Future retirees often wonder when it’s worth moving money into a Roth IRA from some other type of account. After all, Roth IRAs are after-tax money, meaning the funds can eventually be withdrawn tax-free. All things equal, that may sound like an optimal situation, but it often depends on taxes today vs. taxes tomorrow.
Should You Switch to a Roth 401(k) Right Before Retirement?
The decision really comes down to what tax bracket you’re in today versus what you’re likely to face in retirement.
Here’s the quick framework that many people use as a guideline:
- Lower current tax rate vs. expected future → Roth may be more favorable
- Higher current tax rate vs. expected future → Traditional may be more favorable
- Similar current vs. future → Consider blending for tax diversification
Roth vs. Traditional Near Retirement: An Example
Let’s say an individual wants to retire in a year and a half. He earns roughly $114,000 annually, which means he’ll likely fall in the 24% marginal tax bracket or below, depending on filing status and deductions. That’s the key anchor for the decision.
In this case, say he’s already built:
- A large $1.6 million Traditional 401(k)
- A $200,000 taxable account
- A smaller $58,000 Roth bucket
Even with retirement just 18 months away, the math doesn’t change. This is still a tax-rate decision more than an age decision. Furthermore, the big pre-tax balance matters. Down the road, required distributions (RMDs) may keep him in a similar, or potentially higher, tax bracket. That may make paying taxes at today’s rates worth considering.
In this specific example, adding Roth now may help clear things up rather than muddy the waters.
Why Tax Diversification Matters in Retirement Planning
The goal here likely becomes building tax diversification:
- Pre-tax money for flexibility
- Taxable money for accessibility
- Roth money for tax-free withdrawals later
For many, that combination may provide more flexibility managing income and taxes in retirement.
How State Taxes Affect Roth vs. Traditional Decisions
Folks planning to leave a high-tax state like California immediately after retiring may find that Traditional contributions look more appealing. For those who live in and plan to remain in a high-tax state, a Roth may offer more benefits.
Roth vs. Traditional: What to Consider at a 24% Tax Bracket
At a 24% tax rate, shifting 2026 contributions to a Roth 401(k) may potentially make sense, even close to retirement. It’s often less about the proximity to retirement and more about managing taxes wisely within that timeframe.
For many households, the goal becomes creating options so income can be pulled from the most tax-efficient source each year.
Retirement decisions like Roth vs. Traditional are just one piece of a much bigger plan. If you’re thinking about how all the pieces fit together, our Retirement Planning at Every Age guide walks through what to consider at each stage.
Download your copy here: https://www.yourwealth.com/retirementplanningebook/
This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. There are many aspects and criteria that must be examined and considered before investing. Investment decisions should not be made solely based on information contained in this article. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. The information contained in the article is strictly an opinion and it is not known whether the strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production/writing and may change. This material is not intended to provide, and should not be relied on for, tax advice. Any discussion of tax matters is general in nature and may not apply to your individual circumstances. Tax laws and regulations are subject to change and may be interpreted differently. You should consult your own qualified tax professional regarding your specific situation before making any tax-related decisions. The example provided is for illustrative and educational purposes only and is not intended to represent the experience of any specific individual or to provide personalized investment, tax, or financial planning advice. Actual results and outcomes will vary based on individual circumstances, including financial situation, objectives, and risk tolerance.
