At Morris Hall, we know that a secure future hinges on our current preparation. A small amount of time and effort now can lead to considerable benefits later down the road. Many systems have been put into place to help individuals achieve peace of mind as they age and when speaking towards financial security after retirement, 401(k)’s and IRA’s come immediately to mind. But what exactly are these accounts and how can they be leveraged for greater financial security, not only for individuals but for families as well? Here are some insights from an Arizona and New Mexico estate planning law firm. 

What Is a 401(k)?

A 401(k) is a tax-advantaged, defined-contribution retirement plan that is offered by employers to their employees. When you take advantage of a 401(k) plan, specific sums of money are withheld from your pay and reallocated to a separate account. Many employers have programs where they match contributions up to a certain percentage. These funds are stored away until an individual retires. There are two types of 401(k)’s with a single notable difference between them:

Traditional 401(k)

These 401(k) plans, introduced in 1978, are pre-taxed savings accounts meaning that taxes are not accounted for until the funds are accessed. Thus, when one retires and begins to dip into their traditional 401k retirement funds, they will owe a hefty payment to the IRS. 

Roth 401(k)

These 401(k) plans, introduced in 2006, are post-tax savings accounts, meaning taxes are withdrawn before they move into the account. This means that the money that ends up in the account is yours and yours alone. The government has already received its share of the loot. 

Whether you choose to invest in a traditional or Roth 401(k) will depend largely on which tax bracket you find yourself in now and in the future. However, since tax rates can’t be definitively forecasted, many experts suggest contributing to both. 

What Is an IRA?

Unlike a 401(k), an IRA is established between an individual and a financial institution. The idea behind the two accounts is essentially the same, but IRA contributions aren’t matched as they are not through an employer. There are three types of IRAs:

Traditional IRA

Similar to a traditional 401(k), these accounts give you the option to defer taxes on contributions until the funds are redeemed.

Roth IRA

Provided that certain conditions are met, these accounts allow you to contribute money you have already paid taxes on resulting in a tax-free withdrawal upon retirement. 

Rollover IRA

With a rollover IRA, you contribute money “rolled over” from a qualified retirement plan into this traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA. Therefore, when you transition from one employer to another, you can roll the funds from your old 401(k) into this account and continue to build it over time by doing so.  

Make Sure Your Funds are Properly Accounted For

Because of the substantial tax consequences that can result from mistakes involving tax-advantaged retirement accounts, those who are investing for retirement or who are withdrawing funds should strongly consider working with a retirement planning lawyer.

At the law firm of Morris Hall, PLLC, our attorneys provide help to clients throughout Arizona and New Mexico with retirement asset planning including 401(k)s and IRAs. We will meet with you before retirement to identify how to best use tax-advantaged retirement accounts to achieve financial security as you age. We will also work with you once you have retired to protect your nest egg and follow required rules for withdrawals. As leading estate planners in the southwest, we want to make sure your assets are protected and properly distributed when life’s circumstances present themselves. For more information, contact us today.