Should I take advantage of my work’s Roth 401k option?

Taxes
#1

I’ve been contributing to my company’s 401k for the past 5 years and maxed my contributions in 2019.
I just found out we have a Roth 401k option.

Not eligible to contribute to a Roth IRA due to our income (>$300k combined married filing jointly)

Original plan was to do a Roth conversion on the 401k after we FI/RE, but I’m wondering if I should contribute to a Roth now since I have the option.

Our issue right now is that we will have a ton in our retirement accounts but are just now starting to build up our taxable accounts—so this is the limiting factor for when we can reach FIRE. We are about 6-8 years to that point.

Should we take the tax hit now and contribute to the Roth 401k so we have access to those contributions? Or stick with the traditional 401k to get the tax break now in the higher tax bracket?

#2

I called Fidelity and had a long conversation with a salesman about my 401k and the Roth IRA option. I gathered that the Roth IRA has the same limit as your 401k and is directly connected to it. If you call about it yourself, please respond back and refresh my memory!

#3

Hey @Steph!

That’s awesome! It sounds like you guys are killing it and starting to eye your eventual FI/RE date.

It sounds like a “Roth ladder” is going to make sense for you. As you probably know there’s a 5 year waiting period baked into that strategy. So if you are really expecting to have your income go to zero, you need to figure out a way to get through 5 years?

Since you guys are such high income earners and are expecting income to go to zero when you retire, I think it might make sense to stick with the Traditional 401k. Will you be able to bring your taxable account high enough to cover 5 years by the time you retire? Do you have any other investments (like real estate) or any other sources of income?

All that said, you’re talking about big numbers here, so it’s probably worth sitting down with a CPA or financial planner with expertise in this area to help optimize this transition! :slight_smile:

1 Like
#4

Thanks, Jeremy. Appreciate your insight. That’s kind of what I was thinking.
We do have a plan to get our taxable investments over $500k in the next 6-8 years, so that will float us while we do a conversion ladder.
Just wanted to make sure I wasn’t missing out on anything!

2 Likes
#5

Yes its a combined limit of $19k. So if I’m at $11k contributions to my traditional 401k this year, I could still contribute $8k to my Roth 401k.

1 Like