One of the biggest mis-steps that folks make when saving for retirement is putting all their retirement savings & all their investments in qualified accounts.
What do I mean by qualified accounts: IRAs, 401(k)s, 403(b)s etc. As a Master Elite Advisor with the Ed Slott Organization (see website IRAhelp.com) I am constantly working on strategies to deal with getting money out of your qualified accounts during retirement.
Why is this important?
All the money in your qualified accounts is taxable at regular income tax rates. Unless you are expecting to live on a lot less than you make today, you will most likely be in the same or (depending on what congress does) a higher tax bracket.
This could mean the loss of tens of thousands of dollars during your retirement.
Here is what I mean. Most families have the majority of their savings in retirement accounts. IRAs, 401(k), 403(b) etc.. Originally thought of as a great way to save for retirement, retirees are finding out that these accounts can actually devastate their retirement income.
Imagine you are retired and need to put a new roof on your house for $20,000. Being a good saver you have accumulated $250,000 or more in your 401(k) which you rolled over into an IRA. If you were in the 25% tax bracket, in order to pay for that roof, you would need to withdraw over $26,000…OUCH! It can get worse. Since a distribution from your IRA is considered income, it could cause you to pay more taxes on your social security income.
What many of us forget is that in retirement it is not what you have in the bank, it’s how much ends up in your pocket after the taxman takes his share.
What can you do about this?
Well if you are age 65 or younger it’s not too late to diversify your retirement accounts among taxable, tax deferred and tax free accounts. For those of you over 65, it is more important than ever that you have a distribution plan. Your plan shouldhelp minimize the taxes you will pay now and in the future.
If you are under 65 and still working, think about utilizing the Roth option in your 401(k) plan if your employer offers it. You can also create a self funded tax free account through your financial advisor.
For those over 65, you might think about starting to withdraw some money from your 401(k) before you reach 701/2. You can also do a tactical Roth conversion.
In the coming weeks I will be writing about these strategies plus many more issues that will affect you during retirement.
Before attempting any of these strategies you should consult a qualified tax and financial expert. Everyone’s situation is different so find out which strategy works best for your situation.