by Daniel Kittell | Accounting News, News, Newsletter, Retirement, Retirement Savings
If you’ve been sleeping on the Roth 401(k), it’s time for a second look. Yes, they used to come with that inconvenient drawback known as the Required Minimum Distribution (RMD), where you had to withdraw money on a set schedule, whether you needed it or not. But with the implementation of the SECURE 2.0 Act, RMDs are no longer required. Add to this a new rule for catch-up contributions, and Roth 401(k)s just became much more attractive, especially for high earners.
No RMDs Means More Control
Before this change, the IRS required you to start withdrawing money from your Roth 401(k) once you hit a certain age, which forced retirees to pull funds out of an account that would otherwise keep growing tax-free.
Now that both Roth IRAs and Roth 401(k)s are free from RMDs, they’re on a level playing field. This gives you control. If you want to leave your money in the account and let it grow, you can. You have the freedom and flexibility to time withdrawals based on your needs, not a government schedule.
Key Differences Between Roth 401(k) and Roth IRA
Both accounts offer tax-free growth and tax-free withdrawals in retirement. But they are not identical, and the differences are important.
With a Roth IRA, you can only contribute up to $7,500 annually in 2026 (or $8,600 if you’re 50 or older). There’s also an income limit. For 2026, the limit is $153,000 for single filers and $242,000 for joint filers. If you earn too much, you’re not eligible to contribute at all.
A Roth 401(k) doesn’t have those restrictions. The contribution limit is $24,500 in 2026, and there is no income limit.
So for higher earners, the Roth 401(k) is the more accessible option.
A New Rule for Catch-Up Contributions
As of January 1 of this year, under the SECURE 2.0 Act, catch-up contributions for employees who are 50 or older and earn over $150,000 must go into a Roth 401(k). You can no longer direct those extra contributions into a traditional 401(k). That means paying taxes now on those catch-up contributions instead of later.
This might feel constricting for some people, but it’s not a bad deal in the long run. Yes, you’ll pay taxes on contributions now, but the growth and withdrawals remain tax-free.
Why This Matters for High Earners
Put it all together and the Roth 401(k) starts to look like the better option for high earners. You can contribute more than a Roth IRA allows, and you won’t be excluded due to income limits. Your money grows tax-free, and when you withdraw it, you don’t owe taxes on the gains. This can be significant if your balance grows over decades.
Then there’s the question of future tax rates. Many people assume they’ll be in a lower tax bracket in retirement, but when you factor in required withdrawals, Social Security income, and other assets, this isn’t always the case. Some retirees may even end up in higher tax brackets. A Roth 401(k) helps avoid that risk.
To recap, no RMDs, higher contribution limits, and no income restrictions make Roth 401(k)s a strong option. And now, if you’re a high earner making catch-up contributions, you’ll be in a Roth account whether you planned for it or not. Hopefully, now you can start to see why that’s actually a good thing.
by Pete McAllister | Accounting News, News, Retirement, Retirement Savings, Tax Planning, Tax Planning - Individual
A key approach to minimizing taxes, especially as you near retirement, is to implement tax planning strategies that can help you save money and maximize your retirement savings. Here are some tax-efficient strategies to consider.
Contribute to Tax Advantage Retirement Accounts
When you contribute to a retirement account such as a 401(k), IRA, and Roth IRA, you can lower your taxable income in the year you make the contribution. With a traditional 401(k), you defer income taxes on contributions and earnings, which means you won’t pay taxes on them until you withdraw the funds in retirement. With a Roth IRA, your contributions are made after taxes and your earnings may be withdrawn tax-free in retirement.
Utilize Catch-Up Contributions
Workers over the age of 50 are eligible for an additional tax break when they make catch-up contributions to retirement accounts. In 2023 individuals can contribute an additional $1,000 to an IRA (up to $7,500 in total). For 401(k) plans, individuals can contribute an additional $7,500 for a total tax-deductible contribution of as much as $30,000. Catch-up contributions help to save more for retirement and reduce taxable income.
Consider a Health Savings Account
A Health Savings Account (HSA) is a tax-advantaged savings account that can be used to pay for qualified medical expenses. If you have a high-deductible health plan, you may be able to contribute to an HSA. The contributions are tax-deductible, the earnings grow tax-free, and you can withdraw the funds tax-free in retirement to pay for qualified medical expenses.
Make Use of the Saver’s Credit
In order to be eligible for the saver’s credit in 2023, you must contribute to a 401(k) or IRA and earn up to $36,500 for individuals, $54,7500 for heads of household, and $73,000 for married couples. You can claim the saver’s credit on retirement account contributions of up to $2,000 ($4,000 for couples). Depending on your income, it is worth between 10% and 50% of the amount contributed (bigger credits go to lower-income savers). The saver’s credit may be claimed in addition to the tax deduction for traditional retirement account contribution.
Refrain from Triggering the Early Withdrawal Penalty
You could be subject to a 10% tax penalty if you make IRA withdrawals before age 59 ½ and 401(k) withdrawals before age 55. The penalty may be avoided for certain specific purchases such as:
- Up to $10,000 for a first home purchase
- College costs
- Extensive health care costs
- Health insurance following a layoff from your job
If a Roth IRA is at least five years old, you may be able to withdraw funds that you contributed, but not the earnings, without prompting the early withdrawal penalty.
Don’t Sleep on Required Minimum Distributions
After age 73, savers are generally required to take required minimum distributions (RMDs) from IRAs and 401(k)s, and income tax will be owed on each distribution. Should you withdraw the incorrect amount, you could be subject to a 25% penalty of the amount that should have been withdrawn. This is in addition to the income tax due. However, if you act quickly to amend the error, that penalty could drop to 10%. Your first RMD is due by April 1 of the year after you turn 73. All following distributions must be taken by Dec. 31 each year in order to avoid the penalty.
Put Off 401(k) Withdrawals if You’re Still Employed
If you are still employed in your 70s and beyond, you may be able to delay withdrawals from your 401(k) account until your retirement (provided you don’t own more than 5% of the company sponsoring the retirement plan). Just be aware that after age 75, you will still be required to take RMDs from IRAs and 401(k)s associated with previous jobs in order to avoid the 25% tax penalty.
Plan Your Withdrawals
When you start withdrawing funds from your retirement accounts, plan in a way that minimizes taxes. For instance, you can withdraw funds from taxable accounts first to avoid triggering taxes on Social Security benefits. During your 60s, you can take penalty-free withdrawals from your retirement accounts without being required to take distributions each year. You can also take advantage of tax-efficient withdrawal strategies, such as the bucket approach, which involves dividing your assets into different buckets based on when you plan to use them.
by Daniel Kittell | Accounting News, Budget, Financial goals, News, Retirement, Retirement Savings
The Federal Reserve reports that 26% of working Americans have no retirement savings. And among the working Americans who have retirement investment funds, 45% feel that their savings projections fall short of their long-term goals. If you’re a late retirement investor, it’s still possible to build a solid nest egg by the time you retire. The tips below will help you make up for lost time and get back on track.
Estimate How Much You’ll Need
A general guideline for retirement savings is to have 10 times your income saved if you plan to retire at age 67. For example, if your annual salary is $50,000 per year, you should aim to have $500,000 saved by the time you turn 67 years old. However, you should adjust this number based on your individual retirement goals. Do you plan to travel extensively in retirement, or do you want to downsize and live frugally? Increase or decrease your estimate based on these goals.
Start Saving
One of the easiest ways to start saving for retirement is through an employer-sponsored plan, such as a 401(k) or 402(b). These plans are even more valuable if your company offers matching contributions. If you don’t have access to an employer-sponsored retirement plan, think about opening a traditional or Roth IRA.
- Traditional IRAs: Contributions are tax-deductible, but withdrawals in retirement are taxed.
- Roth IRAs: Contributions are not tax-deductible, but withdrawals in retirement are tax-free.
Small business owners and self-employed individuals can also look into retirement plans in the form of SEPs and Simple IRAs.
Pay Down Debt
Debt is holding you back financially, so create a plan to pay off credit card debt, car loans, and other high-interest debt. If your mortgage is fairly new, you might also consider making extra mortgage payments in order to pay down some of your principal. However, if you’re in the later stage of a mortgage, and your payments are mainly covering the principal, it might be more beneficial to invest in retirement rather than putting that money toward your mortgage.
Pay Yourself by Automating Investments
Regular, automatic investments can help close your savings gap between now and retirement. While it might seem smart to be sure you’re covering essential expenses with each paycheck before investing, chances are—unless you’re budgeting faithfully—more of your paycheck is going to impulsive and discretionary purchases than you realize. Get ahead of the game by allocating a portion of your paycheck to be automatically and directly deposited to your retirement account.
Start Cutting Costs Now
It is never too early to get organized and prepare for retirement, no matter how close or far off your golden years are. However, if you’re on the closer-to-retirement end of this spectrum, now is the time to start cutting costs in a meaningful way. Start by minimizing expenses and stashing the extra cash away in savings. In addition to cutting debt, find ways to save on everyday bills and costs. These savings can add up and offer some breathing room once you’re no longer receiving a regular paycheck.
Use Catch-Up Contributions
American workers ages 50 and older are qualified to contribute an additional $6,500 in catch-up contributions to their 401(k) per year, increasing the maximum contribution to a 401(k) to $27,000 per year, or $2,250 per month. This is a lofty monthly goal, and might not be possible for many workers, but aim to contribute as much as you possibly can in order to get you that much closer to your retirement goal. Even if you are just beginning to save at 50 years old, by funding your 401(k) up to the maximum amount—assuming an 8.7% annual return and considering compounded interest—it’s still possible to save $1 million by the time you retire.
