People talk about their retirement and how they plan to save for it every day. Those who have already retired usually have the best traditional advice that they hope others will follow.
However, experts have discovered something else. According to them, you can get the best out of retirement by having the “right mix” of accounts, not just one.
Retirement
People usually withdraw from active working status as they get to their 60s. The earliest retirement age in the U.S. is 62 years, while the standard is usually between 66-69 years. Since most people start working in the late teenage years or twenties, Americans usually spend about 40 years or more in the active workforce.
Therefore, people spend these 40+ years trying to save money for the days when they will be fully retired and work-free.
The Importance of Retirement Accounts
During those years of active work, people tend to open different types of retirement accounts that will help them save up efficiently. They pay a monthly or annual fee to that account or have contracts that help them save by deducting certain amounts over time.
This helps them save up significantly for later years, proving that it is very important for people to have retirement accounts. Retirement accounts can also fund vacation, medical, and feeding expenses.
Traditional 401 (k) Plan
There are different types of retirement plans, but the most common are traditional individual retirement accounts or a pretax 401(k) plan. This plan allows employees to have their employer take a particular portion of their wages or salary and put it in their individual accounts.
This plan is the most popular but not necessarily the best. It is somewhat expensive because of the high costs of administrative work and record-keeping.
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The “Right Mix”
Besides the high administrative costs, 401 (k) plans incur regular income taxes on future withdrawals based on federal tax brackets. Therefore, this does not always benefit everyone. Experts say that tax is a better way to save up for retirement.
This is by using the “right mix” of pretax, after-tax Roth, and taxable brokerage accounts to gain more flexibility in retirement. This mix also provides better comfort in the future as it helps you maximize your savings.
Types of Accounts
There are many other types of retirement accounts that people use regularly. Each has unique advantages and disadvantages, and different tax laws apply to each.
Some accounts help you grow your investments over time, while others remain stagnant except when you deposit money in them. Some accounts are charged with taxes promptly, while others are not charged except on withdrawals.
Individual Retirement Account (IRA)
An Individual retirement account is the most common type of retirement account. It is a long-term investment account with tax-advantaged savings that people actively earning income can use to save for their future days.
Those who are self-employed and do not have access to 401(k)s (which is only available to those with employers) can use IRAs to save for their futures. Opening an IRA through a bank, investment company, or many other channels is also easy.
A Taxable Brokerage Account
A taxable brokerage account is an investment account that is frequently used by those saving up for retirement. Unlike IRAs or 401(k)s, there are no favorable tax treatments on this type of account. Instead, your profit comes from selling your investments.
Furthermore, you will only be required to pay taxes when withdrawing from this account. Unlike many other types of accounts, the investments are not tax-free or tax-deferred.
Advantages of a Brokerage Account
If you plan to retire early, a brokerage account would be a great value. According to Abrin Berkemeyer, a Houston-based CFP with Goodman Financial Workplace, if you plan to retire before age 59½, a brokerage account is a great option.
You can tap into your account without fear of a penalty, which cannot apply to those with other accounts. Those who have pretax IRA or 401(k) accounts get a 10% penalty for withdrawing before the age of 59½
Pretax and After-Tax Distributions
According to Brown, pretax distributions could also help you to climb to a higher tax bracket. In addition, it can trigger higher Medicare Part B and Part D premiums, helping you with medical needs in the future.
On the other hand, after-tax account distributions do not usually boost your earnings or help you gain levies. Therefore, it is important to know the difference between these two distributions and which one best suits you.
Benefits of the “Right Mix”
According to Judy Brown, a certified financial planner at SC&H Group in the Washington, D.C., and Baltimore area, this right mix is exactly what people need to maximize their retirement savings. It can also provide “a lot of different levers to pull to manage your adjusted gross income.”
Brown is also a certified public accountant, speaking from a professional point of view, showing that having more than one account can be highly beneficial.
Other Benefits
Alyson Basso is the CFP and managing principal of Hayden Wealth Management in Middleton, Massachusetts. With her expert knowledge, she says that a mix of pretax, after-tax Roth, and taxable assets can help you “adapt to changing tax laws and personal financial circumstances.”
This will further help you manage withdrawals and taxes. If you have several accounts for the future, you can also make the best of all of them.
Take Expert Advice
Therefore, we urge you to take the advice of these seasoned experts as they are recommending the “right mix” from their professional point of view. All these retirement accounts have advantages and disadvantages, and it is best to conduct proper research before opening them.
Also, you need to consider your goals, risk tolerance, and retirement timeline before you can decide on the best retirement plan. Remember, your future depends on it.
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