Although it's often spoken of as one single thing, retirement planning actually involves a wide array of different elements. For today's retirement savers, this increasingly includes traditional tax-advantaged accounts, Roth accounts, and taxable accounts. Why should you integrate all three into a more stable retirement plan? Here's what each brings to the table.
1. Tax-Advantaged IRA and 401(k) Accounts
What most people think of as 'traditional' retirement savings accounts actually defer taxes until withdrawal. The amount contributed each year before retirement is deducted from taxable income and capital is allowed to grow without tax consequence. The retiree pays taxes when they withdraw the money — both capital and interest. Minimum withdrawals are generally mandatory at a certain age.
The biggest advantage of traditional retirement accounts is that they lower your taxes in years when you're likely earning more money than in retirement. Depending on some retirees' circumstances, there may be little or no taxes due on withdrawals.
2. Roth IRA and Roth 401(k) Accounts
A more recent invention is the Roth account. Contributions are not deductible in the year in which they are made. However, the retiree can withdraw from them — including all growth — without tax consequences later. There is often no minimum withdrawal mandated upon retirement.
While these accounts are less popular than traditional ones due to the lack of tax benefits up-front, they can mean big savings later on. This is primarily because not only do you not pay taxes when you withdraw money, this includes paying no taxes of any kind on the interest earned. The nontaxable nature of Roth accounts makes them popular as the way to fund earlier years of retirement when your income may be higher.
3. Taxable Accounts
While retirement is usually funded largely from dedicated retirement accounts, don't overlook the value of regular taxable savings — things like savings accounts and brokerage accounts.
While you can't deduct the contributions and pay taxes on the growth each year, you can use this money for anything you want with little or no tax effect. If you've already maximized available retirement accounts, investing in taxable accounts boosts your overall savings.
Where to Learn More
Want to know more about using all three of these types of accounts in planning for your own retirement? Start by meeting with an experienced retirement planning service in your state. They will work with you to assess all your options and retirement goals, then find the best route to reach them. Call today to make an appointment.