Maximizing Your 401(k) as You Approach Retirement

As you approach retirement, your 401(k) becomes an increasingly important financial asset. It’s not just a retirement savings account; it can help assure you that you will be financially secure in your retirement years. You should have a well-thought-out financial plan to make the most of your 401(k). Here we discuss steps and strategies to maximize your 401(k) as you near retirement.

Assess Your Current Situation

Before making any decisions, take a close look at your current 401(k) account. Review your contributions, investment choices, and performance over the years. Consider the following:

Contribution Rate: Are you contributing enough to take full advantage of your employer’s match, if available? A general guideline is contributing at least enough to get the full employer match. Think of your employer match as “free money” for your retirement.

Investment Allocation: Ensure your investment portfolio aligns with your risk tolerance and retirement goals. As you near retirement, you may want to gradually shift to a more conservative allocation to protect your savings from market volatility.

Performance: Review the historical performance of your investments within the 401(k) and compare it to relevant benchmarks. If your investments are underperforming, consider adjusting the investments in your portfolio.

Catch-Up Contributions

A catch-up contribution is a retirement savings contribution that allows people aged 50 or older to make additional contributions to their 401(k) or similar retirement accounts such as 403(b) and individual retirement accounts (IRAs). Currently, catch-up contributions allow those 50 and older to contribute an extra $7,500 into 401(k) plans beyond the $22,500 employee deferral limit for 2023. Under SECURE 2.0, workers at least 50 years old and who earned $145,000 or more in the previous year must make their catch-up contributions on a Roth basis beginning in 2026. This means contributions will have to be made using after-tax money. Workers won’t get tax deductions on these catch-up contributions as they would with typical 401(k) contributions. Still, money can be withdrawn money tax-free after retirement. If you make $144,999 or less in a tax year, these changes will not apply to you.

Consider a Roth 401(k)

Some 401(k) plans offer a Roth option in addition to the traditional pre-tax 401(k). With a Roth 401(k), your contributions are made after taxes, but withdrawals in retirement are tax-free. This can be especially advantageous if you expect your tax rate to be higher in retirement than it is now. Diversifying your retirement income sources between pre-tax and Roth accounts can also provide tax flexibility in retirement.

Before SECURE 2.0, employers could match their employees’ Roth 401(k)s with pre-tax dollars, which had to be placed in a pre-tax account like a traditional 401(k). SECURE 2.0 now enables employers to make matching contributions directly to employees’ Roth 401(k)s. This change took effect instantly upon the Act’s passage. Still, it’s important to note that this option is discretionary, and employers can choose to make pre-tax matches or not provide a company match at all.

Plan Your Withdrawal Strategy

As you near retirement, it’s essential to plan how you will withdraw funds from your 401(k) in retirement. A well-thought-out withdrawal strategy can minimize taxes and ensure your savings last throughout your retirement. Here are some key considerations:

Required Minimum Distributions (RMDs): Beginning in 2023, the SECURE 2.0 Act raised the age that you must begin taking RMDs to age 73. If you reach age 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for 2024. You must start taking RMDs from your traditional 401(k) to avoid penalties so you should plan for these distributions in your retirement budget.

Tax-Efficient Withdrawals: Consider the tax implications of your withdrawals. Coordinating withdrawals with other sources of retirement income, such as Social Security and taxable investment accounts, can help minimize taxes.

Emergency Fund: If possible, maintain a separate emergency fund to cover unexpected expenses to avoid prematurely tapping into your 401(k).

Review and Update Your Beneficiaries

Life circumstances change over time, so regularly reviewing and updating your 401(k) beneficiaries is essential. This ensures your assets will be distributed according to your wishes in case of unforeseen events.

Final Thoughts

As you approach retirement, your 401(k) can be pivotal in your financial future. However, navigating the complexities of retirement planning and managing your 401(k) can be challenging. While your 401(k) is a valuable retirement savings tool, it shouldn’t be your only investment. Diversifying your investments across different accounts, such as IRAs, taxable investment accounts, and real estate, can provide greater financial security in retirement. At Northern Way, we can provide you with a tailored plan that optimizes your retirement savings strategy. Reach out to us. We’re here to help you make informed decisions, monitor your portfolio, and adjust your financial plan for retirement.

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