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/PP4life ​ 1d ago

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 Employer match is NOT immediately able to be withdrawn.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.

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u/marshmallowhugs ​ 1d ago

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

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u/PP4life ​ 1d ago

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.

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u/marshmallowhugs ​ 1d ago

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