I’m 45 with $7 million liquid – should I prioritize more Roth contributions in my 401(k), or just stuff it with pre-tax?

With a great deal of capital saved up at the relatively young age of 45, it’s more than worthwhile to strategize contributions to allow for sufficient liquidity while steering clear of potential tax pitfalls that one may fall into at some point down the road.

In this piece, we’ll look at a specific case involving a Reddit user with $7 million in liquid assets who’s wondering if they should go for a Roth 401(k) or just stick with the traditional 401(k) they’ve been contributing to throughout most of their career. Indeed, the 401(k) and Roth 401(k) can be valuable tools when used optimally. And given an individual’s unique personal circumstances, either one could prove the right tool for the job.

In any case, it’s worth understanding when to use both accounts, the pros, cons, and everything in between, before committing to a move. Bringing a financial advisor to your corner also can’t hurt, especially one who specializes in tax planning for high net worth individuals (HNWI) and early retirement.

When would a traditional 401(k) make more sense to contribute to?

A traditional 401(k) can be a better account to contribute to for those in higher tax brackets who expect to be in a lower tax bracket at some point in the near future. Indeed, for prospective early retirees who may exit the workforce in their 40s or 50s, sticking by a 401(k) may be the better way to reduce the tax bill. That said, it’s not just employment income that should come into consideration.

For early retirees who expect their passive income sources (think rental and investment income) to keep their income elevated even after retiring, a 401(k) may make less sense, especially if the 401(k) nest egg is already quite sizeable. Though the Reddit user’s income situation isn’t all too clear, I’m just going to go by their incredibly high net worth and the fact that they’ve already been contributing considerable sums to their traditional 401(k) account.

Given withdrawals from the hefty 401(k) nest egg could quickly propel one into a higher tax bracket in retirement, I’d suggest diversifying into a Roth 401(k). Sure, one won’t be able to save on taxes in any given year. But, at the very least, one won’t be hit with tax surprises in a retirement that could be flush with retirement income. For example, if our Reddit user were to shift gears from a growth (and low dividend yield) portfolio to one that’s more focused on dividends and distributions (think yields in the 3-5% range), deferring taxes into the future may cause our Reddit user to be on the hook for more.

For those with a high net worth and the ambition to live off dividends and interest without having to touch the invested principal, opting for a Roth 401(k) may be a better call, at least in my humble opinion. Sometimes, it pays off to tear the band-aid off by paying the taxes sooner rather than deferring it to a later date.

Prioritizing a Roth 401(k) is a good idea for this wealthy Reddit user.

In my view, this Reddit user already has enough in the way of deferred taxes that they’ll be on the hook for in retirement. For now, moving contributions to the Roth 401(k) makes sense for liquidity’s sake (tax-free withdrawals) and the likelihood the Reddit user will have a high income in retirement (just think of how many dividends will be flowing in once the portfolio has a chance to swell to eight figures).

Of course, someone in a similar situation should contact a financial advisor before choosing which account is best for them. There’s a time and a place for a traditional 401(k), and in some instances (high tax bracket today, lower one expected in the future), it can beat the Roth option.

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