Buzz Update Maximizing your 401(k) and what to do next
A 401(k) is a powerful retirement savings tool. If you have access to such a program through work, it makes sense to take advantage of any employer match. If you have money left over, there are other ways to save for retirement.
Retirement planning ensures that individuals will live out their golden years in comfort, so understanding the ins and outs of this practice is extremely important. This article describes some of the other options available to you to get the most out of your retirement savings strategy and to help you reduce your tax liability.
Key points to remember
Try to maximize your 401(k) each year and take advantage of any match offers offered by your employer.
Contributions are tax deductible in the year you make them, which can leave you with more money to save or invest.
Once you’ve maxed out your 401(k), consider putting your remaining money into an IRA, HSA, annuity, or taxable account.
401(k) Employer Matching
Many employers offer their employees 401(k) plans. And they can even match contributions to sweeten the pot. This means that for every dollar you contribute to your employer-sponsored plan, the company matches a certain percentage. This increases the amount of money saved in your account. Some match up to 50% of your contribution, while others match dollar for dollar up to a specific limit.
Employers generally match Roth 401(k) plans at the same rate as traditional 401(k) plans. However, some employers do not offer Roth 401(k) plans. A notable difference between traditional and Roth 401(k) contributions is that the employer contribution is placed in a traditional 401(k) plan, taxable upon withdrawal. The employee’s share of the contribution is placed in a Roth 401(k).
Some financial planners may encourage investors to maximize their 401(k) savings. On average, individuals earn about $0.50 per dollar, for a maximum of 6% of their salary. It’s the equivalent of an employer writing a check for $1,800 to a worker earning $60,000 every year. Additionally, the $1,800 is essentially free money and can grow over time by investing in the financial markets.
You don’t have to be an investment pro
Although 401(k) offerings can be difficult for non-professionals to understand, most programs offer low-cost index funds, which are ideal for new investors. As individuals approach retirement age, it is prudent to alter their asset allocation by moving some of their retirement assets from stocks or stocks to bond funds. Many adhere to the following age-based allocation model:
At age 30, invest 30% of retirement money in bond funds.
At age 45, invest 45% of retirement money in bond funds.
At age 60, invest 60% of retirement money in bond funds.
Those who object to the age-based approach may instead choose to invest in target date funds, which offer investment diversification without choosing each individual investment.
“Target date funds also tend to be more conservative closer to the selected date. The combination of these advantages can make them a one-stop-shop for 401(k) participants,” says David S. HunterCFP and President of Horizons Wealth Management.
Investing after maximizing your 401(k)
Those who contribute the maximum dollars to their 401(k) plans can increase their retirement savings with a number of different investment vehicles. We have listed a few below.
Individual Retirement Accounts (IRA)
You can contribute up to $6,000 to an Individual Retirement Account (IRA) in 2022 and $6,500 in 2023, provided your earned income is at least equal. If you’re 50 or older, you can add an additional $1,000 in both years, although some IRA options have certain income restrictions.
If you make too much money, you can’t contribute to a Roth IRA. If you earn more than a certain amount and are covered by a company plan, you cannot deduct contributions to a traditional IRA.
Traditional IRA Income Limits
The deduction of a traditional IRA contribution is subject to income limits if you are covered by a workplace retirement plan.
For single taxpayers, the phase-out of the deduction begins at a modified adjusted gross income (MAGI) of $68,000 and disappears completely if your MAGI is $78,000 or more, for 2022. This range increases from $73,000 to $83,000 in 2023. For those who are married and filing jointly, depending on which spouse contributing to the IRA has a workplace retirement plan, the phase-out starts at $109,000 and disappears at $129,000 $ ($116,000 and $136,000 in 2023).
If you are not eligible to deduct all or part of your traditional IRA contribution, you can still contribute up to the contribution limit. Your investment will continue to grow tax-deferred.
Roth IRA Income Limits
Contributing to a Roth IRA also involves income limitations and phasing out. But unlike traditional IRAs, the limit determines your eligibility to contribute.
For single taxpayers in 2022, the income phase-out begins at a MAGI of $129,000 and disappears for incomes above $144,000 ($138,000 to $153,000 in 2023). For married taxpayers filing jointly, the phase-out begins at a MAGI of $204,000 and ends completely above a MAGI of $214,000 ($218,000 and $228,000 in 2023).
Health savings accounts
Health Savings Accounts (HSAs) are available to those with High Deductible Health Insurance Plans (HDHPs), whether they access them through their employer or purchase them independently. Contributions are made on a pre-tax basis.
If used for eligible medical expenses, withdrawals from the account are tax-free. And since users don’t have to withdraw the money at the end of each year, HSAs can work like another retirement plan, making them ideal vehicles for saving on healthcare expenses during retirement.
For 2022, the Internal Revenue Service (IRS) defines a high-deductible health plan as a plan with a minimum annual deductible of $1,400 for personal coverage ($1,500 in 2023) or $2,800 for personal coverage. family ($3,000 in 2023).
Also, under a high-deductible plan, annual out-of-pocket expenses (such as deductibles, co-pays, but not premiums) do not exceed $7,050 for personal coverage or $14,100 for coverage for 2022, but for 2023 do not exceed $7,500 for personal coverage or $15,000 for family coverage.
The contribution limits for 2022 are $3,650 for an individual and $7,300 for a family; however, the 2023the contribution limit is $3,850 for individuals and $7,750 for families. The catch-up contribution for those who are 55 for 2022 and 2023 is an additional $1,000.
Taxable investments are a viable way to accumulate retirement savings. While dividends and capital gains are subject to tax, long-term capital gains on investments held for at least one year are taxed at preferential rates.
If you’ve maxed out your 401(k), be aware of where assets are located to ensure investments are held in taxable versus tax-deferred accounts.
Annuities often get a bad rap, sometimes with good reason. Yet, a variable annuity can provide another vehicle that allows after-tax contributions to grow on a tax-deferred basis.
Variable annuities generally have sub-accounts similar to mutual funds. Ultimately, the contract holder can cash in on the contract or redeem it partially or fully, where the winnings are taxed as ordinary income.
However, be aware that many contracts have onerous fees and substantial redemption fees. If you are considering a variable annuity, do a thorough due diligence and seek the help of a financial advisor beforehand.
How much should you save for your retirement?
The amount an individual will need to save for retirement will be different for everyone depending on their current lifestyle, desired retirement lifestyle, expenses, health and dependents. One suggestion is to take the income you need in retirement and divide it by 4%. So, for example, if you need $70,000 in annual income, you would need a retirement nest egg of 70,000/0.04 = $1.75 million.
What are the 4 common retirement plans?
Common retirement plans include 401(k), traditional and Roth IRAs, SEP IRAs, SIMPLE IRAs, and Solo 401(k).
What is the best retirement plan?
One of the best retirement plans is a 401(k) retirement plan. Not everyone has access to a 401(k) because it must come from an employer and not all employers provide it; however, 401(k)s have high contribution limits, are tax efficient, and many employers match the contributions made by the employee.
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When it comes to your future, investing money is always a good thing to do. Diligent savers who maximize their 401(k) contributions have other retirement savings options available to them.
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