I’m 58 years old with $1 million in my 401(k). Should I switch to Roth contributions?
Whether to switch from contributing to a tax-deferred work plan or switching to a Roth is not a question of “should” but a question of “What works best for you?” Here are some of the considerations:
How much you plan to save for retirement
Your current and future tax situation
The specifics of your Roth option
If you will leave money to your heirs
You can speak with a financial advisor to help you understand the trade-offs, because retirement decisions made early in your journey are important.
A quick review
With a 401(k) plan, your contributions are not taxed when you make them, but are taxed when you make withdrawals – along with any investment gains. In many cases, you also receive a match from your employer for your contribution, which is free money. If, for example, your employer matches 50% of contributions up to 5% of your salary, you automatically get a 50% gain on that money every time you make a contribution. That kind of comeback is hard to beat.
But, like any other tax-deferred plan, you will also need to start taking required minimum distributions at age 73 (or 75 for those born after 1960), which will incur taxes and could very likely earn you up to 85% of your income. Social security benefits taxable.
With a Roth IRAYou don’t get a tax break when you make contributions, but you’ll never pay tax on withdrawals – including all your investment gains – as long as you’re at least 59½ and the account opened. open for five years.
Think about taxes
The younger you are, the more sense a Roth account makes, because you’ll enjoy decades of compounding returns on your investments that will be safe from the clutches of the taxman. Common advice to younger workers is to make 401(k) contributions up to the limit of any employer match and place any other retirement savings in a Roth IRA.
Some of this advice also applies to older workers. Even at 58, you have decades of investing ahead of you: nine years until you reach full retirement age, 67, and up to 30 years of retirement. So it makes sense to put at least part of your assets in tax-free accounts.
But unlike young people, older, well-paid workers are likely to face difficulties. contribution limits on a Roth IRA. For 2024, you can invest no more than $7,000 in a Roth, plus an additional $1,000 if you’re over 50. Additionally, your modified adjusted gross income must be less than $146,000 to $161,000 (for single filers) or $230,000 to $240,000. (joint filers) to make Roth contributions. Anything between these ranges results in the contribution cap being phased out.
However, your 401(k) plan has no income limit and will allow you to store up to $23,000 of 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 a financial advisor can help you make hypothetical projections to evaluate your retirement financing options.
What type of Roth account?
Another consideration is the type of Roth account: is it a Roth IRA plan or a Roth 401(k) plan? The Roth 401(k) is newer but more and more employers are offering it. Like a Roth IRA, your contributions are taxed and all withdrawals are tax-free. But, in most cases, the employer match is pre-tax money, which adds some complexity to your retirement withdrawal strategy.
The good news is that starting in 2024, the Roth IRA and Roth 401(k) plans are not subject to required minimum distributions, allowing you to keep all of your Roth investments funded throughout your retirement. Any money left to your heirs will also not be taxed, and the restrictions on liquidating an inherited Roth account are much more relaxed.
More to Consider
A few additional things to consider about a 401(k) are that while you’re working, most plans give you the option to borrow against your account, requiring you to pay yourself back (with interest). In comparison, you can withdraw contributions without penalty (but not earnings) from a Roth account, even before age 59½ – but there is no mechanism that requires you to replace the money withdrawn from what is 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 after you retire.
Ultimately, a combination of taxable and tax-free retirement accounts gives you several options in terms of timing your retirement, deciding when to collect Social Security benefits, managing taxes and required minimum distributions, what may remain for the heirs, and more.
It doesn’t hurt to get a second opinion on important financial decisions. Get matched and speak with a financial advisor free.
Conclusion
A tax-deferred workplace 401(k) account and a Roth account that allows you tax-free withdrawals both have advantages and disadvantages. Consider your long-term retirement goals and strategy to determine which types of accounts – or combination of accounts – are best for you.
Advice
Structuring retirement payouts, tax strategies, investment approaches and estate planning mean money gets more complicated as you approach retirement, and a good financial planner can help. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool connects you with up to three licensed financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now. You can also read SmartAsset Reviews.
Keep an emergency fund on hand in case you face unexpected expenses. An emergency fund should be liquid – in an account that doesn’t have the risk of large fluctuations like the stock market. The tradeoff is that the value of cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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