Tag Archive for: Roth IRA

How Can I Give My Kids a Head Start on Investing?

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The earlier you start investing, the better. You’ve likely heard this advice before, and hopefully it’s helped you make some smart financial moves. But there’s one group that may not yet know this bit of investing wisdom: the kids in your life.

Whether you have kids, grandkids, or nieces and nephews, these youngsters have an enormous asset on their side: time. Helping them get an early start with investing can give them a huge financial boost. The good news is that there are a lot of ways you can help set up the next generation for financial success. Let’s explore some options.

529 Plans: A Great Tool for Future Education Costs

With rising education costs, 529 plans are often the first type of investment account that parents open for their children. It makes sense. They’re one of the best tools available for long-term education savings. 

You probably already know the main benefits: tax-deferred investment growth, tax-free withdrawals for qualified education expenses and no federal contribution limits (though gift tax may apply beyond annual contributions of $19,000 for 2025). Friends and family can contribute, and funds can be used for a growing range of expenses: college, of course, but also up to $10,000 per year for K–12 tuition. And excess funds can be rolled over to another family member, used to pay for grad school or even used to pay off student loans. 

Custodial Accounts: More Flexibility but Less Control

But what if you want to help your child invest toward future expenses not covered by a 529 plan, like car repairs, travel or the down payment on a house? That’s where custodial accounts might be appropriate. UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are typically easier to set up than a trust and can accomplish some of the same goals.

Custodial accounts let you invest in a variety of assets in a child’s name, including stocks, bonds, mutual funds and even real estate. UTMA accounts also let you hold complex assets like art and intellectual property. There are no contribution limits, and the funds can be used for anything that benefits the child while they’re still a minor. However, your child takes complete control over the account when they reach adulthood (usually age 18–21, depending on the state). At that point, they can use the funds for any purpose.

Note that investment earnings may be subject to the so-called kiddie tax. For 2025, that means the first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child’s marginal rate, and anything above that may be taxed at the parent’s marginal tax rate. Another word of caution: Custodial accounts are considered the child’s asset, which may impact financial aid eligibility more than a 529 plan would.

Roth IRAs: Even Kids Can Start Saving for Retirement 

If you’re thinking even longer-term, you can help your kids start saving for retirement by opening a custodial Roth IRA on their behalf. Roth IRAs allow them to enjoy decades of tax-free investment growth and tax-free withdrawals in retirement. 

To fund any IRA, the child must have earned income—such as from babysitting gigs or slinging ice cream over the summer. Those contributions cannot exceed their total earnings or the $7,000 annual limit (for 2025), whichever is lower. Then, once the child reaches adulthood (usually 18–21, depending on the state), they can transfer those savings to a new account to keep building a bright financial future. 

Beyond Investment Benefits: Teaching Financial Literacy

One of the best financial gifts you can give a child isn’t just money—it’s knowledge. And opening an investment account is an opportunity to introduce your family to some of the most important concepts in personal finance. 

You can start by talking to your kids about budgeting, saving and what it means to invest. Review account statements with them to highlight the power of compounding and the benefits of tax deferral. Use the target-date portfolios in a 529 plan to teach your kids about the value of diversification. Bring them into decisions when picking investments for a custodial account or Roth IRA. It’s a great chance to discuss the long-term advantages of choosing broader market exposure over trying to pick single stocks. 

The earlier a child understands how money and investing works, the better their odds for achieving long-term financial goals. We’re here to help you give them that head start—whether it’s setting up accounts, discussing financial strategies or sharing more ideas for teaching kids about money.

Veronica Cabral

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Kick-start Your Child’s Financial Journey with Roth IRAs

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Summer break is here, and many young people will be working at a summer job or internship. While earning a paycheck is exciting, it can also be an excellent time to consider opening a Roth IRA and contributing a portion of their summer earnings. Not only does this jump-start retirement savings from an early age, but it can also serve as a positive learning experience about the principles of saving, investing, and cultivating long-term wealth.

The Roth IRA offers a unique combination of tax advantages and flexibility, making it an excellent choice for young savers.

Here are a few key benefits:

  • Tax-free growth: Roth IRA contributions are made with after-tax dollars, so your child won’t pay taxes (and perhaps penalties) until they make withdrawals.
  • Penalty-free withdrawals of contributions at any time: Your child can withdraw up to the amount of their total contributions at any time, for any reason, without paying taxes or penalties.
  • Early withdrawals of earnings: If your child withdraws amounts that exceed their contributions before age 59½ or before the account has been open for five years, they may face taxes and a 10% early withdrawal penalty on the earnings portion of the withdrawal.
  • Exceptions to early withdrawal penalties: Your child can withdraw funds before age 59½ or before the account has been open for five years for several reasons (keep in mind that you may be able to avoid penalties but not taxes on any earnings), including:
    • Funds can be used for qualified higher education expenses. 🎓
    • First-time home purchase (up to a $ 10,000 lifetime limit.)
    • If your child becomes disabled. ♿
    • For certain emergency expenses. 🏥
    • If your child is unemployed, they can use a withdrawal to help pay for health insurance premiums. 🩺

The flexibility and withdrawal choices for a Roth IRA can make it an attractive choice for young savers who may need access to their money in the future while still providing a powerful tool for long-term wealth building.

Keep in mind that with a Roth IRA, to qualify for the tax and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be made under certain other circumstances, such as in the examples we listed above. The original Roth IRA owner is not required to take minimum annual withdrawals.

Eligibility requirements

To contribute to a Roth IRA, your child must have earned income from a job, and the maximum contribution for 2024 is $7,000 or the total of their earned income, whichever is less. You can open and manage the account until they reach the age of majority in your state.

One more thing: They may need help filling out their Form W-4

If your child makes less than $14,600 in 2024, they may want to claim an exemption from withholding on their W-4 form by writing “Exempt” on line 4(c) of the form.

Here’s why:

  • Standard deduction: For the 2024 tax year, the standard deduction for a single filer is $14,600. If your child’s total income for the year is less than this amount, they won’t owe any federal income tax.
  • Claiming exemption: If your child expects to owe no federal income tax for the year and wants to have no tax withheld from their paycheck, they can write “Exempt” on line 4(c) of Form W-4. This means their employer won’t withhold any federal income tax from their paychecks.
  • Remember that if your child claims exemption, Social Security and Medicare taxes may still be withheld from their paychecks. Also, if their situation changes and they owe federal income tax for the year, they may face underpayment penalties.
  • Our ideas in this letter are for informational purposes only and are not a replacement for real-life advice. Consider consulting your tax, legal, and accounting professionals if you have questions about completing Form W-4.

If you’d like to discuss opening a Roth IRA for your child or grandchild, feel free to contact us. And feel free to share this with anyone you think might be interested.

Wishing you and your family a wonderful start to the summer!

Bryan Cassick, MBA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

What to Do With a 529 Balance

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Watching your child earn a college diploma is a proud moment for any parent. It also marks another great moment: No more tuition bills. But after all the saving and planning you’ve done, what if there’s still money left over in your child’s 529 plan? Fortunately, you’ve got plenty of options. Here’s a list of strategies to make the most of those surplus education savings.

Keep Paying for School

If your newly minted graduate is pursuing a higher degree, that’s an easy way to spend down the balance in their 529 plan. These funds can be used to cover the same types of qualified educational expenses for graduate programs.

Name a New Beneficiary

If grad school isn’t in your child’s future, the most straightforward option for surplus funds is to assign the 529 account to a new beneficiary. You can change beneficiaries with no penalties or tax consequences, but the person must be related to the original beneficiary by blood, marriage, or adoption. That definition is broader than it sounds: For example, it includes in-laws, first cousins, first cousins’ spouses, and stepparents. You can even name yourself as the new beneficiary and spend the funds on your own continued education.

Repay Student Loans

If your graduate has taken on student loan debt, you can use 529 funds to help pay it down, subject to a lifetime limit of $10,000. You can also use up to $10,000 per sibling to repay their loans, which you can do without changing the beneficiary.

A few things to bear in mind: Most, but not all, student loans qualify. Private student loans must meet several criteria to be included in the program. For example, they must have been used solely for qualified education expenses for a degree or certificate program at an institution eligible for Title IV federal student aid. And they can’t be personal loans from a family member or a loan from a retirement plan. 

Also, 529 plans are run by states, and their rules don’t always align perfectly with federal legislation. We can help you check your 529 to see whether withdrawals for student loan payments will trigger any state tax penalties.

Roll Over Funds Into a Roth IRA

The SECURE 2.0 Act of 2022 added a brand-new option for unused 529 funds. If your 529 plan is at least 15 years old, you can transfer up to $35,000 into a Roth IRA in the beneficiary’s name with no taxes or penalties. 

The biggest limitation with this option is that rollovers are subject to the annual $7,000 Roth contribution limit. (If the beneficiary is 50 or older, that amount rises to $8,000.) You also can’t roll over more than the income earned by the beneficiary in that tax year. Any other contributions made to your beneficiary’s traditional or Roth IRA will reduce the amount you can roll over that year.   

Take the Money…and the Penalty

If you spend 529 funds on nonqualified expenses, you’ll be charged federal income tax and a 10% penalty on the earnings portion of your withdrawal. While doing so isn’t always ideal, it is an option—and sometimes, it may be the best one. For example, if you face a pressing financial need and your only other choice is to take on high-interest debt, paying the taxes and penalties on a nonqualified 529 withdrawal may be less expensive in the long run.

It’s also possible that the earnings portion is small enough to render the penalty insignificant. Let’s say you had $500 dollars left in the account, with contributions accounting for $420. In that case, only $80 would be subject to taxes and penalties. You might decide it’s worth taking the hit to be able to close the account and move on.

The bottom line is that 529 college savings plans have more flexibility than you might think. Reach out, and we will gladly help you weigh all the options for leftover funds. Congratulations to all the recent grads out there—and to the parents who helped foot their tuition bills.

Bryan Cassick, MBA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Young Investor’s Guide to Building a Financial Future—Part 2: Investing for Your Goals

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In the first installment of our Young Investor’s Guide to Building a Financial Future, we looked at avoiding credit card debt to set you off to a healthy start, the benefits of investing over the long term and the advantages of doing so in a retirement account, such as a 401(k) or IRA.

In the second part of this two-part series, we discuss three more investment concepts every young investor may want to embrace:

  • The importance of diversification
  • The dangers of market timing and stock picking
  • The benefits of investing according to a plan that fits your personal goals

Get Diversified

Short-term market swings can challenge even the most resilient investors. However, history shows that over the long term, markets tend to smooth out and trend upward. Diversifying your investments involves spreading risk across various types of assets, not just increasing the number of holdings.

While this may make intuitive sense, many investors come to us believing they are well-diversified when they are not. They often hold numerous stocks or funds across multiple accounts, yet upon examination, their portfolios are heavily skewed towards large U.S. companies or narrow market sectors. Diversification is effective because various investments respond differently to market shifts. When one falters, others may thrive, balancing overall portfolio performance. However, if holdings are too similar, the benefits of diversification diminish over time.

In short: 

Investing in a wide range of assets from different sectors, sizes, and geographies can create a robust portfolio that is better equipped to handle market fluctuations over time.

Avoid Speculating

Focusing on broad market indices helps avoid detrimental speculative behaviors that can harm long-term returns. 

Market timing—buying and selling stocks based on breaking news and short-term market movements—often turn out poorly. Because you’re typically buying into hot trends and selling when conditions are scary, you end up buying when prices are high or selling when prices are low. In both cases, that behavior can significantly impact savings and hinder financial goals

In fact, research consistently shows that investors’ attempts at market timing generally underperform broader indices like the S&P 500, with average equity fund investors trailing by approximately 5.5% in 2023 due to poor timing decisions according to a long-running annual survey of investor behavior by DALBAR.

Similarly, stock picking can reduce diversification and increase concentration risk, where a few stocks can heavily influence your portfolio’s performance. Investors are typically rewarded for taking on systematic risk, or risk inherent to the entire market. Concentration risk is not systematic. It is specific to individual stocks and doesn’t reliably yield rewards. Holding a significant portion of your portfolio in a few stocks exposes you to outsized impacts; for example, a single company’s bankruptcy could lead to substantial losses.

It’s also exceedingly difficult to pick stocks that will outperform the broader market over time. In 2023, over 70% of companies in the S&P 500 Index underperformed the index. These results vary from year to year. But since a handful of companies often drive most of the stock market’s returns, choosing just when to sell the future losers and buy the next big winners can end up becoming an impossible—and often losing—game. 

In short: 

Timing the market can lead you to buy stocks when they’re expensive and lock in losses by selling during downturns. When it comes to stock picking, it’s exceedingly difficult to pick single stocks that will be winners, and holding concentrated stock positions can introduce uncompensated risk to your portfolio. Instead, build a diversified portfolio as part of your long-term financial plan. 

Follow a Plan That Fits Your Goals

So how should you divide up your diversified investments? Start with your asset allocation, which is how your portfolio is spread among asset classes including stocks, bonds and cash. Then base your asset allocation on your personal goals, tolerance for risk and the length of time you have to invest. 

In short:  

Build your portfolio based on your personal goals, risk tolerance and time horizon rather than chasing or fleeing hot or cold investments or focusing on generalized rules of thumb.

Interested in learning more about how to take the first steps toward meeting your personal financial goals? Reach out to set up a time, and let’s talk. 

Bryan Cassick, MBA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Young Investor’s Guide to Building a Financial Future—Part 1: Where Do You Start?

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The future looks bright for younger investors. A 2024 analysis by the Investment Company Institute found that, adjusted for inflation, Gen Zers have nearly three times more retirement assets than Gen Xers did at the same age. This shift is largely due to improvements in the retirement system, such as 401(k)s and employee stock purchase plans.

For new investors, getting started can be overwhelming. With so much information out there, it can be hard to know where to start. The good news is that understanding a few basic principles can set you on the path to a healthy financial future.

In this first of a two-part series, we’ll cover three key concepts for young investors:

  • Getting started on the right foot by avoiding debt
  • Embracing the power of long-term investing
  • Making the most of tax-advantaged accounts

Avoid the Vicious Cycle of Credit Card Debt

Debt impacts your financial life, reducing money available for future growth. Every dollar spent on paying down a credit card bill or car loan is one less dollar that can grow for your future. Minimizing bad debt is essential for a strong financial future.

Not all debt is bad. Low-interest student loans and reasonable mortgages can be beneficial as you can follow a career path or build equity. However, high-interest credit card debt can quickly become expensive and hinder your ability to save and invest.

Credit card debt is particularly harmful due to high interest rates, often around 20% or more. If you carry a balance, interest accrues, and making only minimum payments means your debt grows over time. For example, let’s say you have $1,000 in debt on a credit card with a 20% interest rate. If you only make minimum payments of 2%, it will take you 195 months—more than 16 years—just to pay off this single debt. In that time, you will have paid $2,126.15 in interest—more than double the amount of your original debt. 

In short: 

Use high-interest debt cautiously and pay off your credit card balance quickly. This avoids debt cycles and frees up cash for saving and investing.

Stay Invested for the Long Haul

As a young investor, you may have limited funds, but you have plenty of time. Decades until retirement mean your modest investments can grow significantly.

This growth is due to compounding returns—earning returns on your returns. The longer your money is invested, the more it benefits from exponential growth.  In tax-advantaged retirement accounts, these benefits are magnified as tax-deferred and tax-free growth allows even more money to compound over time. 

In short: 

The longer you stay invested, the more your investments can grow exponentially, thanks to compounding returns.

Make the Most of Tax-Advantaged Retirement Accounts 

The government incentivizes saving for the future by offering substantial tax benefits through retirement savings plans like 401(k)s and individual retirement accounts (IRAs). 

Employer-sponsored plans such as 401(k)s allow you to contribute pretax income, with a maximum contribution of $23,000 in 2024. Additionally, many employers match your contributions, essentially offering free money. Contribute enough to receive these matches to maximize your benefits. 

During tax season, neither your contributions nor your employer’s contributions are taxed as income, and investments within the account grow tax-deferred. You won’t have to pay any taxes until you start taking withdrawals from that account, encouraging the growth of your savings through compounding. Eventual withdrawals are taxed at ordinary income tax rates and withdrawing before age 59½ may incur a 10% penalty on top of regular taxes.

If you want to save even more, consider traditional IRAs, which also permit pre-tax contributions (up to $7,000 in 2024). Like 401(k)s, investments in traditional IRAs grow tax-deferred, with withdrawals taxed as ordinary income. 

Alternatively, there is one other account: Roth IRAs. Unlike traditional IRAs, Roth IRA contributions are after-tax, meaning contributions aren’t tax-deductible, but withdrawals in retirement are tax-free. This arrangement is advantageous, especially for younger investors in lower income tax brackets, as investments grow tax-free.  After your account has been open for five years, you can access your principal contributions penalty-free. However, withdrawing investment gains before age 59½ may incur penalties. Nonetheless, it’s essential to view retirement funds as a last-resort resource and prioritize long-term saving goals over short-term needs.

In short:  

Maximize contributions to retirement plans to leverage their tax-sheltered growth. and take full advantage of employer matching contributions to optimize benefits.

Next up, we’ll take a look at the importance of building a diversified investment portfolio, why speculating can harm your long-term prospects, and how to build an investment plan that meets your individual goals. 

Interested in learning more about how to take the first steps toward meeting your personal financial goals? Reach out to set up a time, and let’s talk.

Bryan Cassick, MBA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Have You Heard of the “Mega Backdoor Roth IRA”?

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Chances are if you are reading this, you’re already at least somewhat familiar with a Roth IRA. While the contribution limit will vary over time, in 2019 the limit is $6,000, plus an additional $1,000 catch up contribution for individuals over the age of 50. This limit is per individual, allowing married couples to contribute up to a maximum of $12,000-$14,000 depending on their age. Direct contributions to a Roth IRA also have an income phase-out limit that you’ll need to be aware of, which starts at $122,000 for single filers and $193,000 for joint filers.

What if I told you there was a way to contribute to a Roth IRA well beyond these limits, regardless of your income level? At some employers, you can.

The typical “backdoor Roth IRA” is a strategy for individuals to contribute to a Roth IRA that are over the income phase-out limitation for a direct contribution. This can be beneficial for many people, but still caps your contributions at only $6,000 or $7,000 per year. In some cases, your 401(k) may allow the ability to contribute on an “after-tax” basis, which opens up a world of possibilities for additional Roth contributions.

Roth contributions are contributed on an after-tax basis(meaning no current tax deduction), but earnings grow tax-free as long as you meet all the withdrawal eligibility rules set by the IRS. This means you must be at least age 59 ½ and meet the IRS’ “5 year rule” at the time of withdrawal.

An “after-tax” contribution works similar to a Roth contribution, but the taxation differs slightly. A pure after-tax contribution also provides no current tax deduction, but earnings associated with the money grow only tax-deferred and are later taxable at ordinary income rates upon distribution. As you can see, Roth dollars are generally more valuable than pure after-tax dollars.

The good news is, there is a fairly easy way to convert your pure after-tax dollars into Roth dollars so that all earnings grow tax-free. Once you hit the $19,000(plus $6,000 catch up for individuals over the age of 50) annual limit for your pre-tax and/or Roth contributions into your 401(k), you will want to begin contributing on an after-tax basis.

Pure after-tax contributions are not subject to the typical annual contribution limit of $19,000 or $25,000. Instead, they are capped at an overall 401(k) contribution limit of $56,000 or $62,000. This overall limit includes all of your pre-tax, Roth, employer matching, and after-tax contributions combined. In other words, if you make $100,000 per year and are under the age of 50, your pre-tax/Roth contributions are $19,000, your employer match is $6,000, and your maximum after-tax contributions are $31,000. ($56,000 – 19,000 – 6,000 match = $31,000 of remaining after-tax contribution ability). This additional $31,000 could then be rolled into a Roth IRA, allowing for the “mega backdoor Roth” contribution. This means you can potentially get up to $37,000 per year into a Roth IRA!

There is one caveat to this however. When you convert your after-tax contributions to a Roth IRA, any earnings that are associated with the after-tax contributions that enter the Roth IRA will be taxable. If you contributed $10,000 after-tax and that money has since grown to $12,000, you will pay tax on the $2,000 should you put the full $12,000 into the Roth IRA. This can be circumvented by removing only the pure after-tax contributions(basis) and leaving account earnings in the 401(k) account to grow tax-deferred and be withdrawn at a later date. For this reason, the sooner you can get the money from the after-tax 401(k) to the Roth IRA, the sooner your money will be growing for you tax-free. Once the money is in the Roth IRA, you are open to the entire world of investing beyond what is offered in the 401(k) plan. You have the ability to have the money invested in mutual funds, ETFs, stocks, bonds, and with the oversight of professional management should you choose.

This is a great savings strategy for individuals who are looking to increase the amount of their retirement savings and want to do so in a tax-advantaged way. For individuals who have the excess cash flow and budgetary means of doing so, the “mega backdoor Roth” is a no brainer. While this strategy can be complex, once initially set up the ongoing maintenance is minimal. Warren Street Wealth Advisors is here to assist and facilitate after-tax contributions, conversions to Roth accounts, and the underlying investment management. For individuals looking to take advantage of this huge tax savings opportunity, be sure to contact us for help getting this strategy implemented for your situation. Please bear in mind this strategy is only applicable to individuals who are already maximizing their current pre-tax or Roth contributions in the 401(k).

If you have any questions on the strategy or investments and tax planning in general, be sure to reach out and contact us as we are happy to help. As with nearly everything financial planning, specific rules and details will need to be implemented on a case by case basis, so be sure to contact us with the specifics of your case.

Justin D. Rucci, CFP®

Wealth Advisor

Warren Street Wealth Advisors

 

Justin D. Rucci, CFP® is an Investment Advisor Representative, Warren Street Wealth Advisors, a Registered Investment Advisor. Investing involves the risk of loss of principal. Justin D. Rucci, CFP® is not a CPA or accountant and the information contained herein is considered for general educational purposes. Please seek a qualified tax opinion or discuss with your financial advisor as nothing in this publication is considered personal actionable advice.

Case Study: Retire Early, Without Penalty

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Case Study – Retire Early, Without Penalty

Learn how we helped a client retire early, without penalty, move out-of-state, and get their desired income level by constructing a strong financial plan.

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Download Case Study: Retire Early, Without Penalty

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Contact Us

Blake StreetBlake Street CFA, CFP®
Founding Partner
Chief Investment Officer
Warren Street Wealth Advisors

Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

The IRA and the 401(k)

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The IRA and the 401(k)

Comparing their features, merits, and demerits. 

How do you save for retirement? Two options probably come to mind right away: the IRA and the 401(k). Both offer you relatively easy ways to build a retirement fund. Here is a look at the features, merits, and demerits of each account, starting with what they have in common.

Taxes are deferred on money held within IRAs and 401(k)s. That opens the door for tax-free compounding of those invested dollars – a major plus for any retirement saver. (1)

IRAs and 401(k)s also offer you another big tax break. It varies depending on whether the account is traditional or Roth in nature. When you have a traditional IRA or 401(k), your account contributions are tax deductible, but when you eventually withdraw the money for retirement, it will be taxed as regular income. When you have a Roth IRA or 401(k), your account contributions are not tax deductible, but if you follow Internal Revenue Service rules, your withdrawals from the account in retirement are tax-free. (1)  

Generally, the I.R.S. penalizes withdrawals from these accounts before age 59½. Distributions from traditional IRAs and 401(k)s prior to that age usually trigger a 10% federal tax penalty, on top of income tax on the withdrawn amount. Roth IRAs and Roth 401(k)s allow you to withdraw a sum equivalent to your account contributions at any time without taxes or penalties, but early distributions of the account earnings are taxable and may also be hit with the 10% early withdrawal penalty.1  

You must make annual withdrawals from 401(k)s and traditional IRAs after age 70½. Annual withdrawals from a Roth IRA are not required during the owner’s lifetime, only after his or her death. Even Roth 401(k)s require annual withdrawals after age 70½. (2)

Now, on to the major differences.

Annual contribution limits for IRAs and 401(k)s differ greatly. You may direct up to $18,500 into a 401(k) in 2018; $24,500, if you are 50 or older. In contrast, the maximum 2018 IRA contribution is $5,500; $6,500, if you are 50 or older. (1)

Your employer may provide you with matching 401(k) contributions. This is free money coming your way. The match is usually partial, but certainly, nothing to disregard – it might be a portion of the dollars you contribute up to 6% of your annual salary, for example. Do these employer contributions count toward your personal yearly 401(k) contribution limit? No, they do not. Contribute enough to get the match if your company offers you one. (1)

An IRA permits a wide variety of investments, in contrast to a 401(k). The typical 401(k) offers only about 20 investment options, and you have no control over what investments are chosen. With an IRA, you have a vast range of potential investment choices. (1,3)

You can contribute to a 401(k) no matter how much you earn. Your income may limit your eligibility to contribute to a Roth IRA; at certain income levels, you may be prohibited from contributing the full amount, or any amount. (1)

If you leave your job, you cannot take your 401(k) with you. It stays in the hands of the retirement plan administrator that your employer has selected. The money remains invested, but you may have less control over it than you once did. You do have choices: you can withdraw the money from the old 401(k), which will likely result in a tax penalty; you can leave it where it is; you can possibly transfer it to a 401(k) at your new job; or, you can roll it over into an IRA. (4,5)

You cannot control 401(k) fees. Some 401(k)s have high annual account and administrative fees that effectively eat into their annual investment returns. The plan administrator sets such costs. The annual fees on your IRA may not nearly be so expensive. (1)

All this said, contributing to an IRA or a 401(k) is an excellent idea. In fact, many pre-retirees contribute to both 401(k)s and IRAs at once. Today, investing in these accounts seems all but necessary to pursue retirement savings and income goals.

I want to talk to someone about my IRA or 401(k)

J Rucci

Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

Justin D. Rucci is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by Marketing Pro, Inc. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

Citations.

1 – nerdwallet.com/article/ira-vs-401k-retirement-accounts [4/30/18]
2 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions [5/30/18]
3 – tinyurl.com/y77cjtfz [10/31/17]
4 – finance.zacks.com/tax-penalty-moving-401k-ira-3585.html [9/6/18]
5 – cnbc.com/2018/04/26/what-to-do-with-your-401k-when-you-change-jobs.html [4/26/18]