Retirement Accounts

Make the most of your 401(k) and IRA savings accounts

Retirement planning today looks a lot different than it did in the 1980s and 1990s—when lots of retirees still had lucrative employer-funded pension plans.

In fact, most people today must save for retirement completely on their own. As a result, we have seen an exponential rise in the popularity of other retirement savings accounts—such as employer-sponsored 401(k) plans and individual retirement accounts (IRAs). So, let us look at some of the factors involved in investing in these popular vehicles.

Say “yes” to free money if your employer offers it

There are two types of employer-sponsored 401(k)s: traditional and Roth.

With both types, you contribute money into the account. And if you’re lucky, your employer will “match” your contributions in some way. We consider these employer contributions “free money”…so if your employer offers it, you should take advantage of it.

With a traditional 401(k) your investments grow tax deferred as long as you don’t remove them from the account. Then you pay taxes on contributions and earnings at the end, when you start withdrawing the money. However, you do pay taxes with a traditional 401(k) when you start to withdraw funds. The IRS taxes these withdrawals as “ordinary income” after age 59.5.

So, investing in a traditional 401(k) makes sense for you, especially if you expect to be in a lower tax bracket when you retire than your current bracket. If you expect to be in the same (or higher) tax bracket when you retire, it may make more sense to opt for a Roth 401(k). (More on those in a moment.) You should also know that there are limits to how much you can contribute each year to a traditional 401(k). For 2024, the annual contribution limit for 401(k)s is $23,000. But people 50 years or older can make “catch-up” contributions of up to $7,500 per year on top of that.

The second type of 401(k) is called a Roth 401(k). With this kind of retirement savings account, you pay ordinary income tax on the contribution before you put the money into the account. Then, when you start withdrawing the money, you pay ZERO taxes on it.

Therefore, whenever you start drawing on your Roth 401(k), you can consider it “tax-free” income. In addition, this option may make more sense for you if you expect to remain in the same tax bracket as when you were younger.

The benefits of contributing to an IRA

For most high-net-worth investors, it may make sense to consider investing in an IRA, too.

For one, with an IRA, you have the entire universe of investments to pick from…instead of the pre-selected group chosen by a 401(k) fund manager. So, your IRA can include individual stocks, bonds and mutual funds from all over the globe. Plus, generally speaking, IRAs allow for more “active management” than a 401(k) during your investing timeline.

Overall, by going with an IRA, it can help you build a smarter, more personalized investment plan—based on your own values, goals and stage in life.

Like 401(k)s, there are two types of IRAs: traditional and Roth. And they follow the same tax pattern as 401(k)s…

For example, traditional IRAs are considered “pre-tax,” meaning they reduce your taxable income right now. But the IRS taxes your withdrawals as regular income later.

On the other hand, with a Roth IRA, you make contributions after paying taxes on them now as income. In other words, your taxable income is not reduced by the amount of your contributions. But you get a tremendous tax advantage down the road, since your earnings are “tax-free” starting at age 59.5.

As a bonus, you can keep a Roth IRA forever—without any of the Required Minimum Distributions (RMDs). The IRS does not even require the account holder to start withdrawing from a Roth IRA at any time! Plus, should the account holder pass away, a spouse or child can inherit it. (The IRS does require anyone other than the spouse who is listed as a beneficiary to withdraw a minimum amount each year.)

We should also note that you can roll a Roth 401(k) into a Roth IRA, beginning at age 72, to bypass the RMD requirement. In addition, your 401(k) turns into an IRA when you retire or leave one job for another.

One downside to having an IRA is that they have lower contribution limits than 401(k)s. (For traditional IRAs and Roth IRAs, the maximum yearly contribution in 2024 is $7,000. Or, if you’re older than age 50, the yearly max is $8,000.)*

Additionally, some people worry about having to manage their own investments, so they stick with an employer-sponsored 401(k) plan.

When do you start withdrawing from a 401(k) or IRA?

As an individual with significant savings, you may not need to start withdrawing from your 401(k) or IRA until much later in your retirement. And a Vestbridge advisor can help you decide when the time is right based on your personal goals and cash flow needs.

The longer you can wait to draw upon your 401(k) or IRA…the more time it can grow in the market.

And no matter when you decide to start withdrawing from it, it may be wise to limit your withdrawals to no more than 5 percent each year. And by working with a trusted financial advisor, like those at Vestbridge, you do not have to go it alone. We can help you determine an effective withdraw strategy to try to maximize your earnings and minimize your tax burden.

We encourage you to call Vestbridge today at 833-592-5252 to schedule a short strategy session with one of our experienced advisors.

*As of 11/1/2023. For a current list of IRS limits and rules on contribution, please visit https:llwu1w.irs.gov/2·etirement-pl,mslpl,m-pm·ticip1111t­ e111ployee/2-tth-ement-topics-40 Ik-,md-proflt-sh,1ring-p!an-contributio11-limits

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