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Should You Convert Your Traditional 401(k) Into a Roth 401(k)?
A 401(k) retirement savings plan is a valuable tool for building a financially secure future. It allows employees to contribute pre-tax dollars, meaning they can reduce their current taxable income and save for retirement at the same time. However, in recent years, another option called the Roth 401(k) has gained popularity. The question then arises: should you convert your traditional 401(k) into a Roth 401(k)? Let’s explore this topic in detail.
First, let’s understand the difference between a traditional and a Roth 401(k). In a traditional 401(k), contributions are made with pre-tax dollars, and the money grows tax-deferred until retirement. Withdrawals during retirement are taxed as ordinary income. On the other hand, a Roth 401(k) is funded with after-tax dollars, meaning contributions are made with money that has already been taxed. The advantage of a Roth 401(k) is that qualified withdrawals made during retirement are tax-free.
Now, let’s discuss the factors that might influence your decision to convert from a traditional to a Roth 401(k).
1. Current and future tax rates: One of the primary considerations is the difference in tax rates. If your current tax rate is relatively low, it may be beneficial to convert to a Roth 401(k) and pay taxes now, especially if you expect your tax rate to be higher in the future. By doing so, you can lock in today’s lower tax rate and enjoy tax-free withdrawals in retirement.
2. Time until retirement: The longer you have until retirement, the more time your money will have to grow. Converting to a Roth 401(k) early on allows your contributions and earnings to accumulate tax-free over a more extended period. This can potentially result in a larger retirement nest egg.
3. Cash availability to pay taxes: When you convert to a Roth 401(k), you’ll need to pay taxes on the converted amount in the year of the conversion. It’s crucial to assess whether you have sufficient cash reserves to handle this tax liability without jeopardizing your financial stability.
4. Future financial needs: Consider your expected financial needs both during retirement and leading up to it. If you anticipate requiring substantial amounts of money in the near future, a Roth 401(k) conversion may not be the best option. Conversely, if you have other sources of income to meet those short-term needs and can afford to let your assets grow tax-free for the long term, converting might be advantageous.
5. Estate planning: A Roth 401(k) can provide significant estate planning benefits. Since qualified withdrawals are tax-free, your beneficiaries can inherit these accounts without owing taxes as well. It’s a valuable tool for passing on wealth to the next generation.
Ultimately, the decision to convert to a Roth 401(k) depends on your individual circumstances. It’s advisable to consult with a financial advisor or tax professional who can analyze your specific situation and help you make an informed choice.
Converting from a traditional 401(k) to a Roth 401(k) can be a strategic move, but it’s important to evaluate the potential tax implications, timing, and future financial needs. By carefully considering these factors, you can make a decision that aligns with your retirement goals and financial well-being.
Lets say you want to convert $200,000 of Traditional 401K dollars into Roth 401k dollars and you would owe 25% in taxes. Can you have the $50,000 deducted from the $200,000. Resulting in $150,000 to put into a Roth 401k , or would you need to have $50,000 in personal cash to pay the taxes? Thanks.
Wrong, Olivia could’ve had a backdoor Roth and there would be no income threshold.
I've actually been asking the same question as this person. I'm 29, maxing out my Roth IRA, have a traditional 401(k). I have seen the math on taxes later on traditional making the total less than Roth when you retire, but what if I don't touch the 401(k) and use my Roth IRA to live on? I feel like the amount my traditional could continue to grow would make it worth more than a Roth 401(k).
***What if we are currently in the historically most favorable tax environment now rather than in 30-40 years where it is unknown.
Wouldn’t i want to pay foreseeable lower taxes now rather than unknown possibly higher taxes later when its time to take disbursements?**
Question. I currently have a brokerage account with fidelity with about 5.8k invested, up a total of about 14.6%. Is it worth taking the tax hit to sell and close this account to open a Roth IRA?
Super relevant. My company will start offering a Roth 401k at the beginning of the new year and I've been wondering what to do with the traditional 401k assets I've already accumulated
This video is so Exceptional, as it answers a lot of question regarding financial independence ,enterpreneurship and how to be a good investor. Well, this year is a good year for me , as I accumulated over 500% ROI from the bullish nature of the market. I am glad to have invested in the financial market following instructions and allowing a licensed investment adviser help me with my investment decision
Roth’s are definitely great tools. Traditional options offer good opportunities as well. I understand a lot of people ❤️ Roth’s but Traditional 401K’s are powerful tools as well. To date my traditional 401K is where the majority of my money is outside the equity in my house.
Ehhhh idk about this one. In my opinion she should be converting it all to roth at this age, unless it would jump her to a higher tax bracket now, such as from 12% to 22% or 24% to 32%. Those are the backets with the most significant jumps and tax consequences. Even if it's just for the benefit of the untaxed growth, which can 10x from now until she's 60 in 30 years. I agree in having a portion of not tax advantaged growth available, but prioritize the roth as much as it makes sense now seems like the best move to me. You can always start building up the traditional portion back up once your income goes into the 32% tax bracket, or within 10 years of retirement if you won't ever get there
March and April 2020 was the perfect time for this. Now not so much
Depending on exactly where she is financially, I wouldn't start to Roth convert until she has her IRA, 401k and HSA (if available) filled up first. If all those are done, and you want to convert, fine, but make sure you pay the taxes separate. I'm in this boat and I Roth convert $10k per year and I'm 35.
I think the benefits of a Roth are awesome