Question:

I’m 59 and a half years old, with $800,000 rolled over into a Roth account from a former employer. I’ve also switched my 401(k) contributions to a Roth three years ago, which now totals about $70,000. Should I keep contributing to the Roth option with my current employer, or should I change back? Would it be a good idea to hire a financial planner at this point?

Answer:

Before jumping to conclusions, it’s crucial to grasp your tax situation along with other elements. A professional might be really beneficial since retirement is approaching. You can look for an advisor through platforms like CFP Board or NAPFA.

First off, understanding your marginal tax bracket is key. Depending on whether you’re filing individually or jointly, the following can be taken into account: If you’re in a 32% tax bracket or higher, focusing on traditional contributions to your 401(k) generally makes sense. On the other hand, if you’re at 22% or lower, sticking with traditional contributions could also be wise. At 24%, it might be a mix of both Roth and traditional options that would work well, says Alonso Rodriguez Segarra, a certified financial planner.

This guideline is an oversimplification and doesn’t cover every factor involved. Discussions about Roth versus pre-tax contributions really depend on personal circumstances. “It’s not just a simple choice; you need to consider current and future tax brackets, retirement income needs, and who gets what when you pass on,” notes Matthew Mancini, estate planning team leader at Wilmington Trust.

Continuing to funnel money into a Roth 401(k) can be advantageous. Qualified distributions are tax-free, which might save you taxes if withdrawals are needed later. Another benefit is that Roth accounts don’t have required minimum distributions, allowing account owners more flexibility. Also, beneficiaries of such accounts can receive tax-free distributions, as Mancini points out.

Conversely, pre-tax contributions to your 401(k) lower your taxable income while working. “This can be a substantial advantage, especially for those in higher tax brackets or wanting to stay under specific income levels,” Mancini explains. There are various factors concerning tax advantages and the implications of contributing to retirement plans. Collaborating with an advisor could help clarify these complexities and assist you in crafting a sound strategy.

It’s often wise to consult experts. “If you have aspirations to leave a legacy, manage debt, juggle various retirement incomes, or assess whether a Roth conversion is suitable, a professional’s guidance can be valuable,” Segarra mentions.

Working with a Certified Financial Planner (CFP) ensures that you have someone knowledgeable on your team. They must meet strict educational standards, pass exams, and gain considerable real-world experience while upholding fiduciary duties. Beyond addressing this issue, a CFP can also help plan your finances leading up to retirement.

If you have specific questions about your 401(k), an hourly planner might be a good fit. They charge you only for the time spent reviewing your financial situation and advising you, without binding you to a longer commitment. Generally, hourly rates range from $200 to $500, depending on location and the advisor’s expertise.

If you’re having trouble with your financial planner or need a new one, feel free to reach out with your questions.

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