Retirement accounts play a vital role in securing your financial future, yet many don’t fully understand the intricacies and lesser-known aspects of these accounts. That lack of understanding can be costly. Being more informed empowers you to make more informed decisions, maximize your savings, and navigate the complexities of retirement planning.
Converting to Your Roth Account
One of the most powerful strategies to optimize retirement savings is converting to Roth accounts. Unlike traditional retirement accounts, Roth accounts offer tax-free withdrawals in retirement. By converting a traditional retirement account, such as a traditional IRA or 401(k), to a Roth account, you can take advantage of future tax-free growth and potentially reduce your tax burden in retirement. You will pay taxes on the amount transferred, just as with any IRA distribution, but it will then grow tax-free in your Roth account for the rest of your and your spouse's life, plus ten additional years of tax-free growth in your children’s hands.
This strategy is especially beneficial when you are retired but less than the RMD age of 73.
Maximizing Charitable Contributions
After age 70 ½, you can directly contribute to charitable organizations from your IRA. Direct donations bypass the tax liability you would create by withdrawing it, paying taxes on it, and then donating the remainder. You can choose if you leave the tax savings in your account or use the savings to provide the organization with a more significant contribution.
Understanding Required Minimum Distributions (RMDs)
There's a common misconception that once you add money to a retirement account, it can remain there indefinitely. Typically, minimum withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts begin at age 73. In 2033 the age will increase to 75, so check with your financial advisor to understand the implications of the minimum distribution on your situation.
Catching Up Contributions
Contributing to retirement early and consistently is the best plan, but there are opportunities to catch up if your balances are lower than you want. Once you've hit 50, the catch-up contribution limits are higher than the regular contribution limits ($6,500 in 2023, but that changes annually), allowing you to boost your assets as you approach retirement. This strategy also gives you a larger tax deduction in your pre-retirement years.
Moving Your 401k Accounts
In addition to state and federal regulations, companies can restrict their 401k accounts. Check their policies if you're tempted to move your account away from your employer to take advantage of lower fees or more robust support. Many employers have guidelines that prevent you from moving your account while you're still employed at that company.
Maximizing Options for Small Business Owners
Business owners that have many employees face multiple rules about what retirement plan options they can offer. If you own a smaller business, you have more flexibility in what retirement plans you can provide. The possibilities are practically limitless, so consult a financial planner specializing in retirement options for small business owners.
If you're not ready to fully retire and instead start a second career, don't forget to take advantage of employee matching funds! Even though you're close to retirement, these last-minute matches will add to the funds you have available down the road.
Drawing Loans From Your 401k
This option is one of those benefits you should know about, but we rarely recommend it. You can loan yourself money from your 401k and not have to pay income taxes as long as you pay yourself back. If you fail to repay the loan, it will be treated as a distribution and subject to income taxes and potentially early withdrawal penalties if you are under 59 ½. This type of loan is a viable option in a catastrophic emergency where there's no other option, but not a good habit because it can significantly disrupt your retirement plan.
No matter what type of retirement accounts you can access or choose to use, it’s important to have experienced CPAs and CFP® practitioners to guide you in making the best decision for your unique situation. Contact us today to start planning for your best future.