Financial Planner Warns: The Big Mistake of Stashing All Your Retirement Savings in Your 401(k)
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U.S. citizens ought to vary their retirement savings to safeguard against potential alterations in taxation.
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Financial planner Georgia Lord mentioned that adaptability during one’s later years is crucial.
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‘Major misconception’ leading Americans to lose out on retirement funds
A 401(k) serves as an essential tool for employees to accumulate savings for their retirement years.
However, Americans should refrain from investing all their savings in their employer-sponsored plans, according to financial planner Georgia Lord.
Tax regulations evolve continuously, making it essential to vary your retirement accounts for greater adaptability when you withdraw funds in the future, as she pointed out, thus preventing potential increases in your tax liability.
Most retirement accounts hold either tax-advantaged, tax-free, or taxable money.
“It’s crucial to distribute your funds among various account types according to their tax implications, ensuring that when you need to withdraw from these investments, you have adequate coverage,” she explained to LIFEHACK.
Just as experts suggest diversifying your investment portfolio, Lord, a financial advisor from Corbett Road Wealth Management, advises spreading out the various retirement accounts you own.
A conventional 401(k) is a ‘tax-favored’ account where employees contribute funds before taxes are deducted.
This enables you to postpone tax payments on your income while employed, allowing you to steadily accumulate savings over time.
Once you retire, you’ll owe taxes on these funds — however, it’s likely that your taxable income will decrease compared to what it was when you were employed.
Roth IRAs and Roth 401(k)s are categorized as ‘tax-free’ because they consist of after-tax contributions, which aim to decrease your tax burden during retirement.
Lord suggested that if tax rates keep increasing, one might consider having some of their assets become tax-free during retirement.
‘Taxable’ funds encompass brokerage accounts that enable you to purchase or trade various investment options, typically these involve contributions made post-income tax.
“We shouldn’t base our choices on current tax laws since they are likely to evolve over time—particularly concerning the retirement of young people who still have numerous years left,” she stated.
For example,
The tax law from the Trump era, enacted in 2017, is set to expire soon.
On January 1, 2026 – triggering significant alterations for millions of U.S. tax filers.
It’s challenging to predict the tax rates at the time of your retirement, how much income you’ll have during retirement, how much you’ll have managed to save, and what kind of lifestyle you might lead, she noted.
Lord explained that by organizing a combination of tax-advantaged, tax-free, and taxable funds, you gain greater flexibility to reduce your total tax burden and remain below specific yearly income limits.
Diversifying your retirement accounts offers flexibility when you start taking withdrawals, referred to as required minimum distributions (RMDs), during your retirement years, she explained.
Planning ahead can help reduce the chances of paying increased Medicare premiums or having a larger portion of your Social Security benefits taxed due to earning above certain thresholds or withdrawing excessive funds from your retirement accounts, she noted.
Lord admitted that not every worker will be able to put money into their 401(k) and still have extra funds available for other investments.
‘To start with, I would at least conduct the matchup within a 401(k) plan,’ she stated.
‘So it ultimately depends on whether you have the ability to save additional funds and which savings method would be most suitable for you.’
For individuals with limited funds to invest, Lord suggests checking whether your 401(k) plan offers the option to set up a Roth account inside it.
This could assist you in expanding your options without needing to create an additional account.
‘She stated that nearly all 401(k) plans offer the choice of including Roth contributions.’
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