Debunking Common Myths with your 401K

There is no “Magic Bullet” with your 401(k) and Roth Conversion strategies to optimize your retirement. Spend a few minutes with us as we debunk common myths and misconceptions with both traditional 401k plans and Roth accounts, as well as Roth conversions. 

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• Myth Number One: My 401(k) is tax-free.

  • The reality is that traditional 401(k) contributions are tax-deferred, meaning you don't pay taxes on the money until you withdraw it in retirement. You will pay income tax on withdrawals in retirement. Roth 401(k) contributions are made with after-tax money, so you’re not taxed on qualified withdrawals in retirement because you already paid taxes when you earned the money. 
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  Myth Number Two: The money in my 401(k) is untouchable until retirement.

  • The reality is that while early withdrawals generally incur penalties and taxes, exceptions exist to cover certain circumstances, such as medical costs, a first-time home purchase, or long-term disability. If your employer’s plan allows it, you can also typically take a loan from your 401(k), but these loans have specific rules, limits and risks depending on how the plan is structured.
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  Myth Number Three: Roth conversions are only for young people.

  • The reality is that while converting earlier allows more time for tax-free growth, Roth conversions can be beneficial at any age, especially if you anticipate being in a higher tax bracket in retirement than you are now, or if tax rates are expected to rise. "Gap years" between retirement and required minimum distributions (RMDs) and/or Social Security can be ideal for conversions when income is lower.
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  Myth Number Four: Roth conversions are always a good idea.

  • The reality is that while Roth conversions are a powerful tool, they aren't for everyone. And even if a conversion is right for you, the timing is important. Factors like your current and future tax brackets, access to cash to pay the tax bill, time horizon, life expectancy, and estate planning goals should all be considered. For example, if you plan to leave your IRA to charity, converting to a Roth might not be tax-efficient since charities don't pay tax on inherited IRA funds.
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