A 401(K) is a valuable vehicle for workers to build retirement savings.
But Americans shouldn’t put all their savings into their workplace plan, warned financial planner Georgia Lord.
Tax laws are constantly changing, so it’s crucial to diversify your retirement accounts to give you flexibility in accessing your savings later in life, he said, and avoid getting stuck with a higher tax bill.
Most retirement accounts contain tax-advantaged, tax-free or taxable funds.
“It’s important to keep your funds in those different types of accounts based on their tax treatment so that when the time comes to withdraw those assets, you can make sure you’re covered,” he told DailyMail.com.
Americans shouldn’t put all their savings into their workplace plan, warned financial planner Georgia Lord.
Just as experts recommend diversifying any investment portfolio you may have, Lord, a financial planner at Corbett Road Wealth Management, recommends diversifying any retirement accounts you have.
A traditional 401(K) is a “tax-advantaged” account, as workers make pre-tax contributions.
This allows you to delay paying taxes on your earnings while you work and gradually build up savings.
When you retire, you will pay taxes on this money, but your taxable income now may be less than during your working years.
Roth IRAs and Roth 401(K)s are classified as “tax-free,” as they are made up of after-tax contributions to help reduce your tax liability in retirement.
If tax rates continue to rise, Lord said, “why not let some of your assets, at least, be tax-free in retirement?”
“Taxable” funds include brokerage accounts that allow you to buy or sell a variety of investments and are often after-tax contributions.
“Today we cannot make decisions based on tax legislation, because there is a good chance that that will change in the future, especially when we talk about the retirement of young people who have so many years ahead of them,” he said.
For example, Trump-era tax legislation introduced in 2017 will expire on January 1, 2026, causing significant changes for millions of taxpayers across the United States.
It’s hard to know what tax rates will be like when you retire, how much you’ll earn in retirement, how much you’ll have saved and what your lifestyle will be like, he added.
“By having a mix of tax-advantaged, tax-exempt and taxable funds, you gain more flexibility to minimize your overall tax liability and stay below certain annual income thresholds,” Lord said.
Tax laws are constantly changing, so it’s crucial to diversify your retirement accounts to give you flexibility in accessing your savings in the future.
Diversifying your retirement accounts provides flexibility for when you have to make withdrawals, known as required minimum contributions (RMDs), during retirement, he said.
By planning ahead, you reduce the risk of paying more Medicare premiums or having a larger percentage of your Social Security benefit be taxed if you earn too much or withdraw too much from your retirement accounts, he added.
Not all workers will be able to invest in their 401(K) and then have funds left to contribute elsewhere, Lord acknowledged.
“First of all, I would at least match it in a 401(K),” he said.
“Then it comes down to whether you can afford to save more and what vehicle you should do it on.”
For those who don’t have a large amount to contribute, Lord recommends seeing if your 401(K) plan allows you to establish a Roth account within it.
This would help you diversify without having to open a separate account.
“Almost all 401(K)s have the option to include Roth dollars,” he said.
