Maximizing 401(k) Strategies and Savings Options
For the first installment of our Your Time, Your Money, we wanted to address an issue many face while progressing through their career regarding your savings and 401(k) strategy. You’ve worked hard, reached goals and possibly received praise for these achievements by being promoted and/or getting a raise. As your income has increased, you might be maxing out your 401(k) and still have remaining money for saving. If you are putting those extra savings in a regular investment account, have you ever wondered if this is this your best option?
What if instead of putting that extra money in a taxable non-retirement account, you put it in a Roth account where it potentially grow tax-free? (Your first instinct might be to say your income is too high and your not eligible – KEEP READING)
In this edition of our Your Time, Your Money blog series, we will be looking at options available to you that are commonly overlooked. As you can see from the table below we aren’t talking about pocket change. Efficiently putting your money into a tax-free Roth account could potentially save you hundreds of thousands of dollars in taxes down the road as your investment grows. In the hypothetical below, someone who was saving an extra $15,000/year for 30 years could save themselves $300,000 by tax-efficient investing their money.
For our clients, this isn’t a hypothetical situation they lose out on, and you don’t have to either. Many 401(k)’s allow you to contribute “after tax-dollars” to a 401(k) once pre-tax contributions have maxed out at $19,000, plus $6,500 catch-up if you are over 50. Once you have made this after-tax contribution, take an in-service distribution each year of your after-tax contributions and directly roll it into a Roth IRA. And don’t worry there is no income limit to worry about when taking advantage of this strategy.
**Note: A plan participant leaving an employer typically has four options (and may engage in a combination of these options), each choice offering advantages and disadvantages. These options include leaving the money in the former employer’s plan, roll over the assets to new employer’s plan if available, roll over to an IRA, or cash out the account.
Are you missing out on taking advantage of the rules? Let us help; it’s what we do. For an in-depth look at post-tax 401(k) contributions, download Columbia Threadneedle Investment’s complete whitepaper and contact us today with your questions.