While there may not be a “perfect” retirement account, there are multiple options available for savers/investors to build their assets for retirement.
Investing in a 401k, 403b, or 457b
Roth IRAs vs Traditional IRAs
These retirement accounts can be used irrespective of what your employer offers.
They have lower yearly limits: $6,500 in 2023 for those under the age of 50 or $7,500 for those age 50 or older.
Contributions can be either after tax (Roth) or pre-tax (Traditional) allowing you to defer taxes to the time of withdrawal (retirement) or pay taxes now to receive tax free growth.
Taxation is at your ordinary incomes rates in either case.
There are income limits that can limit your tax deductions (Traditional) or contribution eligibility (Roth).
Investing in a Brokerage
Taxable Accounts
Income is taxable in the year that it is earned. Interest and non-qualified dividends are taxed as ordinary income. Qualified dividends are taxed as capital gains. Dividends are generally qualified if the shareholder is paid from a US corporation and has held the stock for at least 60 days during a 121 day period that begins 60 days prior to the ex-dividend date.1
The sale of taxable investments incurs capital gains or losses. These will either be short-term (if positions are held less than 1 year) or long-term (if positions are held more than 1 year).
For estate planning, taxable accounts may be stepped-up in basis, meaning that beneficiaries may start their ownership with a more favorable cost basis – reflecting the asset’s (often higher) value on the date of death, not the original, often lower, purchase value(s). Thus, if a beneficiary were to sell the stepped up assets, they would incur little to no capital gains. The step up in basis removes the unrealized gains from the account holder, giving the beneficiary a new cost basis.
Each of these accounts—a Brokerage (taxable), IRA (pre-tax or after-tax), or 401k (pre-tax or after-tax)—offers unique tax advantages. Together, these accounts can provide tax flexibility for withdrawals before and during retirement.
The One Day In July office in Wayne, PA provides investment management services as fee-only fiduciary financial advisors to the greater Philadelphia area, the Main Line, and surrounding communities including Villanova, Radnor, St. Davids, Wayne, Strafford, Chesterbrook, Devon, Berwyn, Paoli, Malvern, King of Prussia, Valley Forge, Havertown, and more.
If you would like to understand how to maximize your retirement savings and withdrawals, contact us today to set up a free consultation. We can meet in person if you're in the area or set up a phone call or Zoom meeting if you prefer.
1. There are exceptions such as dividend paid by REITs.
