withdraw money – along with any investment gains. In many cases you will also receive an employer match for your contribution, namely free money. For example, if your employer provides a 50% bonus on contributions up to 5% of your salary, you will automatically receive a 50% profit on that money every time you contribute. That kind of return is hard to beat.
But like any tax-deferred plan, you must also 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 a gain of 85%. of your social security benefits are taxable.
With a Roth IRA, you don’t get a tax break when contributions are made, but you never pay taxes on withdrawals — including all your investment gains — as long as you’re at least 59-1/2 years old and the account has been open for five years.
Think about taxes
The younger you are, the more sense a Roth account makes, because you’ll have decades of compounded returns on your investments that will be protected from the tax man’s grasp. Common advice for young workers is to make 401(k) contributions up to the limit of any employer match and put all other retirement savings into a Roth IRA.
Some of that advice also applies to older workers. 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. That makes having at least some of your assets in non-taxable accounts a smart move.
But unlike young people, older, well-paid workers are likely to reach the contribution limits of a Roth IRA. Before 2024, you can’t put more than $7,000 into a Roth, plus another $1,000 if you’re over age 50. Additionally, your modified adjusted gross income must be less than $146,000 to $161,000 (for individual filers) or $230,000 up to €240,000. (joint filers) to make Roth contributions. For anything between these ranges, the contribution limit will be phased out.
However, your 401(k) plan has no income limits and you can put up to $23,000 in pre-tax salary into your account, plus another $7,500 if you are at least 50 years old and, if your plan allows it.
A financial advisor can help you make hypothetical projections to evaluate your options for financing your retirement.
What kind 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 and more employers are offering them. Like a Roth IRA, your contributions are taxed and all withdrawals are tax-free. But in most cases, the employer match is made with pre-tax money, which adds some complexity to your post-retirement withdrawal strategy.
The good news is that starting in 2024, both Roth IRA and Roth 401(k) plans will no longer be subject to required minimum distributions, allowing you to keep all your Roth investments during retirement. The money left to your heirs is also not taxed, and the restrictions on liquidating an inherited Roth account are much more relaxed.
More to consider
A few more things to keep in mind about a 401(k) are that while you’re working, most plans will allow you to borrow against your account, leaving you to pay yourself back (with interest). By comparison, you can withdraw contributions without penalty (but no gains) from a Roth account even before age 59 1/2 – but there is no mechanism that forces you to withdraw the money withdrawn from what a retirement account should are to be replaced.
Another reason to keep a 401(k) account current is that if you work for the employer, you won’t have to take required minimum distributions until after you retire.
Ultimately, a mix of taxable and tax-free retirement accounts gives you different options in terms of timing your retirement, deciding when to collect Social Security benefits, how to handle taxes and required minimum distributions, what can be left to heirs, and more.
It doesn’t hurt to get a second opinion on important financial decisions. Get matched and speak to a financial advisor for free.
In short
A workplace tax-deferred 401(k) account and a Roth account that allows you to make tax-free withdrawals both have pluses and minuses. Think about your long-term retirement goals and strategy to determine which types of accounts (or combination of accounts) work best for you.
Tips
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Structuring retirement payouts, tax strategies, investment approaches and estate planning means that money becomes more complicated as you get closer to retirement, and a good financial planner can help with that. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting 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 achieve your financial goals, get started now. You can also read SmartAsset reviews.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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