Roth or Pre-Tax 401(k)?

Summary

Episode Overview

Podcast: Jill on Money with Jill Schlesinger
Episode: Roth or Pre-Tax 401(k)?
Date: December 10, 2025

In this episode, host Jill Schlesinger fields a listener question from Fred in South Carolina about whether he should switch his retirement contributions from a traditional pre-tax 401(k) to a Roth 401(k). Jill unpacks Fred’s entire financial picture, examining retirement account balances, cash flow, debt, college savings, and insurance needs. She provides practical, jargon-free advice about the impact of taxes on retirement savings, the flexibility needed for future spending, and how to strike a balance between pre-tax and post-tax saving. The episode is candid, light, and advice-packed—perfect for listeners facing similar crossroads in 401(k) choices.

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Key Discussion Points and Insights

1. Fred’s Financial Landscape

• Age & Household: Fred, 49, married, wife (44), stepdaughter (12), dog.
• Income: $186,000 salary + variable compensation averaging $240,000 gross per year.
• Current Saving: Maxing out regular (pre-tax) 401(k); $334k in current 401(k), $774k in rollover IRA (pre-tax), $18k in Roth IRA.
• Wife’s Assets: Home-based business, small income. $5-6k in a spousal IRA.
• Debt: $10k car loan, $82k mortgage at 2.75% interest (“Beautiful.” – Jill, 05:55).
• House Value: About $300k (per Zillow).
• Cash Holdings: $27k high-yield savings, $27k Schwab brokerage, $15k in T-bills.
• Child’s College Fund: $7k in a 529, $350/month added.

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2. Weighing Roth vs. Traditional 401(k) Contributions

• Fred’s Core Question: Should future retirement savings go into a Roth 401(k) or stay pre-tax?
• Retirement Projections:
  • Continuing with pre-tax contributions could result in >$3 million in retirement accounts by age 72.
  • Required Minimum Distributions (RMDs) would force large annual taxable withdrawals—over $100k per year, possibly more (07:54).
• Tax Implications:
  • Even if tax rates don’t rise, large RMDs could keep Fred in the 22% or 24% tax bracket.
  • “The money that goes into these pre tax dollars must come out at some point in the future. Right?...The year that you the first year of your required minimum distribution, you would be required to remove over $100,000.” – Jill (07:11, 07:54)

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3. Balancing and Diversifying Tax Buckets

• Jill’s Recommendation: Add more to Roth to diversify taxable sources in retirement.
• Memorable Quote:

  “Let’s balance some of the allocation out between money that’s been taxed and money that hasn’t been taxed. How’s that sound to you?” – Jill (08:02)

• Negotiated split:
  • Fred is open to shifting 50/50 between Roth and pre-tax.
  • Jill jokes she’d prefer all Roth but proposes: “If I say 50/50, we stop paying down the mortgage.” (08:44)
• Fred’s Compromise: Plans to switch fully to Roth contributions next year to see how the budget adjusts. (09:45):

  “Beginning the first of the year, I could swap it all over into the Roth 401K and then see how the budget shakes out because...All right, let’s do it with the taxes.” – Fred (09:45)

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4. Cash Flow and Priorities: Mortgage Payoff & Brokerage Investments

• Jill’s Firm Advice:
  • Stop aggressively pre-paying the ultra-low mortgage (“No!” – Jill, 06:01).
  • Instead, boost investments in the brokerage account for future flexibility.
  • Consider more contributions to the 529 for tax-advantaged college savings.
• Strategic Reasoning:
  • Money is cheap; investing is likely higher yield.

  “The money’s so cheap it doesn’t make a ton of sense to me.” – Jill (09:42)

  • Non-retirement assets provide spending choices between ages 62–70 before Social Security.

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5. Insurance and Estate Planning Check-up

• Life Insurance:
  • Fred has 2x salary coverage from work and term policies totaling $1M.
  • Just added a new 20-year $500k term to cover likely working years.
  • Jill’s Attitude: More is good, but hopefully all policies outlive him! (10:40)
• Estate Docs:
  • Will in progress with wife; acknowledgment that second marriages need careful legal guidance.
  • Jill emphasizes necessity of proper documents, especially in blended families.

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Notable Quotes & Memorable Moments

| Timestamp | Speaker | Quote | |-----------|---------|-------| | 05:55 | Jill | “Beautiful. And you’re not making any extra payments on that, are you?” (re: 2.75% mortgage) | | 06:01 | Jill | “No.” (firmly, about stopping extra mortgage payments) | | 07:11/07:54 | Jill | “The money that goes into these pre-tax dollars must come out at some point in the future... The year that you the first year of your required minimum distribution, you would be required to remove over $100,000.” | | 08:02 | Jill | “Let’s balance some of the allocation out between money that’s been taxed and money that hasn’t been taxed. How’s that sound to you?” | | 08:44 | Jill | “If I say 50/50, we stop paying down the mortgage. There’s a negotiation going on here.” | | 09:45 | Fred | “Beginning the first of the year, I could swap it all over into the Roth 401K and then see how the budget shakes out because ... All right, let’s do it with the taxes.” | | 09:42 | Jill | “The money’s so cheap it doesn’t make a ton of sense to me.” (on low mortgage rates) | | 10:40 | Jill | “Let’s hope that all life insurance expires before we do. Not the game plan.” |

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Important Segments (with Timestamps)

• [03:23] Fred’s Full Financial Picture: Salary, family details, retirement balances.
• [05:27] Debt, cash flow, house value, and mortgage discussion.
• [06:57] Jill summarizes Fred’s “good news and bad news.”
• [07:53] Required Minimum Distribution “problem” if all saving is pre-tax; tax bracket projections.
• [08:35] Discussion: How much should be shifted to Roth? Negotiation and recommendations.
• [08:59] Guidance on brokerage, 529 contributions, preparing for retirement flexibility.
• [09:42] Debate and advice on the wisdom of paying down the mortgage.
• [10:04] Quick check on life insurance and estate documents.

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Tone and Style

Jill is upbeat, approachable, and friendly, with playful negotiation (“If I say 50/50, we stop paying down the mortgage”) and encouragement (“Go get yourself some Roth action. Mark will be very proud of you.”). She’s also unafraid to deliver tough love, particularly about mortgage payments and unnecessary complexity.

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Actionable Takeaways

• For high earners with large pre-tax balances: Consider Roth (post-tax) contributions for tax diversification in retirement.
• Don’t rush to pay off super-low-rate mortgages; investing spare cash likely yields better long-term outcomes.
• Build non-retirement brokerage assets for added flexibility before age 70.
• Check life insurance and estate planning, especially in blended family situations.
• Continue or increase 529 contributions for efficient college saving.

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This episode is a must-listen for anyone perplexed about 401(k) choices, taxes in retirement, or how to prioritize financial goals without falling prey to conventional wisdom. Jill’s advice is smart, actionable, and never dull.

Transcript

[Jill Schlesinger]

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Welcome to the Jill on Money show. It's Wednesday, December 10th and we are here trying to help you make better, less bad, at least more considered financial decisions. If something's going on for you, maybe you're thinking about a new job. Maybe you're ready to sell your house Maybe you're ready to buy your first house. Maybe you're thinking about a tax planning scheme. Maybe someone's trying to sell you something. Just get in touch with us. Go to jillonmoney.com, click the contact Us button, write us a note, and if you'd like to join us on the air live, check the box. Mark will do everything else while you're on the website. Hey, here's an idea. Check out my book. It's called the Great Money Reset. It's a perfect New Year's resolution kind of book. In it, I try to outline the steps that you need to take to turn chaos into opportunity. So go ahead, check it out. The Great Money Reset. Okay, Right now let's talk to Fred, who joins us from South Carolina.

[Fred (Caller)]

I'm trying to figure out if I should be contributing into a Roth 401K with my company instead of the regular 401K.

[Jill Schlesinger]

Fred, tell us about yourself. How old are you?

[Fred (Caller)]

I'm 49. I'll be 50 next year.

[Jill Schlesinger]

And are you single or partnered or married? Married.

[Fred (Caller)]

Got a. Got a wife and stepdaughter and a dog.

[Jill Schlesinger]

Wife, a stepdaughter and a dog. How old is your wife?

[Fred (Caller)]

She is 44.

[Jill Schlesinger]

How old is stepdaughter?

[Fred (Caller)]

She'll be 12 in December.

[Jill Schlesinger]

How much do you earn?

[Fred (Caller)]

186,000 salary and then I have some variable compensation that comes and goes each year. But looking at the last three years, it's about 240 gross.

[Jill Schlesinger]

Does your wife work?

[Fred (Caller)]

She does. She has a small home based business. But it's only a couple hundred dollars a month right now.

[Jill Schlesinger]

All right, so we don't include that, right?

[Fred (Caller)]

No, not really.

[Jill Schlesinger]

Okay, Right now are you contributing the maximum to your 401k?

[Fred (Caller)]

Yes, ma'.

[Jill Schlesinger]

Am.

And that's all traditional right now, right?

[Fred (Caller)]

That's correct.

[Jill Schlesinger]

Okay, so how much is in the 401k total right now?

[Fred (Caller)]

So the 401k with my current company is about 334,000.

[Jill Schlesinger]

Okay, and you have another one, it sounds like.

[Fred (Caller)]

Yeah, I have a rollover IRA from my previous employers. It's 774 today.

[Jill Schlesinger]

Holy smokes. $774,000?

[Fred (Caller)]

Yes, ma'.

[Jill Schlesinger]

Am. Wow. And I'm presuming that's all pre tax.

[Fred (Caller)]

Yes, yes, that was all pre tax. I do have a Roth IRA that I started and then couldn't contribute too long. It's only like $18,000 though.

[Jill Schlesinger]

And what about your wife, does she have any, any of the old retirement plans or anything else floating around like you do?

[Fred (Caller)]

No, she. She never had that option with her previous employments. We did start her spousal IRA last year, and she's got, I think it's about five or six thousand dollars in there right now.

[Jill Schlesinger]

Right now. Given your total earnings, how's the cash flow on all of this?

[Fred (Caller)]

It works pretty well. We, we don't owe much money. We put all our expenses, our living expenses on credit card and pay it off every month. We owe, I think, total $10,000 on her car. Like 82 on the house.

[Jill Schlesinger]

Wait, tell me a little bit about the house. You owe 82,000 in a mortgage. What's the house worth?

[Fred (Caller)]

300 is what she looked up on Zillow last night.

[Jill Schlesinger]

Okay. What is the interest rate on your $82,000 mortgage?

[Fred (Caller)]

Two and three quarters.

[Jill Schlesinger]

Beautiful. And you're not making any extra payments on that, are you?

[Fred (Caller)]

Oh, I have been. I've been paying it off like crazy.

[Jill Schlesinger]

No.

You knew I was going to say that, didn't you?

[Fred (Caller)]

I did.

[Jill Schlesinger]

You were like, all right, maybe if I tell her I got my estate documents done, she won't be as mean to me about paying off the mortgage. We'll talk about that in a second. Hold on. Car loan. What's the interest rate?

[Fred (Caller)]

$2,400,000.

[Jill Schlesinger]

How about money in the bank?

[Fred (Caller)]

Let's see, in the bank we have high yield. We kind of just clear the checking account because it doesn't yield anything. High yield savings is 27,000. There's 27,000 in the swab brokerage account. There's 15,000 in four and eight week treasury bills.

[Jill Schlesinger]

Look at you. You got your cash management going on here. Ma'. Am.

Anything for your stepdaughter.

Have you started a 529 plan or any other kind of account for her?

[Fred (Caller)]

Yes, ma'. Am. She's got about 7,000 in her 529, and I'm sliding about 350amonth in there for her now.

[Jill Schlesinger]

So here's your good news and your bad news.

You're making a lot of money.

You're saving a lot of money. That's the good news.

Right.

Even if we presume that for some amazing reason tax rates are going to stay as low as they are.

Maybe they will.

I don't know. You know, the money that goes into these pre tax dollars must come out at some point in the future. Right?

And you're young.

I mean, you're only 50. How much longer do you think you would work? What's your guess?

[Fred (Caller)]

You know, if I had like twice as much Money probably another 10 years. But I figured, I think you're going.

[Jill Schlesinger]

To have twice as much money. Don't worry.

[Fred (Caller)]

I figured I'd probably worked in my early 60s.

[Jill Schlesinger]

I mean let's just kind of play with some of these numbers for a second. If you are continuing to use pre tax mark, you think it's fair to say that in by the time he gets to 72 that he'll have at least $3 million? It's 22 years. Okay. And it's probably going to be more. But let's just say it's $3 million just for the heck of it.

Right.

The year that you the first year of your required minimum distribution, you would be required to remove over $100,000. Now what does that say to you? It says to me that like there would be 100, it's probably going to be more. That would leave you and that doesn't count Social Security for you and your wife. You're firmly if tax rates don't move in the 22 and maybe the 24% tax bracket anyway. Okay, so let's get some of that money and get it taxed today and let's balance some of the allocation out between money that's been taxed and money that hasn't been taxed. How's that sound to you?

[Fred (Caller)]

That sounds fine. Like maybe 50, 50 or something to start with.

[Jill Schlesinger]

I would do. I tell you what, because you got a million bucks already, I'm kind of inclined to do the whole thing if I can only convince you.

50 50. How about this? If I say 50 50, we stop.

Paying down the mortgage. There's a negotiation going on here. You are young. I wouldn't mind if you added some investments to that to that brokerage account at Schwab.

I think there's two issues here.

One is you could probably put more money into the 529 plan, which is a very tax efficient way to save for education. And two, you could start building up your non retirement assets so that you have a choice. In 10 or 12 years, maybe you are 62. And maybe at 62 you start to say, hmm, you know what, I'm going to just start to wind it down a little bit and you'll have money to access between 62 and 70. And that might be a really good game plan for you. I mean we'll talk between now and then. But I think that paying down the mortgage is always this exciting moment where you're like I don't have a mortgage.

Or I've paid down my Principal, but.

The money's so cheap it doesn't make a ton of sense to me.

[Fred (Caller)]

Well, you know, beginning the first of the year, I could swap it all over into the Roth 401K and then see how the budget shakes out because. All right, let's do it with the taxes.

[Jill Schlesinger]

All right, I'm on board. I'm on board with that. Let me ask you another question. Let's talk a little bit about my fun area of life insurance and estate planning. You have some life insurance for the fam?

[Fred (Caller)]

I do. I've got two times life insurance, so yeah, 365 through employment and then I have a 30 year term for half a million.

[Jill Schlesinger]

Okay, and what about estate documents? Now you have this whole like, you know, second marriage. Always. You need a good estate attorney for that. What do you got?

[Fred (Caller)]

So we've been revising our will recently and actually it's redlined on the computer. I'm waiting on my wife's revisions and then we're going to get it all notarized and legal. And then I recently took out a another 20 year term life for an additional half million just to make sure my wife's taken care of because the whole 30 year will expire before my, before my working time is up.

[Jill Schlesinger]

And let's hope that the, that all life insurance expires before we do. Not the game plan. What else can we do for you, Fred?

[Fred (Caller)]

I, I think that's it. I, I appreciate the help on that. I just wasn't sure how to sort it out in my head which way was better to go.

[Jill Schlesinger]

You're good, you're in good shape. Go get yourself some Roth action. Mark will be very proud of you.

[Fred (Caller)]

Okay, thank you all very much.

[Jill Schlesinger]

If you've got something going on in your life, it could be big, it could be small. We don't care. We want to hear from you. Go to jillonmoney.com, click the contact us button, write us a note, and if you want to join us live, check the box. Mark will do everything else. You can subscribe to us on the Odyssey app or wherever you find your favorite podcasts. Please leave us a rating and review. Review wherever you listen. And of course, do something nice for someone else today. Change your work, change your wealth, change your life. Thanks for listening. We'll talk to you tomorrow.

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[Von Miller]

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