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401(K) Retirement Plan Optimization


You have likely heard that it’s important to save for retirement, but most folks don’t fully understand the best way to accomplish their retirement goals, or maximize the benefits under the current tax code.  This guide will help you understand how to allocate your retirement contributions for the best results.

First, it’s important to contribute to any plan or account that has a matching arrangement, like the example of David’s 401(k) in our last post called Retirement Basics.  A matched contribution immediately doubles the matched money you add to the account.  This is an immediate 100% return on the matched portion of your contributions, and that’s why this is the best.  When you’re ready to begin contributing to your retirement, always contribute at least as much as the company plan will match.  Also, if you’re given the option of a traditional or Roth plan, it’s generally better in the long run if you participate in a Roth plan.

Second, if you want to contribute more toward your retirement beyond the matched percentage offered by your employer, then you may want to consider contributing to a Roth IRA.  This account will most likely not be available with your employer, so you’ll want to ask us to help you create one.  There are limits to contributions to both traditional and Roth IRAs, and they’re usually significantly lower than the limits on an employer-sponsored retirement plan.   In 2020, the total contribution to all of your traditional or Roth IRAs cannot exceed $6,000 ($7,000 for people aged 50 or older).  Visit the IRS website for more details about contributions limits for retirement accounts.

Finally, once you are contributing to your 401(k) up to the match and you are maximizing your contributions to your Roth IRA, and you want to contribute more to your retirement, then go back to contributing to your 401(k).  You’re generally allowed to contribute much more to an employer-sponsored retirement plan account than a traditional or Roth IRA outside of the workplace, so if you want to do more, you have that option.


This is not a simple question to answer.  Every person and family is different, and your retirement goals will be different, too.  We can help guide you through the process of determining how much to save for retirement, but a good rule of thumb is determine your annual income needs in retirement and then multiply that amount by 20.  For instance, if you determine that you will need $40,000 per year in retirement, then you will need 20 times $40,000, or $800,000.  If that sounds unattainable, I want to encourage you and tell you that YOU CAN retire with dignity (and even comfort) if you're disciplined and follow a wise plan.  We are here to help you.


The next problem to solve after determining how much to contribute toward your retirement is then how you should invest those assets.  The answer is not very simple.  Every person and family is different; they have different tolerances for risk and different goals.  

If you have an employer-sponsored retirement plan account through your work, then you will most likely be given a variety of choices to select for investing your retirement assets.  As part of our advising services, we can guide you in that process.  Retirement plans will almost always give you the option of investing in mutual funds.  Sometimes, you can even buy stock in the company for whom you work.

We can help you decide which funds to select based on a variety of factors, including your risk tolerance, investment objectives, and time horizon.  Building your retirement is too important to not follow a wise plan, so let us help you find what’s best for you and your family.  We’d love to visit with you about how to invest your retirement, so call and schedule an appointment with us soon, or send us an email.  

This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

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