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Are Your Retirement Savings Diversified Enough?

Are Your Retirement Savings Diversified Enough?

March 01, 2024

Over 4 million Americans will turn 65 this year, entering into prime retirement age. Today’s retirees are some of the first to start their golden years with a 401(k) plan as their primary savings tool, as opposed to a pension plan.


You may have done everything right during your working years — saving diligently, taking advantage of your company match and building a healthy nest egg to provide for your retirement needs. But if all of your retirement money is sitting in a 401(k), you might be in for a rude awakening when it comes time to use those funds.


While 401(k) plans have several benefits, many savers and investors are unaware of how relying solely on a pre-tax account can impact their future tax liability. As you work toward your golden years, it’s critical to put money into several different savings vehicles that use both pre-tax and post-tax dollars.


Why Does Diversification Matter?

Most people understand what diversification means when it comes to an investment portfolio: Investing in a variety of asset classes and industries can help spread out your risk and protect your investments from major dips on Wall Street. Diversifying your savings helps protect against high taxes and timing issues in retirement.


A pre-tax account, like a traditional 401(k) or IRA, holds money that has not been taxed yet, so you will owe taxes when you withdraw from the account. On the other hand, post-tax savings accounts, such as a Roth 401(k) or IRA, are funded with contributions that have already been taxed. The money then grows tax-free and can be used tax-free in the future.


Unfortunately, very few people save with both types of accounts, which can derail your goals. If all your retirement money is in a pre-tax account, you may not be able to retire when you want to. Even if your 401(k) balance is over $1 million, the taxes you’ll owe in retirement can quickly deteriorate your nest egg.


It’s also important to pay attention to when you can access your money. Both IRAs and 401(k)s are subject to early withdrawal penalties if you try to use your money before age 59 ½. If all of your money is tied up in these types of accounts, you might have a hard time paying for your retirement expenses if you want to retire before age 59 ½.


What’s the Solution?

Opening a brokerage account can help offset any tax or timing concerns. A brokerage account, sometimes called a non-qualified account, is an investment account without any contribution limits or early withdrawal penalties, in most cases. You can fund one with money from a regular savings or checking account and use it to invest in stocks, bonds, mutual funds or EFTs. Keep in mind, brokerage accounts are subject to capital gains taxes.


While a brokerage account isn’t necessarily a retirement-specific account, it’s an extremely powerful tool, especially for anyone hoping to retire early. You can use the income from your brokerage account to help bridge the gap between when you start retirement and when you’re able to access your other retirement accounts and Social Security benefits.


At Zephyrus Financial Services, we help manage brokerage accounts for many of our clients. The flexibility a brokerage account provides is often a good fit for anyone hoping to increase their savings and add more tax diversification to their plan. But what’s right for one client might not be right for another. That’s why we create a customized financial roadmap designed to meet your specific needs.


For some people, opening a Roth IRA is a great way to add more diversification to your savings. But for others, a Roth IRA doesn’t make much sense. Your adjusted gross income will need to fall below a certain threshold in order to contribute, and it doesn’t make sense to contribute to a Roth IRA if you’re in a high tax bracket.


There’s no one-size-fits-all solution. It’s important to consider all your options and pick a strategy that best aligns with your current situation and future goals.


All My Money is in a 401(k) — What Should I Do?

If retirement is on the horizon and all your money is stuck in a pre-tax account, don’t panic. There are several strategies to help lower your taxable income in retirement and create more tax-free income streams. All it takes is a little proactive planning.


We recommend meeting with a financial professional as soon as possible to find a solution that’s right for your situation. The sooner you meet with an advisor, the better — if retirement is right around the corner, it might be too late to make some adjustments.


If you want to learn more about your options, reach out to schedule a meeting with us. You can trust we will put your needs first, at all times and in every decision.


*A diversified portfolio does not assure a profit or protect against loss in a declining market.