I Am 58 With $1 Million in My 401(k). Should I Switch to Roth Contributions?

I Am 58 With $1 Million in My 401(k). Should I Switch to Roth Contributions?

Whether to make the move from contributing to a tax-deferred workplace plan or switch to a Roth isn’t a question of “should” but a question of, “What works best for you?” Just a few of the considerations are:

How much you plan to save toward retirement
Your current vs. future tax situation
The specifics of your Roth option
Whether you’ll leave money behind for heirs

You can speak with a financial advisor to help you understand the tradeoffs, as retirement decisions made early on in your journey are important.

A quick review

With a 401(k) plan, your contributions aren’t taxed at the time you make them but are taxed when you take withdrawals – along with all the investment gains. In many cases, you’re also getting an employer match to your contribution, which is free money. If, for example, your employer gives a 50% match on contributions up to 5% of your salary, you’re getting an automatic 50% gain on that money every time you make a contribution. That kind of return is hard to beat.

But, like any other tax-deferred plan, you’ll also need to start 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 making up to 85% of your Social Security benefits taxable.

With a Roth IRA, you don’t get the tax break when contributions are made, but you’ll never pay any tax on withdrawals – including all your investment gains – as long as you are at least 59-1/2 years old and the account has been open for five years.

Consider the 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 shielded from the tax man’s grab. One common piece of advice to young workers is to make 401(k) contributions up to the limit of any employer match and put any other retirement savings into a Roth IRA.

Part of that advice also applies to older workers. Even at the age of 58, you’ve got 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 folks, older, well-paid workers are likely to hit the contribution limits on a Roth IRA. For 2024, you can’t put more than $7,000 into a Roth, plus another $1,000 if you’re older than 50. In addition, 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 in between those ranges gets the contribution limit phased out.

Your 401(k) plan, however, has no income limits and will let you stash up to $23,000 of pre-tax salary in your account plus another $7,500 if you’re at least 50 and, if your plan allows it.

A financial advisor can help you make hypothetical projections to evaluate your options for funding 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 employers are offering them. Like a Roth IRA, your contributions are taxed and all withdrawals are untaxed. But, in most cases, the employer match is made with pre-tax money, which adds some complexity to your withdrawal strategy in retirement.

The good news is that as of 2024, both the Roth IRA and Roth 401(k) plans aren’t subject to required minimum distributions, allowing you to keep all of your Roth investment compounding throughout your retirement. Any money left to your heirs won’t be taxed, either, and the restrictions on liquidating an inherited Roth account are much more relaxed.

More to consider

A few more points to consider about a 401(k) are that, while you’re working most plans give you the option to borrow against your account, which forces you to repay yourself (with interest). By comparison, you can withdraw contributions without penalty (but not gains) from a Roth account, even before age 59 1/2 – but there’s no mechanism that forces you to replace the money withdrawn from what’s supposed to be a retirement account.

Another reason for keeping a 401(k) account current is that if you’re working for the employer you aren’t forced to take required minimum distributions until after you’ve retired.

In the end, a mix of taxable and tax-free retirement accounts gives you several options in terms of timing your retirement, deciding when to collect Social Security benefits, how to deal with taxes and required minimum distributions, what can be left for heirs, and more.

It doesn’t hurt to get a second opinion on important financial decisions. Get matched and speak with a financial advisor for free.

Bottom line

A tax-deferred workplace 401(k) account and a Roth account that gives you tax-free withdrawals both have pluses and minuses. Think through your long-term retirement goals and strategy to determine what types of accounts – or mix of accounts – works best for you.

Tip

Structuring retirement payouts, tax strategies, investment approaches and estate planning means that money gets more complicated as you approach retirement, and a good financial planner can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.