Three Strategies for Maximizing Tax-Advantaged Accounts and Optimize Your Wealth Accumulation.
Just as a cyclist needs rest and recovery to keep going, a hard worker can become burnt out from the constant effort required to do their job. What if that worker becomes burnt out well before retirement? While the cyclist occasionally stops pedaling to catch their breath, the bicycle keeps moving, ensuring progress continues smoothly and the cyclist avoids exhaustion. We want your investment portfolio to be like the well-maintained bicycle that provides support, momentum, and keeps moving forward.
Maximize Contributions to Retirement Account(s):
One of the most effective ways to build wealth while reducing current tax obligations is, maximizing your contributions to retirement accounts such as 401(k), 403(b), Traditional IRA, and SEP IRA. These accounts offer tax-deferred growth (you pay taxes when you withdraw money in retirement). Trying to contribute the maximum allowable may seem unreachable depending upon your income and current obligations, however, if you increase the percentage of your income saved at least once per year, it may feel more realistic to maximize your retirement saving contributions by focusing on small incremental changes to your overall contributions.
Here’s a tip! After the previous year's tax filing, consider increasing your savings rate in April.
If you already maximized your 401(k) contribution limit or have been phased out...
Explore Deferred Compensation Plans:
If your employer offers a deferred compensation plan, you may have the opportunity to defer a percentage of your annual bonus or salary, there are no contribution limits. By doing so, you can reduce your current taxable income, potentially saving you money in taxes each year you utilize this option. Plus, the funds can grow tax-deferred until withdrawn, providing you with additional retirement savings and flexibility.
Just so you know... There are risks associated with deferred compensation plans such as they are not accessible until retirement and you want to make sure the company offering the plan is in good financial standing.
These plans offer tax-deferred growth potential, similar to other retirement plans, but with greater flexibility. By deferring a portion of your income into a deferred compensation plan, you may reduce your current tax liability in the year you contribute.
Are you near retirement or already retired...
Consider utilizing a Roth Conversion strategy:
For individuals earning higher incomes looking to diversify their tax strategy and hedge against future tax increases, Roth Conversion strategies can be incredibly valuable. It involves gradually moving money from a traditional retirement account, such as a Traditional IRA or 401(k), into a Roth account. You will pay taxes on the converted amount in the year of conversion, the money then grows tax-free, and qualified withdrawals in retirement are tax-free as well.
What if? A married couple that both worked until recently, the husband retired (at age 58), and was the higher income earner. They feel comfortable living off her income and their savings account for a few years before claiming any social security or pension benefit. To ensure they optimize their retirement income, he will gradually convert a portion of his Traditional 401k into a Roth IRA over the next few years, while maintaining a lower tax bracket than when they were both working.
Ecos Wealth Advisors are here to maintain your bicycle, to ensure your ride to financial wellness isn’t bumpy! Call us today for a financial visit.