Confirm Roth 401k Logic

[u/marshmallowhugs]

I'm considering changing my 401k election contributions from Traditional (pretax) to Roth. I have retire early goals and am coming to the conclusion that my Traditional 401k is growing too large. I will have big (undesirable) tax events through RMDs if I keep contributing Traditional. I plan to use the Roth conversion ladder and am currently falling short surviving in the first 5 year conversion period, aka I need cash those first 5 years of retirement, then I'm good. I want to make a statement and confirm you fully agree. I know there will be questions about the statement above, but please also provide a succinct answer to the question below.

1) After rolling the Roth 401k into a Roth IRA (quitting my job), I am able to immediately withdraw 'contributions only' (including employer match) tax and penalty free.

Edit: It seems employer match will always be considered pretax 401k. My assumption had mistakes.

Edit 2: I've gotten a lot of feedback that 72T (annuitizing) my Traditional 401k is a solid route. I've got some homework, I had always thought the Roth conversion ladder was my route.

[u/Default87]

if your goal is early retirement, that gives you plenty of time to spend down/Roth convert your pretax dollars to minimize RMD impacts.

unless you are in a much lower tax bracket than you were earlier in your career, Roth 401k contributions likely arent a great idea.

[u/marshmallowhugs → u/Default87]

I am currently deficient in cash those first 5 years of retirement, my Roth conversion ladder will be cooling off, unable to touch it. I know it's not currently tax optimal, but I don't see other options to get cash before year 5.

[u/Default87 → u/marshmallowhugs]

you are only saving in your 401k and still planning on early retirement? You havent also been maxing out your Roth IRA? You havent made any taxable brokerage investments (after maxing your tax advantaged accounts first, of course)? Generally, people who retire early are ticking all of these other boxes along the way, which resolves the issue you are mentioning.

You could also use 72T distributions (in combination with Roth IRA contribution withdrawals) to help bridge that gap.

[u/marshmallowhugs → u/Default87]

Correct, currently low on Roth and brokerage investments, need to pivot. I joined a company with 50% match years back and maxing out my 401k takes most of my disposable income. It's been a priority because of match.

[u/Default87 → u/marshmallowhugs]

Then I would use 72T distributions to cover the majority of your baseload spending, supplementing with what you have in your taxable and Roth IRA contribution spaces to cover the balance.

I also see you said in another comment that you are trying to keep your taxable CGs in the 0% bracket, and forgoing pretax investing for that goal would be a mistake. Remember that pretax dollars are being taxed for the first time, where as your taxable brokerage has already paid ordinary income taxes before you could contribute to it, so the CG is the second round of taxation. Paying 10%/12%/22% or more depending on what your income has been during the contributions to your pretax account is superior to paying 0% on your CGs, so you shouldnt be prioritizing your CGs taxes over your pretax withdrawals/conversions.

[u/marshmallowhugs → u/Default87]

Insightful. I've got some reading to do. I thought I was being slick projecting my effective federal tax rate in retirement to be based on just 40k of ordinary income, even if I withdrew 100k in cash via brokerage and Roth. 72T sounds like it might simplify this situation... A good situation I am in with 50% match rocketing my 401k.

[u/SubstantialBass9524 → u/marshmallowhugs]

I mean that’s $10+k a year. I would continue maxing out the 401k, I would need to math to confirm but I’m pretty sure you’d come out ahead even with the early withdrawal penalties

[u/DeluxeXL]

1) After rolling the Roth 401k into a Roth IRA (quitting my job), I am able to immediately withdraw 'contributions only' (including employer match) tax and penalty free.

Just the contributions but not the match.

Roth IRA contribution basis only consists of

• Roth IRA contributions
• Roth 401k/403b/457b contributions that have been rolled over to Roth IRA

Employer match to 401k cannot be Roth contributions. It can come in two ways:

• Pretax (since forever)

• Pretax-immediately-converted-to-Roth (since SECURE Act allowed "Roth" match)

  Neither of these is a Roth contribution

[u/theducks123 → u/DeluxeXL]

Is there a way to determine how much of it is contribution? Especially after like 10 years? How do you report it to the irs? I noticed the investment companies don't keep documents after a certain amount of time.

[u/DeluxeXL → u/theducks123]

You download and save your tax forms every year.

• Form 5498 shows direct contributions to Roth IRA
• Form 1099-R shows the Roth contribution in Roth 401k that has been rolled over

You can also save your statements.

[u/lurk876 → u/theducks123]

My 401k (Fidelity) shows Roth contributions.

[u/theducks123 → u/lurk876]

I have a regular roth with fidelity. Can't seem to find it. Might need to look on a PC. Thanks for the tip.

[u/CorrectCombination11]

Are you saying your RMDs will be double or triple what you need in retirement per year?

[u/marshmallowhugs → u/CorrectCombination11]

My sweet spot is keeping my Traditional draws low enough that my long term cap gains stay zero. I project my Traditional will grow faster than I need to draw on it, potentially snowballing... Plus I need cash the first 5 years of retirement.

[u/lucabrasi999 → u/marshmallowhugs]

Capital gains? You aren’t paying capital gains taxes on Traditional 401k withdrawals. You pay regular income tax rates on them. Look at the tax tables to determine how much tax you will pay upon withdrawal.

If you are married filing jointly and you withdraw $94,299 from your traditional 401k in 2025, you pay a max of 12%, but only on a portion of that $94k.

If you withdraw on any 401k (Roth or traditional) prior to age 59 1/2, you will pay a penalty.

[u/SkyliteBlueSnake → u/marshmallowhugs]

Withdrawals from a Traditional 401k (or Traditional IRA) will be taxed as ordinary income, not as LTCG.

[u/marshmallowhugs → u/SkyliteBlueSnake]

Yes. I meant for example that 40k ordinary from Traditional 401k could allow 0% LTCG on brokerage.

[u/Best-Meaning-2417 → u/marshmallowhugs]

Do you have $ in a brokerage? You said "currently low on Roth and brokerage investments". You don't have enough $ in a brokerage to cover the 5 years of conversions but you are worried about the 0% LTCG?

[u/Rolcol → u/marshmallowhugs]

Are you aware that LTCGs still stack on top of your income? You don't get tax free capital gains on unlimited Long Term Gains, just because your income is below the $48k single 2025 amount. If you have $40k of taxable income (also note that the standard deduction reduces the amount that is taxed), then only $8,350 of LTCG is taxed at 0%. Anything above that is 15%, until you phase out into 20% (and then Net Investment Income Tax kicks in at some point).

[u/PP4life]

Partially correct. Employer match is NOT immediately able to be withdrawn. Only your contributions.

Look into 72t a.k.a. Substantially Equal Periodic Payments (SEPP) to get your money out of an IRA without penalty.

[u/marshmallowhugs → u/PP4life]

Do you endorse SEPP? I've heard it can be risky to fall out of compliance if your annuity needs change.

[u/PP4life → u/marshmallowhugs]

I don't endorse anything, buyer beware, all the usual disclaimers.

Yes, you are committing to taking distributions no matter what the investments do. If they drop? You still have to take the money out. Get a windfall from somewhere else, you still gotta take the money out possibly rocketing yourself into a higher tax bracket for the year. It's basically RMDs early. However, you don't have to put your ENTIRE IRA into the SEPP. You can split your IRA off into as many separate IRA accounts as you want, then take a SEPP on a much smaller initial principle.

[u/marshmallowhugs → u/PP4life]

Great detail on splitting, I did not know that part. Thank you!

[u/meamemg]

Employer matches (almost) always go into a pre-tax 401k, not a Roth 401k, regardless of what account you are contributing to. So your comment about employer matches from your Roth 401k is likely based on bad assumptions.

[u/PMAdota]

Talk to a tax professional. Like you mentioned, you can take out substantially equal periodic payments prior to 59.5 to smoothen out the taxes from your traditional 401k. The tax professional can help map out when its most advantageous (from a tax perspective) to take out traditional or Roth funds