Whether you’re preparing to retire or just beginning your career, retirement planning might be a burning subject for you. There are plenty of retirement plans to choose from and it is imperative that you do your due diligence to ensure you find a plan that best suits your lifestyle. “A 65-year-old woman has a 50% chance of making it to age 85, and a 65-year-old man has a 50% chance of reaching age 82” (Investopedia). With that in mind, your retirement planning should include income for two decades.
Learning the basics of retirement planning and 401(k)s might help put your mind at ease. Here are some 401(k) do’s and don’ts to assist you in your retirement strategy.
Don’t assume your tax rates will remain the same. Those entering retirement or preparing for retirement are often mislead into believing that their income tax will remain the same. However, there are many contributing factors that influence tax rates in retirement. Some examples include lifestyle changes, economics, and human error.
Do plan for fluctuating tax rates and other applicable taxes that could impact your account. Because the government dictates when and how much you must withdraw from your 401(k) and other funds, it should come as no surprise that this may change as policies and elected politicians can influence tax rates. An error in calculations can simply increase your tax rate. For example, miscalculating your required minimum distributions can lead to addition taxes.
Other things like capital gains, dividends, and investment interest can contribute to increased tax rates. Also, if you have children who are adults or close to adulthood, paying off your mortgage, and similar lifestyle changes can affect which tax bracket you end up in. Because a mortgage provides a substantial tax deduction, paying off your mortgage can come as a disadvantage to your taxes and thus, effect your way of life.
Don’t leave the account to a surviving spouse. One common mistake in retirement planning is leaving your 401(k) to a surviving spouse. Essentially, because a 401(k) is taxable and your widow will be filing as “single,” causing them to enter the highest-obligation tax status.
Do consider relocating your funds to a Roth IRA account. An alternative to leaving your 401(k) to your surviving spouse is to relocate your funds to a Roth IRA account. Roth IRAs do not require minimum distributions, which allows you to pass the account to your surviving spouse (or other relative). Another alternative is to seek an experienced professional who specializes in life insurance and explore those options. Some life insurance plans offer coverage for expenses that you may leave behind, such as funeral or cremation costs, medical bills, mortgage payments, credit card bills, and other similar expenses.
Don’t miss out on free money and opportunity. There are plenty of opportunities to find a 401(k) plan that best suits your lifestyle. Whether your employer provides a plan and/or matches contributions, it is in your best interest to ensure you’re utilizing your 401(k) plan for all that is has to offer. For example, participate in your plan and take advantage of advice. Many people are misinformed about their 401(k) options, so if the plan and/or advice are available, enjoy them!
Tools used to monitor and score financial wellness for retirement plans, automatic enrollment, and seeking professional advice are all great resources for you to secure implementation of all free money and opportunities available.
Do ensure you contribute enough to utilize all resources. Some ways to incorporate all benefits of 401(k) plans is to understand how they work. For example, many companies have a threshold for the amount they are willing to match. However, most employees do not contribute enough to meet the company-match threshold, which causes you to lose out on free money.
Another common mistake is investing too much in company stock. Overinvesting in company stock indicates that your human and financial capital are dependent on your employer. If the employer goes under, you can lose both your position and your 401(k). To ensure you’re not overinvesting, it is advised to invest no more than 10% in company stock.
Lastly, many employees believe that if they leave a company, they must cash out their 401(k). Doing so triggers taxes and withdrawal fees. Instead, most companies allow you to transfer your 401(k) to your new employer (if available) or allow you to keep it with the current employer (but remove the employer contribution aspect, if available).
If you’re still feeling overwhelmed, seek assistance from a tax planner like QBS. We can identify changes in the tax industry, best practices for retirement planning, and explore all your available options and find one that best suits your needs. QBS offers tax management services, such as state and local tax withholding, quarterly tax reporting, assisting with state and federal tax forms, and much more. Please contact QBS today for assistance with all tax-related inquiries you may have.