Overcoming the compromises in your IRA, 401k, 403b, 457 or TSP to live a more secure retirement.
You’ve done a good job saving. Now, you need a good way to manage that wealth. Planning for the future isn’t just about saving money while you’re working. It’s about getting the most from your money in retirement.
Growing Funds in Today’s Stock Market
Individuals who want their funds to have an opportunity for meaningful growth may choose options with exposure to the stock market. This century the market has experienced significant volatility, including 2000 – 2009 and 2020 where you have lost anywhere between 40% – 60% of your retirement savings
Growing Funds with Low Interest Rates
Individuals who do not want their retirement funds exposed to the market may choose other options, such as bank savings. However, today’s low interest rates have made it difficult to achieve meaningful returns on money in less volatile approaches.
Income for You, Legacy for Your Heirs
Some individuals have accrued money in their qualified accounts, such as 401(k)s and IRAs. In a qualified account, you may want to accomplish two goals with your funds:
First, use the money as income, and second, leave some of the money to your heirs as a legacy.
In a tax-deferred account, you can choose to receive funds for income penalty-free after age 59½. At age 72, the IRS will require you to receive funds from the account in the form of Required Minimum Distributions, or RMDs. Taxes are due when qualified account funds are distributed.
You can also leave all or a portion of the remaining account value to your heirs when you and your spouse are no longer living. The funds will generally be taxed at your heir’s tax rate.
Tax Options in Qualified Accounts
Because tax-deferred accounts require participants to ultimately pay income tax on contributions and accumulation, it’s important to consider the overall taxes projected to be paid. Below is an example of a tax-deferred account, like an IRA. This example shows the taxes that could potentially be owed today and in the future if the account grows. This is a hypothetical example only.
For this example, we assume a 65-year old individual is in the 25% tax liability and has an IRA worth $500,000. We assume the individual’s IRA grows at 5% annually. We have also assumed the account holder lives to age 90. In our first example, the individual pays taxes on his RMDs and reinvests the remainder in another financial vehicle earning 4% annually, where taxes will be paid on the growth. In our second example,
the individual converts his IRA to a Roth IRA, pays the taxes due, and then accumulates funds in the Roth IRA tax-free.