When it comes to retirement planning, tax-free growth should be high on your list. There are a few ways that you can take advantage of tax-free growth for retirement accounts. Here are 3 easy steps to help you make the most of your money.
The first step to tax-free growth for retirement is to take advantage of your in-service withdrawals. An in-service withdrawal is when an employee takes a distribution from a qualified, employer-sponsored retirement plan without leaving the company. Normally, you would be responsible for a penalty, but some circumstances allow you to avoid the 10% tax penalty. These include:
- if you have reached age 59 ½
- if you are withdrawing money to purchase your first home
- you declare hardship
- you establish extreme financial need
Now, not every retirement plan will allow in-service withdrawals, but about 70% of plans in the US offer this option under certain conditions. If your plan allows in-service withdrawals, you can take the distribution to pursue a different investment option that better suits you. One option would be to roll over funds from your current plan into an IRA account.
Next, is the 401(k) rollover. IRAs typically offer a wider variety of investment options than a 401(k). Some 401(k) plans only offer a few funds to choose from and others strongly encourage participants to invest heavily in the company’s stock. These options aren’t right for everyone.
IRAs allow for practically any type of assets. Including stocks, bonds, certificates of deposit, mutual funds, exchange-traded funds, real estate investments and annuities. With a self-directed IRA, you even have options for alternative investments like oil and gas leases, physical property, and commodities.
The big benefit of a traditional IRA is that your investment is tax-deductible now. Your contributions are pre-tax, and that amount is subtracted from your taxable income. Transferring a traditional 401(k) to a traditional IRA is simple because the funds in your 401(k) are also pre-tax. However, tax deferral doesn’t last forever. When you start to withdraw the funds, you will need to pay taxes on them. At age 72, required minimum distributions begin.
Roth IRA Conversion
The final step for tax-free growth for retirement is a Roth IRA conversion. This allows you to move money from a traditional IRA to a Roth IRA. Why convert to a Roth IRA? Well, with a Roth IRA any withdraws are tax-free if you are 59 ½ or older and 5 years have passed since you first contributed to a Roth.
Furthermore, unlike traditional IRAs, there are no required minimum distributions with Roth IRA. If you don’t need the money, you can leave it in the account and pass it to an heir. In addition to avoiding RMDs and harsh penalties, converting some or all of your traditional IRA to a Roth could save you taxes in the long term. Finally, it may be the only way to get a Roth IRA if you earn too much to contribute to one but have funds in a traditional account.
Tax-Free Growth for Retirement
Taking advantage of tax-free growth for retirement is a smart step. If you are ready to learn more about your options for tax-free growth, contact Argent Bridge Advisors today.