Getting Clear on the End of the Year
Ernie Neve, CPA
December 3, 2020
It’s hard to believe that the longest year ever is finally coming to a close, but thank heavens, it is. No matter how you’ve been impacted, this month, I want you to really drill down and think about the challenges you’ve already overcome and how you might set yourself up for success I the future.
For a lot of employees, they’re primary retirement savings platform is the 401(k) and I see a LOT of folks who aren’t necessarily being as smart as they could with those funds.
For starters, the 401(k) is a pretty weak savings vessel, and if we actually looked into its origins, it was never designed to provide more than a modest return for its owner. One of the best ways I’ve heard it described was it was designed to replace the annual bonuses that retirees might have gotten when they were still working.
But here’s the deal: it was NEVER meant to be the “whole enchilada” for your retirement.
If it is right now, you need to begin to really rethink your strategy – and quickly.
Here’s the biggest problem – employees’ contributions are matched to a certain point by their employer, and anything after that is straight from the employee’s pockets. Now, you’d be silly to not take the “free money” your employer is giving you – say, 15% or so – but since you’ll have to pay taxes on the money you withdraw from that 401(k) when you withdraw it, how much are you actually “getting?”
Traditionally, the United States’ taxes on income have been higher for higher earners, and it’s not hard to see taxes are going to go up. How much? How will they impact your retirement accounts? Nobody can say, but the truth is – what your employer is contributing to you may not cover the taxes you’ll have to pay.
At the same time, since 401(k)’s are generally based in mutual funds, there are no guarantees of what those values will be when you retire. Maybe you remember Enron? Or the Great Recession of 2008? Yes, overall value have bounced back, and what was lost has been regained, but if you’re counting on growth and stability in your retirement – and who isn’t – do you want to worry about your retirement accounts tanking?
So here’s my message to you for the New Year: you need to educate yourself about the many ways you can lock income and minimize long-term taxes liabilities for retirement.
Not just for when you retire, but right now – because moving hundreds of thousands of dollars from a 401(k) to, say, a Roth structure is going to cost you a fortune anytime you do it.
But planning for it, or leaving that 401(k) active while you begin to contribute to a “smarter” retirement plan can give you far better results that mitigate the taxes you have to pay now and in retirement.
Of course, all this is just the tip of the iceberg, but it HAS to start with you realizing that your taxes and your income impact your earnings now and far into the future.
Let me and the team know how we can help, because we’re happy to do it.