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The Future of 401K

The Future of 401K

February 28, 2024

There’s been some interesting discussions recently about whether the tax-deferred benefits of 401Ks are truly best for individuals and government. A recent Bloomberg article summarizes, "Neither conservatives nor liberals are particular fans of tax-advantaged retirement accounts, and savers appear to be indifferent to them.  Expect more scrutiny in the coming years as more revenue is needed to fund entitlement programs and interest on the national debt. Eliminating the favorable tax treatment of the 401(k) is much less painful politically than increasing taxes directly."

An additional consideration that I've had come up in my discussions with clients at Sherpa recently centers around being “tax-free” during retirement.  This doesn’t imply not paying any taxes, but rather determining if it is better to pay the taxes now on money someone would save for retirement rather than later

Some people have saved so much in retirement accounts that their income might not be lower in retirement as they begin taking distributions.  Remember, even if your expenses are lower in retirement, the IRS Required Minimum Distributions (RMDs) requires a person to withdrawal a certain amount each year once they reach the age of 73.  For example, if a person or couple have $3,000,000 in retirement accounts at 73, then they would need to take around $110,000 out even if their expense needs were less.  Add that to other income, such as Social Security, pensions, rental income, etc., someone may very well be in higher tax brackets.

While there are several factors to consider for each person, let’s also talk about the potential financial relief and enjoyment if you could be both “debt and tax-free” during retirement.

As with everything financial we discuss, there is so much more involved than just how to mitigate taxes or maximize income which is why I always encourage clients to call me anytime you are making decisions involving money whether it be buying a car, remodeling your home, changing jobs, etc.