- U.S. citizens ought to vary their retirement savings to safeguard against potential alterations in taxation.
- Financial planner Georgia Lord mentioned that adaptability during one’s elder years is crucial.
- READ MORE: 'Major misconception' leading Americans to lose potential retirement earnings
A 401(K) is a valuable vehicle for workers to build up a nest egg for retirement.
However, Americans should refrain from investing all their savings in their employer-sponsored plans, warns financial planner Georgia Lord.
Tax laws change constantly so it is crucial to diversify your retirement accounts to give you flexibility when it comes to accessing your savings later in life, she said, and avoid being caught out with a higher tax bill.
Most retirement accounts hold either tax-advantaged, tax-free, or taxable money.
"It’s crucial to distribute your funds among various account types according to their tax implications, ensuring that when you need to withdraw from these assets, you have adequate coverage," she explained to Ainoti.
In the same way that experts recommend diversifying any investment portfolio you might have, Lord, a financial planner at Corbett Road Wealth Management, recommends diversifying the retirement accounts you hold.
A conventional 401(k) is a 'tax-favored' account where employees contribute funds before taxes are deducted.
This enables you to postpone tax payments on your income while employed, helping you steadily accumulate savings over time.
Once you retire, you'll owe taxes on these funds — however, it’s likely that your taxable income will decrease compared to what it was when you were employed.
Roth IRAs and Roth 401(k)s are categorized as 'tax-free' because they consist of contributions made with after-tax dollars, which can lead to reduced tax obligations during retirement.
If tax rates continue to go up, said Lord, 'why not have some of your assets, at least, be tax free in retirement.'
'Taxable' funds include brokerage accounts which allow you to buy or sell a variety of investments, and are often after-tax contributions.
'We can't make decisions based on tax legislation today, because there's a very high chance that will change in the future - especially when we're talking about retirement for younger folk who have so many years ahead,' she said.
For example, The tax law from the Trump era, enacted in 2017, is set to expire soon. On January 1, 2026 - triggering significant alterations for millions of U.S. taxpayers.
It’s challenging to predict the tax rates at the time of your retirement, how much income you’ll have during retirement, how much you’ll have managed to save, and what your standard of living might be, she noted.
Lord explained that by organizing a combination of tax-advantaged, tax-free, and taxable funds, individuals can gain greater control over reducing their total tax burden and maintain their yearly income below specific limits.
Diversifying your retirement accounts offers more options when you start making mandatory withdrawals, referred to as required minimum distributions (RMDs), during retirement, she explained.
By planning ahead, you lower the risk of paying more in Medicare premiums or a higher percentage of your Social Security benefit becoming taxable if you earn too much or are pulling too much from your retirement accounts, she added.
Lord admitted that not every worker will manage to put money into their 401(k) and still have extra funds available for additional investments.
'Primarily, I would start by matching at least the contribution in a 401(k),' she stated.
'So it ultimately depends on whether you have the ability to save additional funds and which savings method would be most appropriate for you.'
For individuals with limited funds to invest, Lord suggests checking whether your 401(k) plan offers the option to create a Roth account inside it.
This would help you diversify without having to open a separate account.
'Almost all 401(K)s have the option to have Roth dollars within it,' she said.
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