Broker Check

Should I Slow 401(k) Savings for a Roth?

Howard Hook, CFP®, CPA, Quoted in NJMoneyHelp on July 27, 2015

The Question: I don’t have any Roth investments, but I’ve heard that it’s good to have taxable and tax-free income in retirement. Should I slow down 401(k) savings so I can do a Roth IRA?

The Answer: The best answer to your question would be part of a larger look at your overall retirement plan. You might want to consider a free money makeover with NJMoneyHelp.com.

But here are some items to consider.

Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton, said he likes for his clients to have different buckets of money with different tax characteristics.

“Traditional IRAs and 401(k)s are great tax saving vehicles while accumulating assets, but not so great when distributions are being made since every dollar coming out of the plan is taxable,” he said.

Qualified distributions from a Roth IRA are not subject to income tax. This can help preserve your retirement assets because nothing is lost to income taxes, Hook said.

But, if you expect to be in a lower tax bracket in retirement than you currently are, you should probably continue to make 401(k) contributions because it reduces your current taxes.

Dean Shah, a certified financial planner in Oakland, said the simple answer is no — especially if your employer is matching a portion of your contribution.

“You should contribute the maximum to your 401(k) before you contribute to a Roth IRA,” he said. “You can contribute up to $18,000 — $24,000 if you’re age 50 or older — to your 401(k) in 2015.”

Shah said contributions to Roth IRAs are limited to $5,500, or $6,500 if you’re age 50 or older, and are not tax deductible.

“However, withdrawals from Roth IRAs are tax free and have no penalty,” he said. “The contribution limit is phased out for higher income earners.”

That means depending on your adjusted gross income (AGI), you may not be able contribute to a Roth anyway.

“If you are unsure whether it makes complete sense financially to do, you may want to still do a small amount just to provide some flexibility in the future,” Hook said.

Another option is to ask your boss about adding a Roth 401(k) option to your company’s plan. This will give you the tax diversification you’re looking for without lowering your 401(k) contributions. Just remember if you contribute to a Roth 401(k), you’ll lose the benefit of lowering your tax burden today, so speak to an advisor before you make any moves.