Building Your Retirement Plan and Savings

 

Retirement planning and savings is critical for everyone. As we head to holiday season it is worth assessing and optimiging your investment plan irrespective of whether you are already have one or starting new. 

 

Deferred Benefit Plan such as Individual Retirement Account (IRA), 401K, and their Roth variant are the most common retirement options for many. In this post, we will cover some of the important elements about them for 2024 and 2025.  If you have an opportunity to participate in Deferred Compensation Plan, please schedule time with us on a right tax strategies as it is outside the scope of this post.

 

Roth IRAs and 401(k)s both have annual contribution limits that you should keep in mind. Before we get into the limits, there are some fundamental differences between Roth and regular variants of the IRA and 401K. 

 

Roth vs Regular: Pre-tax contribution to IRA and 401K reduces your taxes for the current year. Principal and earnings from the regular IRA and 401K are subject to taxes at the time of withdrawl. You fund your Roth IRA and Roth 401K with post-tax dollars but the earnings are free of taxes at the time of withdrawl.  Another key difference is that while traditional IRAs and 401(k)s have Required Minimum Distribution (withdrawal) starting at age 73 (as of 2024), Roth IRAs do not require these distributions while the original account owner is alive.

 

Contribution Limits

  • IRA limit: If you’re under 50, you can make up to $7,000 in IRA contributions in 2024 and 2025. This limit applies to either a traditional and Roth IRA, or a combination of both.

 

  • 401(k) limit: If you’re under 50, you can contribute up to $23,000 to a 401(k) or similar workplace retirement plan in 2024. That limit increases to $23,500 in 2025. Let us call this as regular limit. 

 

  • 401K Maxium:  In addition to regular 401K or Roth 401K limits, you can make additional after-tax contribution to your 401K (assuming your employer plan allows for it). Your employer can also contribute matching dollars to your 401(k), but their contribution when added to yours cannot exceed $69,000 in 2024. That limit increases to $70,000 in 2025.

 

  • Catch-up contributions: If you are 50 or older, you can contribute an extra $1,000 to an IRA and $7,500 to a 401(k) or similar plan.


Optimizing Contribution

  • Roth IRA and 401k: Contributing to a Roth IRA or 401(k) doesn't impact your ability to contribute to the other. Even if you maxed out on 401K (whopping $69K in 2024), you can still contribute the full $7,000 into a Roth IRA. You simply need to have enough earned income to cover both contributions. This applies to those looking to open an IRA or Roth IRA account for their children.
  • Income Limits: Roth IRA contributions are subject to income limits while there is no income limit that affects Roth 401(k) contributions. However, your contribution to 401K (regular as well as Roth 401K) has to be through payroll. 
  • Backdoor Contribution and Taxes: If your income level is too high then you will need to fund your IRA and then convert them into Roth IRA. Depending on your account balance across all your IRAs (including SEP, Rollover), the Roth conversation may have some taxes.

 

Optimizing for Taxes via Roth Conversion:

  • Qualified withdrawal from Roth IRA and Roth 401K have no taxes making them financially very attractive. If you are young and on a lower tax bracket it might be better to contribute to Roth.
  • If you have a substantial balance in your IRAs (regular, Rollover, SEP)  then converting them over a period of time will save you substantially and avoid having to do Required Minium Distribution (RMDs).
  • We recommend that you consult with us as your tax professional or your financial advisor. 

 

If you need tax planning consider scheduling time with us, your tax professional or with your financial advisor. Holidays are best time to spend some time on them.