You’re 55 years old and have over $1 million in your 401(k). Should you switch to making Roth contributions?

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Mike Bernard, CFP® offers advisory services through KFG Wealth Management, LLC dba Korhorn Financial Group. This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results….(read more)

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Over $1M in Your 401K – Should You Switch to Roth?

If you are fortunate enough to have over $1 million in your 401K, congratulations! You are in a small and fortunate minority. However, with great wealth comes great responsibility, and you may be facing some important decisions about how to handle your retirement savings. One decision you may be considering is whether to convert your traditional 401K to a Roth 401K.

A Roth 401K is similar to a traditional 401K in that you contribute money from your paycheck and it grows tax-deferred. However, the main difference is that with a Roth 401K, you contribute after-tax dollars, and withdrawals in retirement are tax-free. In contrast, with a traditional 401K, contributions are made with pre-tax dollars and withdrawals are taxed as ordinary income.

So, should you consider switching to a Roth 401K if you have over $1 million in your traditional 401K? The answer depends on various factors, including your current and future tax situation, your age, and your retirement goals.

One consideration is your current tax bracket. If you are in a lower tax bracket now than you expect to be in retirement, it may make sense to convert to a Roth 401K, as you will pay taxes now at a lower rate than you would in the future. On the other hand, if you are in a higher tax bracket now than you expect to be in retirement, it may be better to stick with a traditional 401K, as you will pay taxes now at a higher rate than you would in the future.

Another consideration is your age and the length of time you have until retirement. If you have several decades until you plan to retire, a Roth 401K may be a good option, as your money will have more time to grow tax-free. However, if you are nearing retirement, the benefits of converting to a Roth 401K may be limited, as there will be less time for your money to grow tax-free.

Additionally, your retirement goals and expected income in retirement should also be taken into account. If you expect to have a large amount of income in retirement from other sources, such as a pension or real estate investments, it may be beneficial to have some tax-free income from a Roth 401K. On the other hand, if you expect to have a lower income in retirement, a traditional 401K may be the better option.

It’s important to note that converting to a Roth 401K involves paying taxes on the amount you convert. This can be a significant upfront cost, but it may be worth it in the long run if you expect to be in a higher tax bracket in retirement.

Ultimately, the decision to switch to a Roth 401K should be carefully considered and tailored to your individual financial situation. It’s a good idea to consult with a financial advisor or tax professional to help you make the best decision for your specific circumstances.

In conclusion, if you have over $1 million in your 401K, switching to a Roth 401K may be a good option, but it depends on a variety of factors including your current and future tax situation, your age, and your retirement goals. It’s important to carefully consider the pros and cons before making a decision, and to seek professional advice to help you make the best choice for your financial future.