Plan 401 (k) is a great tool for saving for retirement if your employer offers. After all, investing in them is easy because the money is taken out of the salary directly. And you get your savings through pre-tax dollars, making it much more affordable to put money in your account. Your employer may even qualify for some contributions, which is a great benefit because you are literally getting free money.
But just because 401 (k) is a good option for a retirement investment account does not mean that there are no disadvantages. And one of the big drawbacks is that placing all retirement savings up to 401 (k) can lead to higher taxes on your social benefits. That’s why.
A distribution of 401 (k) is considered income when determining whether your social security benefits are taxable.
If you increase your 401 (k), chances are that most or all of your retirement income will come from that account along with your Social Security benefits. Unfortunately, receiving large amounts from 401 (k) to supplement social security retirement income may reduce the number of checks in the Social Insurance Administration.
This may be because social security benefits become partially taxable when your income exceeds $ 25,000 as a single person or $ 32,000 as a joint marriage.
Not all income is taken into account in this calculation, although only half of your social security benefits, as well as 100% of other taxable income. And it is this category of “other taxable income” – this is where the problem may arise. See, distributions from 401 (k) are taxed as ordinary retirement income, and therefore they are accounted for as taxable income to determine what portion (if any) of your Social Security checks you lose to taxes.
Because the average social security benefit replaces only about 40% of pre-retirement income, you are more likely to rely on your investment accounts to supplement your benefits. And if most or all of your extra money comes out of your 401 (k), as this is the main account to which you have contributed, you will quickly find yourself with an income above the threshold at which some of your benefits will be taxed – especially since those the thresholds at which benefits are taxed are not indexed to inflation, so they do not increase even as wages and prices.
What to do, not increase 401 (k)
First, you always want to contribute to your 401 (k) to get a full employer levy. And you also want to find out if your employer offers Roth 401 (k). If they are, you can deposit them with dollars after tax and withdraw taxes in retirement so that any distributions from your Roth are not considered income to determine if your social benefits are taxable. You get all the benefits of a workplace account without having much of a traditional 401 (k) side.
But if your employer doesn’t offer a Roth 401 (k), you may want to contribute to a traditional 401 (k) to get your employer’s match and then put extra money into a Roth IRA (assuming you’re eligible for a contribution) in a contribution based on income).
Although investing in Roth means that contributions are a little more expensive when you make them, because you invest with dollars after tax, you can withdraw as much as you want from your retired Roth IRA without owing distribution taxes. or providing most of the taxable social security income. In other words, you can avoid federal taxes on most or all of your retirement money.
Because every little thing counts when you live on a fixed income, getting some retirement money from Roth so you can limit your taxes on your social security payments can make a big difference in your financial security as a retiree.