Updated: Jun 29, 2021
“What should I do with my personal retirement savings dollars?” This question is likely one of the most important financial decisions you can make that will affect you for many years to come. On one hand, certain investment vehicles can help you reduce taxes you owe today on your earned income but will be fully taxed as you use the money in retirement. On the other hand, some options can help you reduce taxes on your future retirement income, but you will owe taxes on the dollars saved today. So, what should you do? What are your options?
The most common retirement vehicle is a traditional 401k. This option allows for pre-tax contributions - this means you don’t pay income taxes on the money you contribute. 401k contributions give you a huge benefit today because you do not need to pay taxes on any of these dollars. However, you must remember that when you make withdrawals from this account in the future, all the funds (including the interest earned) are taxable at future tax rates. There are, of course, many other benefits to the common, traditional 401k including employer matches. This means that if you work for an employer that matches your contributions, they will help fund your retirement while you are working for them. It would likely be beneficial for you to contribute to your 401k in order to receive the matched amount from your employer. Each employer or company has different requirements and standards when it comes to their 401k match programs, so it is vitally important to educate yourself on how to best use this benefit.
If you are in a position to receive a year-end bonus from your employer, now is a good time to evaluate your contributions to date. You may be able to use some or all of that bonus to contribute enough funds to maximize your employer match if you haven’t already. Maximizing your year-end contributions could also help reduce current taxes if you are creeping up on a higher tax bracket.
However, if you have already maximized your employer match, there may be another option to consider. Utilizing a ROTH IRA could provide you with other benefits such as accumulating tax-free growth and tax-free withdrawals in the future. Many 401k plans are now offering a ROTH option inside their employer-sponsored plan. This, in my opinion, is one of the best ways to go (if it is available to you, of course). A ROTH 401K allows you to contribute after-tax dollars and also receive the match from your employer. Just remember that the employer match portion will be taxable in retirement but the growth on your own contributions could be tax-free when you take it out. We ultimately do not know what our taxes will look like when we retire, so it is best to be prepared and proactive concerning our retirement planning.
Deciding what option is best for you can be very challenging due to the vast number of choices you have. This post highlights some benefits of a traditional 401k, but we also understand that this option may not be readily available to you. There are many other retirement vehicles we can utilize in order to help you achieve your financial goals. Consulting with a trusted Financial Advisor and a qualified Tax Advisor is key to navigating the vast options that are available to you. Please contact us here at Lift Financial if we can be of any assistance to you.