I’m on track for a multi-million 401(k) – is there a ‘too big’ balance that forces me into higher taxes later?

It’s an unfortunate thing that many people enter retirement with little to no money in savings. But in this Reddit post, we have a strong saver who’s on track to end up with millions of dollars in their 401(k) by the time their career comes to an end.

Having a multi-million-dollar 401(k) is clearly a good thing. The problem, though, is that it might push you into a higher tax bracket come retirement, which is what the poster is worried about.

That’s certainly a valid concern. But thankfully, there’s a good workaround.

You may want to move some savings into a Roth

It’s true that with a traditional 401(k), you’re going to pay taxes on the money you withdraw in retirement. Not only that, but eventually, you’re going to be forced to withdraw your money year after year in the form of required minimum distributions (RMDs). And once those RMDs take effect, taxes will be unavoidable.

Making matters worse is that while we know what tax rates look like today, we don’t know what they’ll look like in the future. The concern is that if they increase, you may end up burdened with taxes during your senior years. For this reason, you may want to consider a Roth conversion ahead of retirement.

If your 401(k) has a Roth savings component, you may be able to do an in-plan conversion. Otherwise, you could move your savings into a traditional IRA and then convert it to a Roth.

A Roth conversion could trigger a pretty large tax bill for you, though. So it’s best to consult a tax or financial professional for guidance on how to go about it. And you may want to spread out your conversion over several years to avoid too large a near-term tax hit.

But all told, having at least some of your money in a Roth account for retirement could work to your advantage. And the sooner you move funds into a Roth, the more you can benefit from tax-free gains in that account.

Why it pays to have a Roth

When people talk about Roth accounts, they tend to highlight benefits such as tax-free gains and withdrawals. But there’s more to the story than that.

With a Roth IRA or 401(k), you also won’t have to take RMDs. This gives you the utmost flexibility with your money.

Furthermore, if you’re able to leave your savings alone, or take withdrawals without having them count as taxable income, it could benefit you in other ways.

Medicare enrollees who are high earners, for example, face surcharges on their Part B and Part D premiums. But since Roth withdrawals don’t count as income, you can potentially save money on Medicare costs by keeping funds in a Roth.

So if you’re worried that having millions of dollars in your 401(k) will leave you in a tough spot as far as taxes in retirement go, talk to an advisor now about doing a Roth conversion. Even if you only move a portion of your nest egg into a Roth, it could still offer a world of upside by the time retirement rolls around.

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