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The Roth 401K and Meal Planning Made Easy | EP 289

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Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Disclosures.

What You’ll Get Out Of Today’s Show

  • For almost 12 months, we’ve all been trying to do the best that we can. As frequently discussed on the show, we try to do things slightly different, optimize in the ways that we can, and make the best of the situation.
  • Jonathan’s wife Dani has been coming up with all kinds of creative little activities for the kids. Even Jonathan was recruited for a rock painting project.
  • Brad has been listening to a new podcast, Ordinary Sherpa, created by Heidi, a member of Jonathan’s Talent Stacker podcast. The podcast is about creating little adventures in life with your family.
  • At the same time, in the mastermind group Brad takes part in, he was inspired by a discussion related to dads really showing up to be a part of their kids’ lives.
  • The podcast theme and mastermind group discussion converged for Brad when his daughter, Molly, asked him to go explore the creek with her. Rather than playing along for a minimally acceptable amount of time, Brad showed up like he really wanted to be there and they had hours of fun exploring together.
  • What if you started to show up for everything in your life with the attitude that you really wanted to be there?
  • It’s difficult to be focused on growth in all areas of your life at the same time. There are different seasons when you will be able to lean into one over another but it’s good to figure out a baseline you’re comfortable with and recognize when it’s time to rebalance.
  • Since Brad’s financial life is on autopilot, it’s not something he spends much time focusing on. However, sometimes things do backslide and he needs to return a little focus to it. Such as, he recently canceled two recurring charges for streaming services, not because their costs were going to have a significant impact, but because he was no longer getting value from them.
  • Relationships is an area Brad believes he could spend more time focusing on. If he were to ask himself, “Am I showing up as the best version of myself for my wife and kids every day?” his answer would be “no”.
  • Who should be leaning into and leveraging their Roth 401K? Sean Mullaney, The FI Tax Guy, says the Roth 401K works similar to a 401K except the funds going in are taxable today and come out later tax and penalty-free.
  • Those currently in a high tax bracket looking to retire early are probably better off contributing to a traditional 401K. But someone just out of college in a 10% federal tax bracket may benefit from paying 10% in taxes today rather than 20-30% later on. Even someone who may have substantial taxable income in retirement may benefit from a Roth 401K.
  • A Roth 401K can also be a hedge against future tax rates for anyone who prefers to lock in their tax rate today.
  • If your 401K plan offers it, you don’t have to do all Roth 401K or traditional 401K. You can split the difference.
  • For example, a 60-year-old new retiree with a large 401K will be taxed on every dollar withdrawn. We don’t know what future tax rates will be.
  • Roth 401K withdrawals don’t work the same way as traditional 401K withdrawals. You can structure it in a way that you can recover tax-free contributions, From a Roth 401K, you may need to rollover into a Roth IRA.
  • For the early retirees who don’t plan to retire at a super early age or anyone with artificially low income for a few years, the Roth 401K is a strategy to consider.
  • If you aren’t 59 1/2 yet, Roth 401K withdrawals are subject to the cream in the coffee rule where 2/3 of the withdrawal is tax and penalty-free but 1/3 is subject to ordinary income tax and a penalty. This is different than a Roth IRA where contributions may be withdrawn at any age tax and penalty-free.
  • When you roll over a Roth 401K to a Roth IRA, the Roth 401K contributions go in as Roth IRA contributions, and earnings become Roth IRA earnings. You could then take out the full amount of contributions tax and penalty-free before touching the earnings.
  • If you aren’t 59 1/2 and need to access your Roth 401 contributions, it makes sense to roll them over to a Roth IRA first.
  • If you have employer stock in your 401K, there may be net unrealized appreciation. You do not want to roll it over from a traditional 401K to a traditional IRA without considering a tax planning strategy. This requires assistance from a tax professional.
  • If you want to do a backdoor Roth IRA, rolling over 401K to a traditional IRA isn’t a good idea.
  • The fees associated with 401K plans have gotten better over the last 10-15 years. The investment choices are better with lower fees. It may not make sense to do a rollover.
  • As a general rule, retirement accounts have required minimum distributions (RMDs) once you turn age 72. The exception is the Roth IRA. While RMDs from a Roth 401K are not taxable, you want to keep that money growing tax-free as long as possible for you and your heirs. If you’re 72, Sean would recommend you roll your Roth 401K to a Roth IRA for that reason.
  • Generally, you need a separation of service to do rollovers from a Roth 401K to a Roth IRA. Look for your plan’s Summary Plan Description (SPD) which details withdrawals.
  • 401K plans are subject to the ERISA law, where creditors cannot access the funds, except for ex-spouses and the IRS. IRA creditor protection varies from state to state. Something to consider before a rollover.
  • Dani and the ChooseFI Foundation are using meal planning as a financial literacy tool. Always looking for ways to get children interested and thinking bout decision-making and personal finance, they have put together Meal Planning Made Easy.
  • The meal planning project helps kids put financial literacy concepts into a real-world contest. The goal is to make financial literacy concepts more than just habits but to have kids take ownership and have fun doing it.
  • In the 3rd through 5th-grade video series, Dani talks them through meal planning. They are tasked with going into a grocery store, either in-person or virtually, and planning all three meals for one day.
  • The meal planning project is adaptable to fit every socioeconomic setting.
  • The tasks grow as children develop. High school students may plan meals for an entire week, searching the pantry first, and finding recipes to help on the budgeting side of things, just like parents have to do.
  • Sign up for Meal Planning Made Easy at Choosefi.com/mealplan.

Resources Mentioned In Today’s Conversation

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Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Disclosures.
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