IRA, social security, income tax and everything financial : INVESTMENT


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You pay as much as you can on a 401 (k) or other employer-sponsored pension plan. If your income allows, you will also contribute the maximum annual amount to your Roth or traditional IRA. But you still want to set aside more money than 401 (k) and IRA to make sure that your retirement is everything you hoped for. What options do you have? Here are some things to consider …

Before you go beyond that – are you really maximizing your 401 (k) and IRA?

IRAs and employer sponsored pension plans like 401 (k) have some real advantages when it comes to saving for your retirement. Before proceeding, make sure you are really contributing everything you can.

In 2020, most people can contribute up to $ 19,500 to a 401 (k) plan and up to $ 6,000 to a traditional or Roth IRA (subject to income restrictions). However, if you’re 50 years or better, you can earn up to $ 6,500 in catch-up for your 401 (k) in 2020 and another $ 1,000 for your traditional or Roth IRA. If you file a joint tax return with your spouse, your spouse may be able to make a full IRA contribution, even if they have little or no taxable compensation. (See Spouse IRAs for parents who stay at home for more details.)

In addition to the deductible limit described above, most 401 (k) plans also include non-deductible contributions. The limit for all contributions to your 401 (k) plan, including deductible and non-deductible contributions and the catch-up process over 50, is $ 63,500 for 2020. The great advantage of non-deductible contributions is that you are entitled to rollover those not deducted Contributions directly to a Roth IRA (subject to plan restrictions). This is known as the Mega Backdoor Roth IRA post and can really be a big deal.

Taxable investment accounts

Your other main option is to invest through a taxable investment account. The federal government’s lower income tax rates, which apply to long-term capital gains and qualified dividends, make a significant contribution to preventing investments outside of a tax-privileged retirement savings account such as 401 (k) or IRA. And a taxable investment account offers an enormous advantage: you have enormous flexibility. You can choose from a virtually unlimited selection of investments, and there is no federal penalty for withdrawing funds before the age of 59.

Notable investment options:

  • Mutual funds or separately managed accounts (SMAs) that are managed for tax efficiency reasons intentionally minimize current taxable distributions
  • Indexed mutual funds and exchange traded funds (ETFs) are rarely traded and therefore tend to have low taxable annual distributions
  • Tax-free municipal bonds and municipal bond funds generate income that is free of federal and / or state income tax

The other big advantage of a taxable account is that your heirs are eligible for a move if you don’t use the money in the account and it is invested in asset appreciation (such as growth stock funds) when you die -on the basis of the asset. In this way, the heirs, if they sell the property, are taxed only on the growth of the property to Her death. The growth from the time of purchase of the asset until your death is completely tax-free (subject to possible estate taxation at the state and federal levels).

Always think of the big picture

Your investment decisions should be based on your individual goals, time frame, risk tolerance and investment knowledge. You should evaluate each investment decision in terms of how the investment fits into your entire investment portfolio and whether it meets your general asset allocation requirements. A financial professional can be invaluable when evaluating your options.

For many, it may be useful to invest some of your money in three different types of tax accounts: deferred tax accounts such as 401 (k) or traditional IRA; ultimately tax free, like Roth IRAs; and taxable investment accounts that take advantage of the flexibility of disbursement and low capital gain rates. With a tripartite approach, you can plan your tax implications when you need to withdraw money. Instead of having only purely taxable withdrawals from a 401 (k) plan, you can only tax a portion of the withdrawals in this way and tax a portion with capital gains from your non-deferred account. This offers you the best of all worlds!

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