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Should you make 401(k) or Roth IRA contributions?
In a perfect world, the answer would be both. If you have the means, maximizing your traditional 401(k) and Roth contributions is a great way to build a diversified set of retirement savings. But, of course, your paycheck gets a vote. So, if you have to choose, should you switch from contributing to a 401(k) to Roth 401(k) or Roth IRA contributions? The answer is… it depends on a lot of factors.
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“The Roth IRA is the closest thing to a free lunch from Congress — the gift that actually keeps giving over the long term. But that’s why the earlier one takes advantage of it, the better,” said Vijay Marolia, a managing partner at Regal Point Capital.
Alongside tax rates, age is a critical issue when considering whether to switch to a post-tax account. The younger you are, the longer this account will grow, and that can be even more impactful given you pay taxes on the contributions and not returns.
Here, in your 50’s, you’re on the bubble. You’re not in the near-unambiguous range of, say, a 25-year-old investor, but you still have some saving years left. The difference will come down to growth and taxes.
“Given your combined $1 million in 401(k) accounts, incorporating Roth IRAs into your retirement strategy is wise. Planning for retirement and making smart investment choices are vital steps for securing long-term financial stability.” said Dutch Mendenhall, CEO of RAD Diversified.
But Mendenhall also warns that it’s important to understand the rules around your various retirement options. Specifically, if you switch from traditional 401(k) contributions to a Roth 401(k) or Roth IRA, your taxes will increase. This is because you’ll lose the tax deduction for your original portfolio contributions, meaning you pay taxes on any money that goes into the Roth accounts. Now, this effect could be modest depending on the rest of your tax situation, but it should be accounted for.
Unless you make only modest contributions to your 401(k), which could be unlikely given a $1 million account balance, you may not be able to shift entirely to a Roth IRA. The annual contribution cap for these accounts is only a percentage of that of a 401(k). Here’s a breakdown for 2025:
