{"id":589,"date":"2020-12-30T12:00:00","date_gmt":"2020-12-30T12:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/why-i-switched-my-401k-from-roth-to-traditional-for-early-retirement\/"},"modified":"2025-08-29T20:57:41","modified_gmt":"2025-08-29T20:57:41","slug":"why-i-switched-my-401k-from-roth-to-traditional-for-early-retirement","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/why-i-switched-my-401k-from-roth-to-traditional-for-early-retirement\/","title":{"rendered":"Why I Switched My 401(k) from Roth to Traditional for Early Retirement"},"content":{"rendered":"

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When I say my finger hovered over the \u201cConfirm changes\u201d button and I broke a cold sweat, I\u2019m not exaggerating \u2013 this decision wasn\u2019t easy for me, as we all know I love Roth (and for good reason!)<\/a>.<\/p>\n

When I first set up my 401(k), I chose Roth (mostly because my dad told me to) \u2013 but also because it made sense to me. My income wasn\u2019t that high, and early retirement wasn\u2019t yet a twinkle in my eye. I figured the chances that my \u201cincome\u201d (and by extension, tax bracket) would be lower in retirement were slim. <\/p>\n

Fast-forward three years, and both my income and retirement goals have changed dramatically.<\/p>\n

If you\u2019re unfamiliar with the basics of Roth and Traditional retirement accounts, I recommend checking out <\/em>this article<\/em><\/a> first. It\u2019ll give you a solid foundation for the riveting narrative below.<\/em><\/p>\n

It\u2019s important to constantly revisit the plan<\/h4>\n

This is a hotly contested conversation in the early retirement community, mostly because a lot of the arguments are based on assumptions we\u2019re all making about the future of tax law. <\/p>\n

Ever since I started actively working toward financial independence, I\u2019ve been finding as many new sources of income as possible and shoveling<\/em> money into investment accounts. My current annual spend for 2020 so far (still have December to go) has been $28,752.73. <\/p>\n

I don\u2019t know off the top of my head what my total take-home pay<\/strong> was for 2020, but I know it was probably closer to $70,000 after all sources of income (permanent full-time roles, temporary work, freelance, etc.) were taken into account. [Sidebar: This is why I encourage side hustling to the best of your ability \u2013 my take-home pay was increased by around 42% by all my other work outside of traditional 9-5 employment.]<\/em><\/p>\n

Unfortunately, we aren\u2019t just taxed on our total take-home pay \u2013 we\u2019re taxed on the original, gross paycheck <\/strong>amount. <\/p>\n

This means I was paying taxes on my Roth 401(k) contributions (because remember, Roth means you pay the taxes before<\/em> you put the money in, so you can take it out tax-free) based on a total income that was probably (pre-tax) closer to $90,000. <\/p>\n

Even with the standard deduction of $12,550 (which makes my taxable income about $77,450), the $30,000 that I need to live comfortably is a far cry from my current income.<\/p>\n

After all, early retirement goals are predicated on the idea that you spend as little as comfortably possible and try to maximize your earnings so you can save rapidly. <\/p>\n

How the tax situation changes when you plan to retire early<\/h4>\n

If you think the government lets you get off tax-free in retirement when you\u2019re no longer working, think again. Uncle Sam is like the roommate who won\u2019t stop eating your Honey Nut Cheerios after you\u2019ve asked him to Please stop, these are $4.99\/box<\/em>.<\/p>\n

In a \u201cTraditional 401(k)\u201d scenario, the government taxes your \u201cincome\u201d in retirement, even though it\u2019s coming from your own investment account. (If it comes from the Roth account, you wouldn\u2019t pay taxes on it \u2013 because you paid the taxes when you put the money in!)<\/p>\n

This means the decision about whether to pay the taxes before<\/em> you put the money into the account or when you take it out in retirement depends on whether you think you\u2019ll be in a lower or higher tax bracket at the time of retirement.<\/p>\n

For most young people starting out (with starting salaries to show for it), the conventional wisdom is that it\u2019s better to pay the taxes in your current tax bracket (because you\u2019ll probably be cashing out more in retirement, and we know tax brackets will change and likely go up based on the way our government has spent money this year). <\/p>\n

HOWEVER<\/em>:<\/p>\n

If you plan to retire early (late 30s, early 40s), you\u2019re most likely planning to stick to a rather conservative \u201cannual income.\u201d Remember my annual spend above? About $28,000, as of November? Let\u2019s say I decide to ball out a little more and use $36,000 per year in early retirement, or $3,000\/mo., instead of my current $2,600\/mo. (See?! Moving up in the world!)<\/p>\n

$36,000 is still a whole hell of a lot less than the $77,450 (a rough estimate of $90,000, minus the $12,550 standard deduction for singletons like myself) or so taxable income I\u2019ve got right now.<\/p>\n

So in my Roth 401(k), I was paying taxes in the 22% tax bracket on my contributions<\/a>, and edging closer to the 24% bracket.<\/p>\n

My ballsy $36,000 withdrawal rate in early retirement puts most of my taxable income in the 12% tax bracket, and would be taxed as such (when you consider what a $12,550 deduction would do to a $36,000 income, you realize it\u2019s even dramatically lower: $23,450 of taxable income).<\/p>\n

It\u2019s either pay 22% on my contributions now, or between 10% and 12% when I take them out. <\/p>\n

The big fat caveat? Tax rates will probably change<\/h4>\n

This is where the uncertainty comes in, and the reason for my cold sweats. It was an emotional decision, because nobody knows what the future will hold for our federal income taxes (and how tax law might change over the next 15 or so years before I retire).<\/p>\n

I essentially had to make the following call: <\/p>\n

I feel reasonably confident that, even if tax law changes<\/em>, it\u2019ll be cheaper for me to pay taxes on the money I actually<\/em> withdraw in retirement than the 22-24% I\u2019d be paying right now in the income bracket from which my Roth contributions would be coming, which I\u2019m constantly trying to maximize and will likely increase over the next few years. <\/p>\n

Plus, a big benefit of the Traditional 401(k) for early retirees is that you can complete a Roth IRA conversion ladder, which enables you to use your 401(k) penalty-free (this is a fancy logistics waltz that I break down here<\/a> \u2013 don\u2019t worry too much about the ins and outs of this just yet; all you need to know is that the Traditional 401(k) enables you to skirt some penalties). <\/p>\n

Another consideration for singles<\/h4>\n

I\u2019m legally single (and pay taxes accordingly) right now. Chances are, by the time I\u2019m 40, I\u2019ll be married \u2013 and the \u201cmarried filing jointly\u201d tax brackets are even more forgiving than the tax brackets that unmarried people are in, which makes me feel like the Traditional route is even more attractive. Can\u2019t wait to break it to Thomas that we have to get hitched in order for my early retirement plot to pan out smoothly!<\/p>\n

One last thing: Embrace the confusion and math<\/h4>\n

Trying to educate myself on the logistics of early retirement (and then challenging myself to share it with you in a way that makes sense) has been one of the most humbling things I\u2019ve encountered yet writing Money with Katie. Just when I think I have it all down, I find another nugget of information that throws my strategy into a baby tailspin. <\/p>\n

If you\u2019re feeling confused, remember: You\u2019re not alone. Luckily, the O.G.s of the early retirement game have already reached retirement and spend their ample free time combing through 1,000-page PDFs of tax law on sites that end in .gov, so we\u2019ve got some strong advocates on our side.<\/p>\n

I realize all the back and forth, assumptions, and options can make analysis paralysis overwhelming. I encourage you to just keep increasing the contribution. Keep investing. Don\u2019t worry about whether or not it\u2019s perfect, or if you\u2019re going to wish you\u2019d done it differently someday. The important thing is that you do SOMETHING \u2013 and through that something, I guarantee you\u2019ll learn.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

When I say my finger hovered over the \u201cConfirm changes\u201d button and I broke a cold sweat, I\u2019m not exaggerating \u2013 this decision wasn\u2019t easy for me, as we all know I love Roth (and for good reason!). When I first set up my 401(k), I chose Roth (mostly because my dad told me to) \u2013 […]<\/p>\n","protected":false},"author":178814,"featured_media":2432,"comment_status":"closed","ping_status":"open","sticky":false,"template":"si-template-single-post-401-k-s-and-iras.php","format":"standard","meta":{"footnotes":""},"categories":[37,35],"tags":[47],"class_list":["post-589","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-independence","category-investing-and-taxes","tag-401ks-and-iras"],"yoast_head":"\nWhy I Switched My 401(k) from Roth to Traditional for Early Retirement - Money with Katie<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/moneywithkatie.com\/why-i-switched-my-401k-from-roth-to-traditional-for-early-retirement\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why I Switched My 401(k) from Roth to Traditional for Early Retirement - Money with Katie\" \/>\n<meta property=\"og:description\" content=\"When I say my finger hovered over the \u201cConfirm changes\u201d button and I broke a cold sweat, I\u2019m not exaggerating \u2013 this decision wasn\u2019t easy for me, as we all know I love Roth (and for good reason!). 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