Retirement Accounts (401K, SEP IRA, Roth)

To create a future income stream for retirement, it is important to structure your accounts effectively to maximize your growth and minimize your taxes.

  1. Potential Direct Financial Impact

    • Tax efficiencies from utilizing tax-advantaged accounts (401(k)s, IRAs, etc.)
    • Contributions to pre-tax 401(k) plans and potentially traditional IRAs reduce your taxable income now.
    • Tax deferred growth on contributions to pre-tax 401(k)s and traditional IRAs.
    • Withdrawals from pre-tax 401(k)s and traditional IRAs are subject to ordinary income taxes.
    • Contributions to Roth 401(k)s and Roth IRAs are after-tax, so there is no reduction in income now.
    • Tax-free growth and withdrawals on contributions and earnings from Roth 401(k)s and Roth IRAs.
    • Potential to contribute up to $19,000 to a 401(k) plan in 2019 vs. $6,000 for IRAs.
    • Potential tax deduction for contributions to a Traditional IRA if you and/or your spouse do not have the option to participate in a 401(k) and/or meet the income limits.
    • Penalties for withdrawing funds from your retirement accounts before age 59.5 unless separating from service with your employer after age 55.
    • Required minimum distribution (RMD) on an annual basis start at 70.5 years old for assets held in a Traditional or pre-tax 401(k).
    • Potential tax deductible employer contributions for business owners (SEP, SIMPLE, Solo 401(k), Safe Harbor 401(k), etc.).
  2. Potential Secondary Impacts

    • Potential retirement account consolidation to simplify portfolio management.
    • Rebalance or adjust your asset allocation annually to ensure it is appropriate based on your objectives, time horizon, and risk tolerance.
    • Evaluate any costs associated with any asset management fees, investment fees, and/or transaction fees.
    • The need to be familiar with income limits on Roth IRAs and/or the ability to take a tax deduction on a contribution to a traditional IRA if you or your spouse have a 401(k) available.
  3. Self Completion/Execution Risks

    • Not contributing at the right level for your present and future needs.
    • Not utilizing the most tax-advantageous retirement vehicles.
    • Not having an appropriate investment mix based on your objectives, risk tolerance and time horizon.
    • Contributing to an account in which you are over the income limits to be eligible (ie. Roth IRA) and possibly being subject to an excise tax.
    • Unintentionally over-contributing to a 401(k) plan if you switch jobs during the year and usually max out.
    • Not taking annual required minimum distributions (RMDs) from your pre-tax 401(k) plan and traditional IRAs starting at age 70.5 and getting hit with penalties.
    • Withdrawing funds from your retirement accounts before age 59.5 and being subject to penalties and ordinary income taxes on pre-tax or traditional IRAs.
    • Not realizing that certain account types for business owners have mandatory matching requirements or may cap contributions for highly compensated employees if not.
  4. Situations Where Expertise Adds the Most Value

    • Tax Adviser
      Consulting a tax adviser may be helpful to determine the optimal retirement accounts to minimize your taxes now and during retirement as part of your overall withdrawal strategy. Additionally, a tax adviser may be able to identify other tax-advantaged vehicles and advise you on the possible benefits of converting existing tax-deferred assets to tax-free. Working with a tax adviser is highly recommended if you are self-employed to determine the best retirement account type to suit your business needs.
    • Legal Adviser
      Working with a trust and estate attorney may be beneficial to consider how different types of retirement accounts play into your wealth transfer strategy if you plan to leave assets to future generations.
    • Financial Adviser
      Working with a financial adviser may be advantageous to help you determine, and stick with the right investment mix, needed to meet your retirement goals. They can also advise on which investments you should hold within retirement accounts versus taxable accounts. Additionally, a financial adviser may be able to help you create an updated budget that enables you to save more into your retirement accounts.

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