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Planning for retirement is one of the most significant financial goals we all face, and choosing the right retirement accounts is a critical part of that process. Each type of account offers unique saving and tax advantages, and it’s essential to understand how each of those benefits work- and how they’ll impact you in retirement.
At Sage Financial, we’re passionate about helping you build a retirement strategy that aligns with your goals while minimizing tax surprises. In this article, we’ll break down the basics of four of the most common retirement accounts you may have access to and be making decisions about. Please discuss your goals and needs with your advisor before making any changes to your accounts.
1. Traditional Retirement Accounts: Tax-Deferred Growth
Examples: Traditional IRA, 401(k), 403(b)
Traditional retirement accounts are popular for a reason: they let you defer taxes on the money you contribute. Contributions are usually tax-deductible (depending on your income, plan and contribution type), which can lower your taxable income today.
The trade-off? When you withdraw money in retirement, those distributions are taxed as ordinary income. This means you’ll pay taxes at your marginal tax rate, which could be higher or lower depending on your income in retirement.
Key Benefits:
Tax savings now: Contributions reduce your taxable income.
Tax-deferred growth: Investments grow without being taxed along the way.
Considerations:
Required Minimum Distributions (RMDs) start at age 73, whether you need the money or not.
Withdrawals before age 59½ may be subject to a 10% penalty, plus income tax.
2. Roth Retirement Accounts: Tax-Free Withdrawals in Retirement
Examples: Roth IRA, Roth 401(k)
Roth accounts flip the traditional model: you contribute after-tax dollars today and then qualified withdrawals in retirement are tax-free. This makes Roth accounts an excellent tool for those who expect to be in a higher tax bracket in the future, or those who want to protect themselves from rising tax rates.
Key Benefits:
Tax-free growth: Investments grow without being taxed.
Tax-free withdrawals: No taxes on qualified distributions after age 59½
No RMDs: You can let the money grow as long as you like!
Considerations:
Contributions don’t reduce taxable income today.
Income limits apply for Roth IRA contributions. Roth 401(k)s are available to everyone with a plan option.
Are you over the income limit for a Roth IRA and still want to save more for retirement? You may have another option to save to a tax-advantaged account. Work with your advisor to identify potential pathways.
3. Taxable Investment Accounts: Flexibility with No Tax Breaks
Example: Individual brokerage account
While not technically a “retirement account,” taxable brokerage accounts play a crucial role in many retirement strategies. These accounts don’t offer the tax advantages of IRAs or 401(k)s, but they provide ultimate flexibility.
Key Benefits:
No contribution limits: Invest as much as you want when you want.
No RMDs: Use the money when and how you like.
Favorable tax rates on long-term capital gains and qualified dividends.
Considerations:
No tax-deferred growth: Interest, dividends, and realized gains are taxable in the year they occur.
Requires careful tax management to avoid unnecessary tax liabilities.
4. Health Savings Accounts (HSAs): Triple Tax Advantage
An HSA isn’t just for healthcare expenses—it can be a powerful retirement savings tool. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.
Key Benefits:
Triple tax savings: Contributions, growth, and qualified withdrawals are all tax-advantaged.
No RMDs: Funds roll over year-to-year, growing indefinitely.
Versatile withdrawals: After age 65, you can withdraw for non-medical expenses (taxed like a traditional IRA).
Considerations:
Requires a high-deductible health plan (HDHP) to contribute. This could cause higher out-of-pocket medical expenses than other plans, and is not appropriate for everyone.
Withdrawals for non-medical expenses before age 65 incur penalties and taxes.
Which Account Strategy Is Right for You?
As you can see, there are a myriad of retirement and other investment savings accounts with various taxation and important considerations to choose from. The above are the four most typical retirement savings accounts and others exist as well.
Choosing the right mix of accounts depends on your individual financial situation, future goals, and tax outlook. At Sage Financial, we help our clients develop personalized retirement plans that optimize their savings capacity for their goals, being mindful of taxes today and in the future. Whether you’re just starting to save or are nearing retirement, we’ll guide you through creating a efficient savings roadmap towards the retirement you envision.
Ready to Create Your Tax-Savvy Retirement Plan?
Let’s work together to ensure your retirement savings align with your goals. Schedule a free introductory call with Sage Financial today to get started.
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