Should Kelley Switch from Roth to Traditional 401(k)?
“It sounds like you might be in your highest earning years… probably in the 22% and higher tax brackets.”
If that’s the case, Kelley may benefit from switching her contributions to a Traditional 401(k) instead of Roth:
🔄 Roth vs. Traditional 401(k)
| Roth 401(k) | Traditional 401(k) | |
|---|---|---|
| Contributions | After-tax | Pre-tax |
| Tax Benefit | Tax-free withdrawals | Lowers current taxable income |
| Best for | Lower income years | Higher income years |
Reducing taxable income with traditional contributions today could free up more money to invest in her taxable brokerage account.
🚪 The Mega Backdoor Roth: Hidden Superpower?
“Your 401(k) plan… may also allow you to contribute beyond that with what’s called after-tax contributions.”
If Kelley’s employer plan allows it, she might unlock the Mega Backdoor Roth—an advanced strategy that allows after-tax 401(k) contributions and in-service conversions to Roth accounts.
How It Works:
-
Contribute after-tax dollars to your 401(k)
-
Convert those to Roth via:
- In-service withdrawal to Roth IRA
- In-plan Roth conversion to Roth 401(k)
This can potentially allow over $60,000 in total annual contributions (depending on the IRS limit for the year and employer match).
🔍 To explore this option:Request the Summary Plan Description (SPD) from HR and look for terms like “after-tax contributions,” “in-service distribution,” or “Roth conversion.”
Risk Management: Don’t Skip the Essentials
“Make sure you haven’t overlooked any risk management basics…”
As Kelley accelerates toward FI, protecting what she’s building is just as important as growing it.
✅ Risk Management Checklist:
- ✅ Long-term disability insurance
- ✅ Appropriate life insurance
- ✅ Sufficient homeowners, auto, and umbrella coverage
- ✅ Estate documents (will, powers of attorney, healthcare directive)