Sixty-three percent of Americans polled by ValuePenguin said they could not comprehend how a 401(k) plan works, according to this article on CNBC. Not having full understanding of this savings vehicle could hurt workers’ retirement prospects. For example, clients will miss out on the opportunity to boost their savings by not contributing enough to get the employer’s match. A 401(k) plan also allows workers to contribute on a pre-tax basis, enabling them to lower their taxable income.
Government securities are good options to consider for retirement investors who would rather have stable returns (even if that means lower returns) than invest in risky investments with high return potential, according to this article on Forbes. Risk-averse clients could also opt for low-cost index mutual funds, private lending and multifamily apartment syndications. Corporate and municipal bonds are other options for investors who want to build a low-risk portfolio.
Clients should plan on how much they should save in traditional 401(k)s and IRAs and how they should spend these savings to minimize the cost of taking required minimum distributions from these accounts by the time they reach the age of 70 1/2, according to this article on U.S. News & World Report. They should also pursue strategies to lessen the impact of RMDs, which are treated as taxable income. That’s because they will have a substantial RMD amount and consequently a hefty tax bill if they own considerable assets in these accounts.
For retirement investors who are planning to convert traditional IRA assets into a Roth, the conversion cannot be limited only to the nondeductible portion of the IRA balance, according to this article on MarketWatch. The converted amount will be subject to the pro-rata rule, which determines the tax-exempt amount based on the percentage of nondeductible contributions with respect to the total contributions made to the traditional IRA account. This means that if the nondeductible contributions amount to $5,500 and the traditional IRA has $55,000 in total contributions, the nontaxable portion of the converted amount will be 1/10th.
