When choosing a retirement savings plan, understanding the differences between Traditional and Roth accounts is essential:
• Traditional IRA/401(k): Contributions are tax-deductible, reducing your taxable income in the year of contribution. However, withdrawals in retirement are taxed as ordinary income.
• Roth IRA/401(k): Contributions are made with after-tax dollars, but withdrawals in retirement are completely tax-free (if certain conditions are met).
The IRS sets annual limits on contributions to retirement accounts:
• 401(k) Plans: Up to $23,000 per year (plus a $7,500 catch-up contribution for those 50+).
• IRA (Traditional & Roth): Up to $7,000 per year (plus a $1,000 catch-up for those 50+).
• SEP IRA & SIMPLE IRA: Designed for small business owners, with higher contribution limits based on income.
Maximizing employer-sponsored plans can enhance retirement savings:
• If your employer offers a 401(k) match, contribute enough to get the full match—it’s free money.
• Health Savings Accounts (HSAs) can double as a retirement savings vehicle since withdrawals for medical expenses are tax-free.
Contributing to tax-advantaged accounts can provide immediate and long-term tax benefits:
• Lower taxable income in the year of contribution (for Traditional plans).
• Tax-free growth on investments within the account.
• Potential tax-free withdrawals in retirement (for Roth accounts).
For Traditional IRAs and 401(k)s, retirees must begin withdrawing funds at age 73 to avoid IRS penalties. Planning ahead can help minimize unnecessary tax liabilities.
Final Thoughts: Maximizing contributions to tax-advantaged retirement accounts is a powerful tool for lowering your tax bill while building wealth for the future. Whether you choose a Traditional or Roth plan, taking advantage of these tax-saving opportunities ensures a financially secure retirement. Need help optimizing your strategy? Our financial advisors are here to guide you.
