21 Nov Should I ditch 401(k) for Roth IRA?

Q. I know the tax plan is just getting worked out, but I’m thinking they may decide to get rid of Roth IRAs – and I love mine! Does it make sense to cut back my 401(k) contributions so I can do a Roth for this year and hopefully for 2018? Just to make sure I can get it in before they make ugly changes?
— Not liking change

A. You’re right that we don’t yet know what the final tax plan will look like — or if it will even pass — given all the controversy we keep hearing about.

Before you make a decision to slow 401(k) contributions, you have to consider several factors, said Chip Wieczorek, a certified financial planner and investment advisor with Tradition Capital Management in Summit.

Those factors include your current account values and types, how much you’re contributing annually, employer matching and future income levels versus your current income.

“If you have a significant amount of assets in tax-deferred accounts such as traditional IRA or 401(k) then it may make sense to add to a Roth IRA,” Wieczorek said. “This will give you a tax-free bucket to pull from, if needed, in retirement.”

But, he said, if you would be losing out on an employer match to make Roth contributions, that would not make a lot of sense. Your match really is “free money,” Wieczorek said.

Another consideration, he said, if you think your retirement income is going to be the same or considerably higher than what you are currently earning, then additional contributions to a Roth IRA may make sense.

“In most cases people do not make more than they are currently making so you are paying taxes at a higher rate now to make your contribution and would be withdrawing funds at a lower rate in the future,” he said. “My advice would be to weigh all of the factors and see what makes sense for you.”

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The post was originally published in November 2017.