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BFG in the News: Greg answers a reader’s question about saving less in a 401(k) to do a Roth IRA

Investing Taxes Retirement Planning Baron Team Insights

Gregory Cannillo, MBA, FPQP®, is quoted on this topic, answering a reader’s question on NJMoneyHelp.com by Karin Price Mueller, originally published in February 2024.  

“Should I lower 401(k) contributions to do a Roth IRA?”

A 60-second read by Gregory Cannillo:  Your ability to contribute to a Roth IRA is dependent upon multiple concerns:

  • Since you are 49 and have earned income, you may be eligible to contribute $7,000 a year for 2024, compared to $8,000 if you were 50 or older. Keep in mind Roth IRA contribution eligibility phases out at $161,000 of income if you file as Single and $240,000 if you file as Married Filing Jointly (MFJ) in 2024. 

  •  If you needed to access the funds within the next 10 years from the Roth IRA account, you would be taxed at 10% rate if you withdraw the account’s earnings before 59 ½ years of age. Qualified distributions from the Roth IRA need to happen at least five years after the account was created in order to avoid the 10%, although there are some specific exceptions.
  • You cannot borrow from the Roth IRA, whereas you would be able to borrow a limited amount of money against a 401(k) account if you remain employed by the company. Additionally, if you are older than 55 and lose your job you are able to take distributions early from your 401(k) as long as the 401(k) is kept with your prior employer.

  • Something else to consider are your marginal taxes – if you feel you will be taxed at a higher rate past 59 ½ than you are currently taxed, a Roth might be a good option because the funds can be drawn tax-free compared to a 401(k), which would be taxed at your future tax rate.
  • Finally, Roth IRA’s do not require required minimum distributions (RMD) whereas 401(k)’s do. 

  • All in all, the option of a Roth IRA requires a reflection on your specific financial scenario, and your expected need for financial resources in the short-term and long-term future. For example, you will want to be sure to have enough funds set aside for easy access in case of a “rainy day” emergency prior to setting up a Roth IRA. Reviewing your question with a financial planner and tax accountant can help you determine how to save for retirement optimally. 

Read Karin Price Mueller’s article here.

If you have any further questions, please reach out to your Baron Team.

Disclosure: This is a general communication being provided for informational purposes only. Past performance is no guarantee of future results. Every investment strategy has the potential for profit or loss. This material is not intended to be relied upon as a forecast, research, tax, or investment advice. Please consult your financial planning and tax professional for personal advice.