Jennifer’s Story

Jennifer has been a diligent saver for years. She’s regularly maxed out her contributions to her employer-sponsored Traditional 401(k). But a recent update in her company’s retirement options has left her feeling unsure of how to proceed. Jennifer has been notified of the following:

After-tax contributions: This feature allows 401(k) plan participants to invest additional funds into their Traditional 401(k) account beyond the $20,500 annual IRS 402g contribution limit. Additional funds can be added up to the annual IRS 415 contribution limit of $61,000.

Roth in-plan conversions: This feature allows participants to convert all or part of their pre-tax and after-tax Traditional 401(k) contributions to their Roth after-tax account.

With this new information, Jennifer reaches out to Crafted Finance for help. Her questions include the following: 

  • Does it still make sense to max out pre-tax contributions, or should the initial $20,500 be put towards Roth contributions?
  • If the initial $20,500 are put towards pre-tax contributions, is there a benefit to taking advantage of the new option to convert to a Roth in-plan?
  • Is it a good idea to put more after-tax dollars into the $61,000 limit plan? There’s no immediate need for cash, but eventually she intends to buy a house.

Crafted Finance’s Solution

Jennifer is already approaching her long-term retirement goals at full-speed. But with these new retirement options, she’ll be able to take her savings into overdrive. 

It’s a fantastic “problem” to have! So we start off by telling Jennifer she’s in a position to make a decision based on her own personal preference.

If she continues as is ($20,500 in pre-tax contributions to her traditional 401(K)), she’ll still hit her long-term financial goals. But by making post-tax contributions, and converting to a Roth in-plan retirement account, she’ll be able to knock them out of the park.

Below, in green, you can see the lifetime difference these Roth additions will make: pic-for-mega-roth.png

By 2042, Jennifer will have $733k more in savings. But the truly staggering difference happens over the decades that follow. By shifting to more Roth-based assets, Jennifer has the ability to create an additional $16.5M in lifetime value. 

 

Still, there are tradeoffs to making after-tax (Roth) contributions:

  • She’ll have to adjust to her take-home pay decreasing,
  • She’ll need to sell shares of stock in her brokerage account, when cash is needed,
  • And she’ll have less cash to put into other accounts (ex: her brokerage) when investing.

Conclusion

Jennifer is excited about her company’s new opportunities for retirement. And she decides to take advantage of some of the long-term benefits the Roth additions offer. With her ideal retirement more than on track, she only goes part way on the full $61,000 annual limit. This way, she’s able to keep more take home pay, and free up cash for other, more-liquid investments.

 

By working with Crafted Finance, Jennifer feels she has a trusted partner for making the necessary changes to her budget. And she knows there’s help in moving cash around when it comes time to buy a house. 

 

If you relate to Jennifer’s story, or are facing your own unique challenges preparing for retirement, don’t hesitate to reach out. You can contact us at (650) 336-0598, or schedule a complimentary consultation to discuss your situation. 

 

*Note: Specific client details have been changed for privacy reasons. 

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