Part 2 – Tax & 401k Info for ALL Ages

Part 2 of “under the radar” tax law changes. These changes lead to a needed discussion of current, related tax topics applying to ALL ages of savers with 401k accounts – and possibly IRA accounts too. There is still a decent amount of time remaining in 2023 to make a difference in 401k saving.

Remember that Roth 401k plans have slightly different income requirements than Roth IRA accounts:

  • Roth 401k accounts (which run alongside regular 401k accounts) have NO income limits.
  • Roth IRA accounts DO have income limits.
Roth 401k monies have NO RMDs under current tax law. Traditional, pre-tax 401k monies have RMDs and create taxable income in the future.

Advice for higher earners who no longer qualify for Roth IRA accounts: make sure to utilize the Roth 401k to some extent if your company offers a 401k plan with the Roth option. Also remember that Roth 401k contributions are made after-tax, whereas regular or traditional 401k contributions are made pre-tax.

There are those 401k savers who might ask, “Why would I forego a tax deduction and contribute to my 401k after-tax today, electing to use the Roth 401k?” Good question with a solid answer.

  • The reason saving in a 401k account partially or entirely after-tax using the Roth 401k can make sense is that most of the clients and friends I know and work with are maxing out (or close to maxing out) their 401k contributions.*
  • Therefore, over a lifetime of diligent 401k contributing total balances in 401k accounts can reach $1 million and much more.
  • This means that required minimum distributions, or RMDs, someday (at age 73 or older) – which are taxable income – can be over $70,000 or $80,000! This income is in addition to social security (which is mostly taxable income) and portfolio income such as dividends. Plus, any other forms of income.
  • Roth 401k monies have NO RMDs under current tax law. Traditional, pre-tax 401k monies have RMDs and create taxable income in the future.
  • Higher taxable income in retirement increases Medicare premiums – by law.
  • It can make sense to attempt to “straddle” the tax structure today and contribute to a combination of both Roth 401k and traditional pre-tax 401k, in order to create tax free income someday.
  • Note, there may come a time when the pre-tax 401k monies get to such a value where it could make sense to contribute solely to the Roth 401k.

This discussion can get “into the weeds” pretty quickly, if not already. Please ask me for input on this topic and absolutely check in (or ask me to assist with checking in) with your CPA on all tax advice.

*401k limits for 2023 are $22,500. For those age 50 and older, the additional catch-up limit is $7,500, for a total of $30,000 to the 401k.

This information is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.


Leave a Reply

%d bloggers like this: