By Mike Gibbons, RICP®
When it comes to retirement plans, you have plenty of options. The trick is choosing the ones best suited for your unique situation.
If your employer offers both Roth and traditional 401(k) plans, you have an important decision to make. With a traditional 401(k), you get to fund your account with pre-taxed dollars but have to pay taxes on future withdrawals. A Roth 401(k) works in the opposite sense. You pay taxes up front but get to withdraw tax-free in retirement.
Both types of 401(k)s have their pros and cons, but regardless of which you choose, there are several ways to maximize your future distributions. Here are three effective strategies to get you started.
1. Minimize Taxes
This one mostly applies to traditional 401(k)s. One of the easiest ways to minimize taxes is to pay attention to your income tax bracket. If you know the income ranges for each tax bracket, you can limit your distributions to avoid accidentally getting bumped up to the next bracket. Consider your options while making contributions. “Do I prefer the upfront deduction of contributing to the traditional 401k or would I rather the tax-free nature of distributions while in retirement from the Roth 401k and after-tax contribution”? Also consider making post-tax contributions which can be rolled to your own Roth while still working.
Lastly, consider holding off on Social Security distributions as long as possible. This will help keep your taxable income (and income bracket) to a minimum.
2. Maximize Contributions
In 2020, the maximum 401(k) contribution is $19,500 (plus an additional $6,500 catch-up contribution for those over 50 years old). (1)
Ideally, you’ll want to max out your contributions every year. But depending on your life circumstances, this isn’t always realistic. If you are unable to contribute the maximum, try to at least take advantage of your employer’s matching program, as this is basically free money.
The goal should be to steadily increase your contributions as your income grows. Whenever you get a raise, consider dedicating a portion (or all) of it to your 401(k). And if you make automatic contributions, don’t forget to adjust them as necessary.
3. Start Early
The easiest and most powerful way to maximize your future distributions is to start contributing as early as possible. When you’re young, it’s easy to procrastinate saving for retirement—especially when your income is tied up with student loans, raising kids, and a mortgage. It requires a disciplined budget but is well worth the effort.
Thanks to compounding interest, starting to save just a few years earlier could equate to tens of thousands of dollars (or more) when you retire. Instead of continually putting off contributions until “someday” when money isn’t as tight, do your future self a favor and revisit that budget.
Next Steps
These are just a few of the many ways you can maximize your 401(k). But the truth is, there is a lot more to consider when planning for retirement. By working with a financial advisor, you’ll not only learn the best accounts to choose and how to maximize distributions, but also how to avoid costly mistakes.
At Gibbons Financial Group, we can help you create a custom financial road map designed to achieve your financial goals. If you’re ready to get your retirement planning taken care of once and for all, call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation. Also, be sure to join our free webinar, Retiring Early From Pharma.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation. Under the RIA, Mike helps manage approximately $150 million in assets under management and works with clients that meet a minimum investment criterion.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2015-2019* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*As reported by Financial Planning Magazine, June 1996-2015, based on total revenue. Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management, among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2015 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual
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