Now that the 2018 tax filing season is mostly over it is time to talk the reality of 2019 taxes – and more important, taxes beyond 2019. This leads to the question, “How much is too much in a 401k?”
This subject requires more than one edition of TGIF 2 Minutes. For starters here are a handful of issues, facts and questions to ponder over the upcoming long weekend:
- There CAN be “too much of a good thing”, or too much in a Traditional pre-tax 401k. This does NOT mean stop saving!! Rather, gain an understanding of the tax treatment of the 401k.
- Similar to the “bonus” of the tax deduction for those pre-tax dollars that go INTO your 401k while you are working, there is the “sting” of taxation someday when Required Minimum Distributions (RMDs) kick in at age 70½ when you will likely be retired and on a fixed income. There are present-day savings strategies to greatly reduce the future sting of RMDs. How much is in your 401k today?
- As I have outlined in previous editions of TGIF 2 Minutes, use of the Roth 401k (different from a Roth IRA) and Roth IRA conversion are ways to address both a large current 401k and a future very large 401k. Have you considered the Roth 401k?
- Strategies also exist for large IRA Rollovers (resulting from old 401k accounts) or for Inherited IRA accounts.
- These strategies apply both to younger people and those in their 60’s and 70’s. Stay tuned to TGIF 2 Minutes for more.
- Like the current US President or not (and this is NOT a political statement) the fact is that the current tax brackets established by the late 2017 tax law MAY be the lowest tax brackets Americans see in the next several generations. It makes sense to use these lower and expanded 22% and 24% tax brackets to the best advantage before they sunset in 2025.
Not enough advisers, both financial advisers and tax professionals, are talking with clients about these facts and issues. But the smartest advisers ARE – and the conversations are not simple and easy. Difficult conversations today can lead to peace of mind in the future. Isn’t that what life is all about?
More to come on these important topics. Though for a holiday weekend, “less may be more.” Happy Memorial Day weekend!
Thank you for reading and TGIF!