This retirement account saving and spending roadmap can be of assistance whether you have just started your first job out of college or if you are in your late career counting down the days until a secure retirement. For those that are nearing or in retirement, we will share some insights on taking money out of your retirement accounts.
Company retirement plan contribution limits for 2023
The maximum contribution is $22,500 or 100% of your compensation, whichever is less for company sponsored retirement plans such as a 401k or 403(b).
If you are age 50 and older, you get a “catch-up” contribution of $7,500 for a total of $30,000. If you want to contribute to the “catch-up” bucket, you may have to indicate an additional withholding, so be sure to check with your plan provider.
Company retirement plan distributions – RMDs
Required minimum distributions (RMD) begin at age 73 if you have funds in an employer sponsored plan.
If you are still working for the company, you may be able to get an exception and delay the RMD until you have separated from service. The plan must allow this, and you must be employed for the entire year.
Types of Employer Sponsored Retirement Plans
You may be offered a 401k plan through your employer if they are a for-profit company. If they offer a company match, this is the first place you will want to allocate retirement savings dollars. For example, your company’s plan may match up to 3 percent of your salary or 50 cents up to 8 percent of your salary. The company match is free money that you can put toward your retirement savings. If you don’t participate, then you miss out on the match. Who would want to turn away free money?
Another advantage is that contributions are made on a pre-tax basis lowering your taxable income for the year. The money can usually be invested in a mix of mutual funds and exchange-traded funds, while some plans allow individual equities. The Bedell Frazier Financial Planning team can help you or your children with 401k asset allocation recommendations.
- Accumulation Key: If you want to contribute to the 50 and over “catch-up” bucket, you may have to indicate an additional withholding. Be sure to check with your 401k provider.
- In Retirement Key: If your plan allows, you may be able to access these savings at age 59.5 penalty-free if you are focused on early retirement. The growth of the investments over time is tax-deferred, which is a fantastic wealth accumulation tool. However, a 401k is subject to required minimum distributions (RMD) which is when you have to start taking withdrawals every year. The current age at which required minimum distributions begin is 73, and the withdrawals are taxed as ordinary income. There can be some tremendous financial planning opportunities in the years between the time you retire, no longer receive paycheck income and begin the mandatory ordinary income generated by your required minimum distributions.
Your contributions are after-tax dollars rather than pre-tax dollars, but when you make withdrawals in retirement, they are tax-free. The Roth 401k offers the combination of tax-free growth and tax-free withdrawals in retirement.
- Accumulation Key: If you contribute to your employer’s Roth 401k, you are still eligible to receive the company match, if they offer one. If your plan allows they may now place that match in a Roth bucket after SECURE Act 2.0 passed in December of 2022. If the plan doesn’t allow, it will be deposited into your traditional 401k.
- In Retirement Key: The withdrawals from a Roth 401k are tax-free. This sets up some tax diversification in your retirement withdrawals. Just as you diversify your investment portfolio, you should also consider diversifying your tax liability. Many investors have a disproportionate amount of their wealth tied up in tax-deferred accounts such as traditional IRAs and 401k. Roth 401k will no longer be subject to required minimum distributions (RMD) starting in January of 2024.
Similar to a 401k, a 403(b) is a taxed-advantaged retirement plan for non-profit organizations and some public-sector workers like teachers. The investment options are limited to mutual funds and annuities, with most plans not allowing individual equities, exchange traded funds (ETF) or Real Estate Investment Trusts (REITs).
- Accumulation Key: An extra perk of a 403(b) plan is that if you have worked for the same eligible organization for at least 15 years you are allowed to make a bonus contribution of $3,000 per year with a total lifetime of $15,000. This is in addition to your age 50 and over “catch-up” contribution of $7,500, meaning you could hypothetically contribute $30,000 for five years.
- In Retirement Key: If you are a retired public safety officer (police officer, fire firefighter, ambulance crew member), you can withdraw up to $3,000 from your 403(b) plan and use it to pay for accident, health, or long-term care insurance.
A 457 plan is a tax-advantaged retirement plan primarily for state and local government employees, like municipal employees and civil servants. In addition, some charities have 457 plans for their employees.
- Accumulation Key: A unique feature of 457(b) plans is that in the three years before retirement, you are allowed to contribute up to double the annual limit or 100% of your salary, whichever is less.
Your employer sponsored retirement plan is generally a key ingredient in building toward your eventual retirement. Saving in this bucket is usually the first step of a retirement savings roadmap. Not all plans are created alike. Contact us today to discuss your specific needs.