A pre-retiree with about $3.5 million across pre-tax, taxable, Roth, and cash accounts plans to retire at 62 and wants $100,000 for home projects before retiring. The instinct is to stop Roth 401(k) contributions, use paycheck savings to build cash, and fund renovations without touching a $300,000 cash reserve. A different approach is recommended: continue maximizing Roth 401(k) contributions and use available cash for the projects. Cash in a savings account has no special tax advantage, while skipped Roth 401(k) contribution room cannot be recovered later. Keeping Roth contributions preserves the ability to withdraw from Roth if future cash needs arise, creating greater flexibility.
"“If you use your $100,000 in after-tax cash and you continue to save in your Roth 401(k), and say 3 years from now you realize, wow, we don't have as much cash as we needed in our cash reserves, you can always take the money from your Roth.”"
"“Two pots of money can each pay for a kitchen remodel, but they are not interchangeable on the back end. Cash sitting in a savings account has no special tax status. Roth 401(k) contribution room, once skipped, is gone forever. You cannot go back next year and make this year's contribution.”"
"“Whereas if you stop saving in your 401(k) in order to preserve your cash, you lose that option on the money that could have been growing tax-free forever.”"
Read at 24/7 Wall St.
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