Importance of Balance

Almost everywhere you turn, health and fitness gurus are talking about the importance of balance in all areas of life. We are told to have a balanced diet, a balance between work and play, a balance between activity and rest, and even a level of balance within the ways we exercise. It seems too much of any one thing or continually doing the same things can be more harmful than good.

Believe it or not, the same is true with your finances, particularly when saving for retirement. Some experts suggest that people should save the maximum amount allowable in tax deductible savings plans (401(k), IRA, etc.) every year. The most prevalent reasons cited are lowering taxable income while working and taking advantage of the tax deferred compounding of investment gains. While we agree it is wise to take advantage of tax deferred compounding of interest, dividends, and capital gains, we encourage more careful consideration of making the maximum allowable contributions to such plans.

Here’s why:

1. All money coming out of Traditional 401(k), Profit Sharing, Defined Contribution, 403(b), and IRA plans is considered taxable income. As such, it is counted in the calculation which determines how much of your Social Security income benefits are taxable. So, having lower taxable income in retirement is advantageous.
2. Monies contributed to and kept in traditional plans are subject to tax penalties if withdrawn before age 59.5. Because of this, consideration should be given to potential needs for funds prior to that age (education, for example).
3. Throughout retirement, parents and grandparents may desire to help their children and grandchildren financially. Having a healthy balance between traditional retirement savings versus Roth and other non-retirement savings will enable you to choose how to help in the most tax efficient way possible.

Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

Striking a balance when saving for retirement may lead to a more fulfilling second act. If you have any questions about your retirement plan, feel free to contact us today.

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