Are Retirement Accounts Scaring You Away from Financial Planning?

Many people (but not you, right?) are probably avoiding too much funding in retirement accounts like the plague.

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Why?

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Because there’s a lot of misconceptions on how they actually work.

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You either don’t know the rules, or someone has maybe confused you to the point of taking no action to clean up your investments.

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I’ve explored 4 misconceptions about retirement plans that I’ve heard, just in the past 2 weeks, followed by a more accurate explanation of the concepts involved.

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“Isn’t the IRA Rollover limit like $7,000?”

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When you leave a former job, you may vaguely remember that you have an option to do what’s called a rollover to an IRA.

You google “IRA contribution limits” and are discouraged to see that $7,000 is the most you can put in.?

Your motivation to take control of your retirement money is now stifled as you look at your 401(k) portal say $143,894.23.

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WAIT!!!

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You’re mixing up two different ideas.

Contribution: putting your income into an account.

Rollover: transferring a balance to a different account.

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Because you’ve already contributed to a 401(k) or 403(b), you can roll over the full balance. And if done correctly, none of it would be taxable.

“I don’t want to put my money into a retirement account so that it’s locked up.”

Allow me to introduce you to the Roth IRA.

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You contribute (remember that word?) after-tax dollars into the account. Any amount you contribute is therefore eligible to be returned to you without taxes or penalties.

It’s the earnings that could be subject to penalties and taxes.

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Example: you contribute $7,000 per year for 5 years ($35,000), and the account grows to $60,000 in total.

If you need cash, the $35,000 you put in can be returned without taxes or penalties. The $25,000 gains could be subject to tax and penalty if you pull them out before age 59.5.

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“I’ve maxed out my 401(k).”

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Let’s examine what “max out” means for your company retirement plan.

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For example, your company offers a 100% match up to 5%.

• You put in 5% of your income.
• You make $150,000, so that means you contribute $7,500.
• You say “I’m maxed out.”

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No, you’re not “maxed out.”

You actually have $15,500 more dollars you can put in (for 2024).

401(k) & 403(b) plans allow you to defer up to $23,000 + $7,500 (for those age 50+).

If you’re looking for a tax-deferral (or even another Roth option), then understanding this figure is important.

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“401(k)s are a scam.”

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I’m going to take a wild guess that the first time you heard this, it came from someone trying to sell you life insurance, cryptocurrency, or a real estate investment course.

401(k) plans, like every other financial mechanism out there, are tools to accomplish a goal.

Whether it’s the right tool for you is a separate discussion.

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You can still take advantage of matches and profit sharing, features that aren’t readily available in IRAs or Roth IRAs.

Unlike Roth IRAs, though, you don’t get the friendly return of contributions free of tax and penalty.

But see, right off the bat there’s a couple pros and cons.

Be wary of anyone telling you “this is a scam,” when millions and millions of people are actively using them to live prosperous retirement lifestyles.

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Don’t be afraid of those retirement accounts just because you want to retire before 60.

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There’s plenty of opportunity to use them productively as a piece of the plan. But sure, they don’t have to make up your whole financial plan.

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If you want to learn more about finding the right balance between saving for the next 5 years, then the next 20, then the next 50… that’s kind of what I do.

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Learn more about me by visiting my bio on the Century Financial website.

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Send me a message with your thoughts or questions!