Question: “I am 59 ½ and have $800,000 rolled over from my previous employer to a Roth. I also switched my future 401(k) employee contributions three years ago to a 401(k) Roth, which now has about $70,000. Should I continue with my current employee 401(k) Roth contributions or switch back? Would hiring a planner be beneficial at this point?”
Answer: Before we can answer this, you’ll need to understand your tax bracket and some other information — and yes, a professional may be helpful here, especially considering you are so close to retirement. You can find advisers using CFP Board, NAPFA or this free tool from our ad partner SmartAsset that matches you to fiduciary advisers.
First, you need to “understand what your marginal tax bracket is and depending on whether you filed your taxes as an individual or jointly, apply the following rule of thumb: If your tax bracket is 32% or above, giving traditional contributions to your 401(k) usually makes sense because of the amount you would deduct from your taxes today with your tax-deferred retirement plan. If your bracket is 22% or less, Roth contributions may make more sense. If it’s 24%, combining Roth and traditional contributions may be a smart option,” says certified financial planner Alonso Rodriguez Segarra at Advise Financial.
There’s no doubt that this rule is an oversimplification that doesn’t take into account other factors. And discussions involving Roth or pre-tax contributions are usually gauged on a case-by-case basis. “It’s not a one-size-fits-all approach as there are things to consider like current tax rates versus future tax rates, retirement income needs and resources, and the options for the beneficiaries of the assets,” says Matthew Mancini, wealth planning team leader at Wilmington Trust.
That said, the benefits of continuing to contribute to a 401(k) on a Roth basis could be saving on income taxes in the future when distributions may be needed, as all qualified distributions from a designated Roth account would be income tax-free. “Roth accounts have no required minimum distributions, so the account owner never needs to take any distributions that aren’t in excess of what they need. Beneficiaries of the 401(k) or IRA would also enjoy tax-free distributions when they eventually inherit the asset,” says Mancini.
On the other hand, making pre-tax contributions to a 401(k) reduces your taxable income while you’re still working. “This income reduction could be a big benefit for taxpayers who are in higher tax brackets or who are looking to remain under a certain income threshold,” says Mancini. When discussing tax benefits and consequences of contributing to a qualified retirement plan, there’s no shortage of considerations to make. Working with an adviser can help you untangle the complicated nature of a situation like yours and guide you in implementing a plan that makes sense for you.
Working with a professional is beneficial. “A professional can help you if you want to leave an inheritance, if you have any debts, if you’ll receive other income in retirement, if you need to know whether a Roth conversion strategy is right or if you’re a person inclined to give gifts,” says Segarra.
Working with a CFP means you have someone on your side who has completed rigorous education requirements, passed exams, performed thousands of hours of work-related experience and upholds a fiduciary duty. In addition to working through this issue, a CFP can also help you create a financial plan that will guide you through retirement. You can find advisers using CFP Board, NAPFA or this free tool from our ad partner SmartAsset that matches you to fiduciary advisers.
You could also benefit from working with an hourly planner just to help you answer your specific 401(k) question. This way, you’re only paying for the time it takes an adviser to review your financials and offer advice on this subject, without the pressure of an ongoing commitment. For reference, hourly advisers typically charge between $200 and $500 per hour, depending on location and expertise.
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