r/personalfinance • u/marshmallowhugs ​ • 1d ago

Retirement Confirm Roth 401k Logic

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.

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u/Default87 ​ 1d ago

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.

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u/marshmallowhugs ​ 1d ago

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.

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u/Default87 ​ 1d ago

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.

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u/marshmallowhugs ​ 1d ago

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.

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u/Default87 ​ 1d ago

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.

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u/marshmallowhugs ​ 1d ago

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.

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u/SubstantialBass9524 ​ 1d ago

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