Is it better to withdraw from 401k or Roth IRA? (2024)

Is it better to withdraw from 401k or Roth IRA?

A Roth IRA might be the better choice if you:

Depending on their plan's investment menu, employees might be better off maximizing the match from their employer and then funneling extra retirement dollars into a Roth IRA. That way they can take advantage of better investment options if the fund lineup is too limited in the employer's plan.

Are You Too Old for a Roth IRA? There is no maximum age limit to contribute to a Roth IRA, so you can add funds after creating the account if you meet the qualifications. Roth IRAs can provide significant tax benefits to young people.

Minimize tax upfront: draw from less-taxed assets first.

TFSA withdrawals are tax-free. Income from your RRSP/RRIF is fully taxable. Reserve this for as long as you can, but remember that you must start drawing from your RRIF after the end of the year in which you turn 71!.

It can be a surprisingly complicated choice, but many experts prefer the Roth 401(k) because you'll never pay taxes on qualified withdrawals. Contributions are made with pre-tax income, meaning you won't be taxed on that income in the current year.

Tax diversification: High-income earners often find themselves in higher tax brackets. A Roth 401(k) account gives you more flexibility in managing your tax liability during retirement. Having a Roth account also allows you to be strategic about the tax treatment of your investment choices.

Should You Split Contributions Between a Roth and Traditional Account? Splitting contributions between a Roth and traditional account can allow you to get some tax benefit today while hedging somewhat against higher tax rates in the future.

Maximizing your contributions to a Roth IRA can greatly benefit your retirement planning and provide peace of mind for the future. With the potential for tax-free withdrawals, the ability to pass on the account to heirs, and the flexibility to use it as a last-resort emergency fund, it is a smart financial decision.

One of the easiest ways to lower the amount of taxes you have to pay on 401(k) withdrawals is to convert to a Roth IRA or Roth 401(k). Withdrawals from Roth accounts are not taxed. Some methods allow you to save on taxes but also require you to take out more from your 401(k) than you actually need.

What is the best withdrawal strategy for retirement?

The "4% rule" is a popular example of the dollar-plus-inflation strategy. Here's how it works. You withdraw 4% of your portfolio in your first year of retirement. Then, in each subsequent year, the amount you withdraw increases with the rate of inflation.

In contrast to the more conservative 4% rule, the 7 percent rule suggests retirees can withdraw 7% of their total retirement corpus in the first year of retirement, with subsequent annual adjustments for inflation.

You have to wait longer for the tax-savings payoff with a Roth IRA versus a traditional IRA. You pay taxes on the money before it goes into the account, meaning no tax deduction.

If you're now in one of the higher tax brackets, your tax rate in retirement may have nowhere to go but down. In this case, you're probably better off postponing the tax hit by contributing to a traditional retirement account.

The Roth IRA five-year rule says you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to a Roth IRA account. This five-year rule applies to everyone who contributes to a Roth IRA, whether they're 59 ½ or 105 years old.

Traditionally, tax professionals suggest withdrawing first from taxable accounts, then tax-deferred accounts, and finally Roth accounts where withdrawals are tax free. The goal is to allow tax-deferred assets the opportunity to grow over more time.

One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.

The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.

IRAs and 401(k)s both have tax benefits for retirement savers. Get your 401(k) match, then max out your IRA. Dayana is a former NerdWallet authority on investing and retirement. She has written for The Associated Press, The Motley Fool, Woman's Day, Real Simple, Newsweek, USA Today and more.

"Saving in a Roth 401(k) could be a better way to go if the taxes on a Roth IRA conversion are prohibitive." Higher contribution limits: In 2023, you can stash away up to $22,500 in a Roth 401(k)—$30,000 if you're age 50 or older. Roth IRA contributions, by comparison, are capped at $6,500—$7,500 if you're 50 or older.

Why Roth is always better?

The Roth 401(k) holds the advantage because tax-free growth and withdrawals in retirement mean your savings won't be affected by future tax rates (since they've already been taxed). Both Roth and traditional 401(k) contribution limits are currently set at $23,000 ($30,500 if you're over the age of 50) for 2024.

It removes a certain amount of risk. In this case, if you split your retirement funds between a traditional 401(k) and a Roth 401(k), you would pay half the taxes now, at what should be the lower tax rate, and half when you retire, when rates could be either higher or lower.

"Unfortunately, the income limits on Roth IRAs make it difficult for many higher-income individuals to contribute directly to these accounts," said Hayden Adams, CPA, CFP^®, director of tax and wealth management at the Schwab Center for Financial Research.

There is no income limit for a Roth 401(k). The Roth IRA's after-tax contributions, so qualified withdrawals are tax-free.

A backdoor Roth IRA is a conversion that allows high earners to open a Roth IRA despite IRS-imposed income limits. Basically, you put money you've already paid taxes on in a traditional IRA, then convert your contributed money into a Roth IRA, and you're done.