Roth IRA or Roth 401(k)?

Summary

Episode Summary: "Roth IRA or Roth 401(k)?"

Podcast: Jill on Money with Jill Schlesinger
Host/Author: Audacy
Release Date: January 14, 2025

Introduction

In this episode of Jill on Money, host Jill Schlesinger, CFP®, delves into the nuances of retirement accounts, specifically comparing Roth IRAs and Roth 401(k)s. The episode features a series of listener questions that provide real-life scenarios, prompting Jill and her co-host Mark T. McGowan to offer tailored financial advice.

Listener Questions and Expert Analysis

1. Retirement Planning for Early Retirement ("Pseudo Retirement" at 58)

Timestamp: [03:41] - [07:48]

Listener Profile:

• Age: Both 55
• Assets:
  • $1.6 million in retirement savings (Roth IRA: $300k, Traditional IRA: $500k, Traditional 401(k): $800k)
  • $100k in a money market account
  • $100k in a 529 account for daughter’s education
• Income: Currently $250k annually
• Pension: $4,500/month starting in 2028, 100% survivable
• Social Security: Approximately $2,000/month each at full retirement age (67)
• Retirement Goal: $100k/year needed, aim to retire at 58

Discussion: Jill and Mark analyze the listener's plan to retire early by supplementing a part-time job to bridge the income gap until Social Security kicks in. They suggest:

• Maximizing Roth Contributions: To maintain tax efficiency.
• Drawing from Traditional 401(k): To manage taxable income effectively.
• Potential Plan Adjustments: Limiting further 401(k) contributions and enhancing non-retirement savings for flexibility.

Notable Quote: Jill Schlesinger states, “I think in these next few years, stop putting money into the 401(k) and just beef up your non-retirement savings... having some flexibility” ([06:45]).

2. Retirement Planning with Significant Age Difference in Partnership

Timestamp: [07:48] - [12:35]

Listener Profile:

• Age Difference: Partner is 64 (retired), listener is 46 (part-time, 30 hours/week)
• Income & Assets:
  • Listener: $110k in a 403(b), $14k in stocks
  • Partner: $123k in a 401(k) brokerage account
• Retirement Needs: Approximately $8,000 - $8,500/month
• Health Considerations: Listener is a breast cancer survivor with potential heart challenges

Discussion: Jill and Mark emphasize the complexities introduced by the 17-year age gap, highlighting:

• Social Security Strategies: Ensuring optimal claiming strategies based on marital status and age.
• Financial Coordination: Balancing retirement timelines and income streams to accommodate health and longevity.

Notable Quote: Mark T. McGowan remarks, “Nothing major. I'm going to assume that they've accounted for health care costs and their monthly spend. It’s doable” ([07:38]).

3. Choosing Between Roth IRA and Roth 401(k)

Timestamp: [12:35] - [15:00]

Listener Profile:

• Situation: High earner seeking to maximize Roth contributions
• Challenge: Income levels exceed Roth IRA eligibility thresholds
• Question: Should they prioritize a Roth 401(k) over attempting a backdoor Roth IRA?

Discussion: The conversation focuses on the benefits and practicalities of Roth 401(k)s versus Roth IRAs:

• Simplification: Favoring Roth 401(k) contributions when income restricts Roth IRA eligibility.
• Investment Flexibility: Roth 401(k)s often provide higher contribution limits and simplified tax benefits without the complexities of backdoor contributions.
• Future Considerations: Awareness of emerging products like Solo Roth 401(k)s, though still limited in accessibility.

Notable Quote: Mark T. McGowan advises, “I would just do the Roth 401(k). Unless he's thinking, oh, I can do the Roth IRA and then do all my pre-tax and save 30,000... Just do all Roth 401(k)” ([14:01]).

Key Insights and Takeaways

1. Roth vs. Traditional Retirement Accounts:

   • Roth 401(k)s offer higher contribution limits and immediate tax-free growth, making them advantageous for high earners who exceed Roth IRA limits.
   • Traditional IRAs and 401(k)s provide tax-deferred growth, beneficial for reducing taxable income in higher earning years.

2. Early Retirement Strategies:

   • Balancing part-time work with retirement savings can bridge income gaps.
   • Diversifying income streams—including pensions and Social Security—can enhance financial stability.

3. Age Differences in Couples:

   • Significant age gaps require tailored strategies for Social Security claiming and retirement funding to ensure both partners are financially secure.

4. Maximizing Retirement Savings:

   • Prioritizing retirement accounts that align with income levels and tax strategies is crucial.
   • Flexibility in savings strategies can provide a buffer against unforeseen financial needs.

Conclusion

In this episode, Jill Schlesinger and Mark T. McGowan provide comprehensive advice on navigating retirement planning complexities, particularly concerning Roth IRA and Roth 401(k) options. Their analysis underscores the importance of personalized financial strategies to accommodate diverse life situations and retirement goals.

Notable Quotes with Timestamps

• Jill Schlesinger: “I think in these next few years, stop putting money into the 401(k) and just beef up your non-retirement savings... having some flexibility” ([06:45]).
• Mark T. McGowan: “Nothing major. I'm going to assume that they've accounted for health care costs and their monthly spend. It’s doable” ([07:38]).
• Mark T. McGowan: “I would just do the Roth 401(k). Unless he's thinking, oh, I can do the Roth IRA and then do all my pre-tax and save 30,000... Just do all Roth 401(k)” ([14:01]).

Additional Resources

For more personalized advice or to submit your questions, visit jillonmoney.com and explore the free weekly newsletter or subscribe to Jill on Money Live for live webinars and bonus content.

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Note: This summary excludes advertisement segments and focuses solely on the content discussed between [02:23] and [15:00] in the provided transcript.

Transcript

[Jill Schlesinger]

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[Jill Schlesinger]

Welcome to the Jill on Money show. It's Tuesday, January 14th and we are are here trying to help you make better, less bad, more considered financial decisions now. It does not mean we actually are aspired to make you perfect or to optimize your life. We just want to focus on you and what's going on and we're trying to listen to what you're saying but also go beyond that because sometimes when we hear your stories, there's something you come into the program wondering about and then it brings up a totally separate issue.

[Mark T. McGowan]

Regardless of what it is.

[Jill Schlesinger]

If you'd like to get in Touch with us and join us on the air.

[Mark T. McGowan]

All you need to do is go.

[Jill Schlesinger]

To jillonmoney.com, click the contact us button, write us a nice long note. If you are shy and you don't want to come on the air, it can be a little bit shorter. If you're thinking about maybe coming on the air, don't forget to check that box. And while you're on the website, don't forget to sign up for the free weekly newsletter. And of course, make sure that you subscribe to Jill on Money Live, where.

[Mark T. McGowan]

You will have access to course quarterly.

[Jill Schlesinger]

Live webinars, a back catalog, more bonus content. We're starting to beef it up, all for the bargain basement price of $45. Jill on money Live. It's right there on the website. Okay, Mark, it is time for us.

[Mark T. McGowan]

To do some emails.

[Jill Schlesinger]

And I thank you so much for sending me just a handful of the myriad, the hundreds, maybe thousands of emails that are out there. Okay, so the first message we have received. This is from Jerry. I love this subject. It's great. Pseudo refirement at 58. Oh, my God, I love that. Instead of retirement refirement. Mark, we gotta use this. I'm gonna totally steal this, Jerry. I promise I'll give you the citation. This is great. Okay. Jerry writes. Hi, Jill and Mark. I love your show. My wife and I are new listeners, and as we approach refirement. Get it. Financial independence, retire early and need your input, please.

[Mark T. McGowan]

We are both 55.

[Jill Schlesinger]

No debt, no mortgage. A $300,000 house is paid off. Here's what they have. $1,600,000 in retirement savings, 300,000 in a Roth, 500,000 in an IRA, $800,000 in a traditional 401K. They've got about $100,000 in a money market account and also another $100,000 in a 529 account. This is set aside for our daughter, who is currently in high school and will go to college costs. Okay. We also have a pension. Oh, my gosh. It starts paying in 2028. It's 100% transferred if either of us dies. $4,500 per month pension. He says annuity. I wonder if that's a real pension or if it's an annuity contract. Regardless, $4,500 a month. That's all we need to think about. They'll both be eligible for Social Security, about 2 grand a month at age 67, their full retirement age. There's nothing else there. They need about $100,000 a year in Retirement to live comfortably based on the last couple of years of expenses. Okay. We both want to quit at 58. Oh my God. They currently make about $250,000 a year total and they fully fund their 401s, probably with a catch up as well. Okay, here's the deal. At 58, I would go part time and I would work in my friend's car dealership and I'd earn about 30 grand a year just for fun, three days a week helping out. In three years they'll have the 30,000 and then they'll have the $4,500 a month and there'll be 58, of course. So what is interesting about this is, you know, you're not quite there, right? If you have 84,000, you'll have, sorry, $84,000 of taxable income. You'll need to draw down that traditional 401. Not a lot, you know, you'll probably need, I don't know, probably. I don't know what state you live in. Maybe 30 of that a year. That's okay. So you do that starting when you retire and that will 30 or 40, I guess from the 401k. But don't roll it over so you can trigger that rule that allows you to access the money as soon as age 55, which would be great. And I think then you should probably be okay. I don't know how long you plan to work in the dealers, but if you're willing to do that for a bunch of years to kind of lessen the burden on just draining your accounts, that might be kind of good. Is there anything I see that's not doable in here? I guess that if, you know, we really consider that the pension doesn't have a cola. You know, a few years into this, you're going to have to start drawing, withdrawing more and more from your 401. Now let's say you do that and you get to your age 67 and then you're essentially grabbing those two Social Security checks to replace the 401k money. That's okay too. I wouldn't mind just pulling all that 401k money out, get that tax paid. As you are in a lower bracket. I don't think there are too many holes in this plan. Mark, do you see any holes in the plan?

[Mark T. McGowan]

Nothing major. I'm going to assume that they've accounted for health care costs and their monthly spend. No, I mean there's not a ton of wiggle room, but I think it's doable.

It's doable.

[Jill Schlesinger]

I think in these next few years though, stop putting money into the 401k probably and just beef up your non retirement savings. Although they could just put it in the Roth, frankly, or even in, you know what I mean? Like, I guess it does not matter really. They've got 100 grand available. I just, you know, I always like to have a little extra since I know that might be something that is important to them, having some flexibility. Okay, this is from Vijay who says, how do you go about retirement planning and financial planning when you have a 17 year age difference? My partner is 64, retired and collecting Social Security. I'm 46 and working part time, 30 hours a week. This is just the start of the question. I have many more. Okay, well look, the way you start is what you may want to do is engage somebody to help you out with this because there is, you know, it's a little bit tricky if Your partner is 64 and you know that person is going to collect Social Security at 67 or 70. I would say that it depends also whether you will be claiming on half of your partner's record or not. Whether you're actually married would allow you to do so. You'd have to be married to be.

[Mark T. McGowan]

Able to do that.

[Jill Schlesinger]

But it really, you know, it takes a little bit of finessing because when you have that big age difference, you know, your partner might be well and good. Like, hey, I'm good, I'm great, I can retire. But you may not be. So at the end of the day, it's not that complicated, but you have to take it into account. Okay. Ellie writes, I would love to retire with my husband still working. What do you think? Okay, here's the message. Jill and Mark, I greatly appreciate the insights and positive perspectives shared on your podcast, which I listen to every morning during my workout.

[Mark T. McGowan]

I find your wisdom to be a.

[Jill Schlesinger]

Source of motivation and encouragement for me. Oh, that's so nice. Thank you, Ellie. Okay. Ellie and her husband, they're both 62 and she says, I'm considering retiring within the next two years or sooner. My husband plans to work until he is 67. He's in excellent health. However, I have some health concerns as a breast cancer survivor and facing some heart challenges related to family genetics. Okay. She earns 110, husband earns 123. She's got $633,000 in a 403. He has $940,000 in his 401k brokerage account, $43,000 savings account, 102,000, $14,000 in stocks.

[Mark T. McGowan]

Social Security at her age.

[Jill Schlesinger]

67, $2,400 a month. Social Security for him at age 67, 2,800. They own their home. It's valued at $1.4 million with a mortgage interest rate of 2%. Oh my God. The remaining balance on the mortgage is just $185,600. We prefer to stay in our current location. It's close to family and potential future grandchildren. Smiley face. Two kids, married. Launched HSAs 11,000 for her, 22 for him. And their expenses are about 8 to 8,500amonth, which includes their mortgage payment of 3,000. Could you please provide your thoughts of the possibility of retiring in two years or possibly sooner? I'm also open to considering part time employment, likely without benefits, but only if necessary. Thank you for the valued and appreciated insights. Jill and Mark. Happy New Year. Okay, just looking at this here. So he's got 123 grand. It looks to me like they can absolutely survive and pay their bills on his 123 grand. Like after tax. I guess the only thing that would happen for him is that he probably wouldn't be able to. I don't know if you're maxing out your retirement accounts right now, but he would no longer be able to do that. You'll need that cash flow. And if in the next two years you're really thinking about you retiring, what.

[Mark T. McGowan]

Could really be helpful would be. You said you have a 403.

[Jill Schlesinger]

I might drop that down to like.

[Mark T. McGowan]

If you have a match.

[Jill Schlesinger]

Probably don't. But I would drop that down a little bit and I would look at beefing up some of that savings and brokerage account money a little. Just a little. But I think you should be fine as long as he's willing to work until he's 67. Any holes in this plan, Mark?

[Mark T. McGowan]

Not that I see. They'll. They'll continue to live off of his salary for the next five years. 67. They'll have $5,000 in Social Security. They'll have all their investments. They only need around 8 to 9,000 to live on. It looks good. I don't think she, if she wants to retire now, she probably could, probably.

[Jill Schlesinger]

But you know, if she wants to like sort of slide into age 403B. I wonder if she's a nurse or if just out of curiosity, or if she's a teacher, if maybe she has a pension. But she didn't mention a pension, so probably not. Okay, last question. This is from Mr.

[Mark T. McGowan]

Anonymous who says yes.

[Jill Schlesinger]

Another question on Roth versus traditional. Here we go. Anonymous is a longtime listener, grateful to us, blah blah blah. I used to listen since before Mark was too shy to come on the air. Lol. Remember that Mark?

[Mark T. McGowan]

That was the case for many, many years.

[Jill Schlesinger]

Many years. Okay Mark, here is the question. Anonymous has 401k contribution questions. I do think about maximizing Roth as much as possible. However, I make just enough money to put me outside of threshold to make Roth IRA contributions. The thought is if I max out traditional contributions to my 401k, it would lower my AGI so that I would be eligible to make a Roth IRA contribution for both me and my wife. The pro rata rule prevents me from pursuing a backdoor Roth. Does that make sense or should I Forget about Roth IRAs and stick to Roth 401ks? Hope that question makes sense. Thanks for the attention and the hard work. This is best. Anonymous Mark, why do a Roth IRA if he's got a Roth 401k?

[Mark T. McGowan]

Yeah, I don't get that. I would just do the Roth 401K. Unless he's thinking, oh, I can do the Roth IRA and then do all my pre tax and save 30,000. Forget that. Just do all Roth 401K and then if you still have seven or eight thousand dollars left over, put it in a brokerage account.

[Jill Schlesinger]

Yeah, I think that's fine. I would just do, I would do the Roth 401k. I guess the only reason I would do it is if your retirement plan at work stinks. Maybe that's a possibility and you want to just have more flexibility. But as you lay it out for us, I don't think so. I think just use the Roth 401K. I just got an interesting note from Fidelity which was like, hey, they're finally getting into like Solo Roth 401ks. But it's still very hard. So for those you are self employed, you'll have to hop around for that.

[Mark T. McGowan]

You'll find it.

[Jill Schlesinger]

But what was the point? Someone you had to use take a.

[Mark T. McGowan]

Physical check to wear.

[Jill Schlesinger]

Where was it? Do you remember?

[Mark T. McGowan]

I think it was Schwab. Yeah.

[Jill Schlesinger]

Oh my God. So there is a little bit of a lag between what is possible by law and what is actual doable in real life. So anyway, if you've got a question about a Roth, if you've got a question about maybe what kind of what kind of house you're going to buy, whether you should refinance, whether you should just say forget it, I can't refinance I'm going to sell. I'm going to buy something. Whatever it is, just give us a holler. Go to jill on money.com click the contact Us button. Of course, let us know if you'd be willing to come on the air. Don't forget to sign up for the free weekly newsletter Mark does a great job with that comes out every single Friday. You can subscribe to us on the Odyssey app or wherever you find your favorite podcast.

[Mark T. McGowan]

Please leave us a rating and review.

[Jill Schlesinger]

Wherever you listen and of course, lift someone up. Change your work, change your wealth, change your life. Thank you for listening. We'll talk to you tomorrow. Real Estate it's been a cornerstone of.

[Mark T. McGowan]

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[Ben Stiller]

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