Creating a thorough retirement plan is a financial decision that demands careful consideration. One of the most effective tools employed in saving for retirement and reducing taxes is a qualified retirement plan. A qualified retirement plan is a retirement plan that has been established by an employer to enable retirement income to an employee and that employee’s beneficiaries. Examples of qualified retirement plans include 401(k), 403(b), pensions plans, and defined benefit plans, etc.  While not considered to be a qualified retirement plan, an IRA, or individual retirement account, is also considered to be a popular retirement savings vehicle for individuals.  Both 401(k)s and IRA(s) offer tax benefits and can aid in a smooth transition to retirement. In this blog, we will discuss how to leverage tax advantages through 401(k)s and IRA(s), which we will refer to as Retirement Savings Plans for purposes of this blog.

Overview of Retirement Savings Plans and Benefits – 401(k) and IRA

A traditional 401(k) is an employer sponsored plan that allows employees to contribute pre-tax dollars towards their retirement savings. When it comes to qualified retirement plans, the traditional 401(k) is a popular option offered by many employers. One of the biggest benefits of a traditional 401(k) plan is the ability to contribute pre-tax dollars. This means that any money contributed to the plan is taken out of your paycheck before taxes are applied, which can significantly reduce your taxable income for the year. Over time, this can add up to significant tax savings and help you maximize your retirement savings. Another advantage is the potential for employer matching contributions. Many employers will match a certain percentage of their employees’ contributions to the plan, up to a certain limit. Additionally, 401(k) plans typically offer a wide range of investment options to choose from, which can help you build a diversified investment portfolio. This can help minimize risk and maximize potential returns over time. It’s important to note that there are some limitations to 401(k) plans, such as contribution limits and age restrictions on withdrawals.

Unlike a traditional 401(k), which is typically offered by an employer, an IRA is a personal retirement savings account that can be opened by anyone. There are two main types of IRA: traditional and Roth.

A traditional IRA allows you to make tax-deductible contributions up to a certain amount each year. This means that any money you contribute to the account can be deducted from your taxable income, which can result in significant tax savings. In addition, traditional IRAs also offer tax-deferred growth, which means that any earnings or gains on your investments are not taxed until you begin making withdrawals at retirement age. However, it’s important to note that when you do start taking withdrawals, they will be taxed as ordinary income.

A Roth IRA, on the other hand, does not offer immediate tax benefits on contributions. Instead, you contribute after-tax dollars, which means that you’ve already paid taxes on the money you’re investing. However, the big advantage of a Roth IRA is that once the money is in the account, it grows tax-free. When you make qualified withdrawals at retirement age, you won’t have to pay any taxes on the earnings or gains. This can be a huge advantage, especially if you expect to be in a higher tax bracket when you retire.

One key benefit of both traditional and Roth IRAs is that they offer a high degree of flexibility when it comes to investment options. Unlike a 401(k), where your investment options are typically limited to a handful of choices selected by your employer, IRAs provide you with a much wider range of options. This can be especially valuable if you want to diversify your investment portfolio, or if you have a particular investment strategy in mind.

Another advantage of IRAs is that they can be used to complement other retirement savings plans. For example, if you’re already contributing to a 401(k) at work, you can still open an IRA and continue to contribute to both. This can help you maximize your retirement savings and take advantage of the tax benefits of both plans.

A Roth 401(k) is an employer sponsored plan that combines certain features of a traditional 401(k) and a Roth IRA. The contribution limits for a traditional 401(k) and a Roth 401(k) are the same.  However, unlike a traditional 401(k), Roth 401(k) contributions are made with post-tax dollars, which is the same as a Roth IRA.

Each of these retirement plans offers unique benefits, and it is important to understand the differences between them to choose the best one for your individual retirement goals. A financial professional can help you navigate the retirement savings landscape and create a retirement plan tailored to your specific needs.

Retirement Savings Plan Contribution Limits and Withdrawal Rules

As a responsible saver or investor, monitoring your financial plan is critical for staying on track and achieving your long-term goals. Keeping track of your contributions and withdrawals ensures that you are not overspending or under saving, and helps you make informed decisions about where to allocate your funds. Consistent tracking also allows you to adjust your financial plan if your circumstances change, which is especially important when planning for retirement or other major life events. By staying vigilant about your plan and regularly checking in on your progress, you can ensure that you are well-positioned for a secure financial future.

Similar to 401(k) account holders, traditional IRA account holders can start taking qualified distributions upon attaining age 59 ½ and must begin taking RMDs upon reaching a certain age (ranging from age 70 ½ to 75 depending on one’s birth year).  Failure to make required withdrawals can result in a heavy penalty of up to 50% of the RMD amount not taken.

In contrast to traditional IRAs, Roth IRAs do not have RMD requirements while the owner is alive.   However, in order to avoid a 10% early distribution penalty on the earnings, withdrawals must be taken after age 59 ½, and after a 5-year holding period, with exceptions for circumstances such as first-time home purchases, college expenses, etc.

Roth 401(k)s have similar age 59 ½ and 5-year holding period requirements as with Roth IRAs, but similar to the traditional 401(k), some Roth 401(k) plans may also offer alternative options for hardship distributions or a loan.

The Importance of Monitoring Your Plan – Keeping Track of Contributions and Withdrawals

As a responsible saver or investor, monitoring your financial plan is critical for staying on track and achieving your long-term goals. Keeping track of your contributions and withdrawals ensures that you are not overspending or under saving and helps you make informed decisions about where to allocate your funds. Consistent tracking also allows you to adjust your financial plan if your circumstances change, which is especially important when planning for retirement or other major life events.

Retirement planning is essential to build a secure financial future. By understanding the details of retirement savings plans and the various types, benefits, and tax advantages, you can make a more informed decision about how to save for retirement. With careful planning, saving for retirement does not have to be difficult, and it can help you on a path toward financial stability and peace of mind.

Start Your Retirement Plan Today with Members Trust Company

At Members Trust Company, we understand the importance of meeting our clients’ unique investment objectives, specific needs, and suitable risk tolerance levels. We offer seven distinct ETF models that have been carefully designed to cater to a variety of investor preferences.

Our investment team is comprised of highly skilled and experienced professionals who monitor each of the ETF models against industry-standard benchmarks. This diligent approach allows us to identify any deviations or variances from our target allocations and take proactive measures to realign the portfolios. We understand that the market and industry dynamics are constantly evolving. Therefore, our team ensures that these environmental changes are duly considered during the rebalancing process to optimize our clients’ returns within their acceptable risk parameters.

We believe that a prudent and disciplined investment approach is essential in generating consistent returns for our clients. Members Trust Company remains fully committed to delivering market-leading investment solutions, including IRAs and FlexIRAs, that cater to our clients’ diversification, growth, and income objectives.

Discover More Flexibility with the FlexIRA

Members Trust Company’s FlexIRA product provides additional benefits for IRA account owners seeking to optimize their estate planning options. The flexibility of the product is indicated in its name, as it offers three different support levels to allow account owners to choose the best option that fits their individual needs. With the FlexIRA, beneficiaries gain access to innovative payout options that enable them to use retirement savings in different ways.

The first key benefit of the FlexIRA is its ability to extend payouts beyond the 10-year limit, which was established by the SECURE Act in 2019. This is an important feature for those who want to provide additional support to their beneficiaries, such as children or grandchildren, over an extended period of time.

In addition, the FlexIRA product allows IRA account holders to support beneficiaries with special needs without risking access to government benefits, which is a critical consideration for many families. This feature is attractive for IRA account owners who have dependents with disabilities, as it can provide financial security beyond the account owner’s lifetime.

Another benefit of the FlexIRA product is its ability to adapt as your circumstances change. If you change your mind about the level of support you want to provide to your beneficiaries, you can easily upgrade your plan from one option to another, at no additional cost. This level of flexibility is crucial, particularly given that estate planning often requires regular reviews and updates.

The FlexIRA also offers the ability to grow assets tax-free for charities while providing a steady income stream for the charities chosen by the account owner. The option to support charities in this manner not only benefits the organization but also provides an opportunity for individuals to give back in a way that has been traditionally reserved for larger corporations. With the FlexIRA, the account owner has the power to choose how his or her retirement savings can contribute to the greater good. In conclusion, the FlexIRA offers greater flexibility and distribution options for account holders as they provide for their beneficiaries, protect their assets, and support charitable organizations.

Start your retirement plan today, give us a call at (888) 727-9191.

Non-deposit investment products available through Members Trust Company are not deposits of or guaranteed by the trust company, a credit union or credit union affiliate, are not insured or guaranteed by the NCUA, FDIC or any other governmental agency and are subject to investment risks including possible loss of the principal amount invested. Members Trust Company, owned and managed by America’s credit unions, is a special purpose federal thrift regulated by the Office of the Comptroller of the Currency. Past performance is not indicative of future results. This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant. Any opinions expressed are those of the presenter and do not necessarily reflect the position of Members Trust Company. The information above is obtained or compiled from sources we believe to be reliable. We Do Not Guarantee that such information, will be free from errors, omissions, whether human or mechanical, nor do we guarantee their timeliness, accuracy, or completeness.