Ask an Advisor: With $2M in Our 401(k)s at 55, Should We Switch to Roth Contributions?

As we approach our mid-50s, my partner and I have been contemplating a significant shift in our retirement savings strategy. With a combined 401(k) balance of $2 million, we're wondering if it's time to switch to Roth contributions. We've heard about the potential tax advantages, but we're not sure if it's the right move for us. So, we decided to ask an advisor for some guidance.

First, let's understand the basics. Traditional 401(k) contributions are made with pre-tax dollars, reducing our taxable income for the year. However, we'll pay taxes on withdrawals in retirement. On the other hand, Roth 401(k) contributions are made with after-tax dollars, so there's no immediate tax benefit. But qualified withdrawals in retirement are tax-free.

Our advisor explained that the decision to switch to Roth contributions depends on our expectations for future tax rates and our current tax situation. If we expect our tax rate to be higher in retirement, converting to Roth could save us money in the long run. However, if we expect our tax rate to be lower in retirement, it might be better to stick with traditional contributions.

We also need to consider the five-year rule for Roth conversions. To withdraw earnings from a Roth IRA, we must have held the Roth IRA for at least five years. This rule applies to both Roth 401(k) conversions and Roth IRA conversions. If we convert our traditional 401(k) to a Roth, we'll need to wait five years before withdrawing the converted funds without penalty.

Our advisor suggested that we consult with a tax professional to help us estimate our tax liability on a conversion and determine the best course of action for our specific situation. They can also help us navigate the complexities of the five-year rule and any potential penalties.



In conclusion, switching to Roth contributions could be a strategic move for us, given our age and the size of our 401(k) balance. However, it's essential to consult with a tax professional and consider our expectations for future tax rates and the five-year rule before making a decision. By doing so, we can make an informed choice that best suits our financial goals and retirement plans.