black people and money

When Saving In Your 401(k) Can Be Too Much Of A Good Thing

When Saving In Your 401(k) Can Be Too Much Of A Good Thing

By Ryan Velez

As a financial professional, Matt Hausman often gets questions and requests for information both in his personal and professional life. When he does feel like providing some help, he asks whether or not they have a diversified portfolio.

“Usually the answer is yes; they’ll say they have stocks, bonds and mutual funds,” he shares. “And I’ll say, ‘I mean are you tax diversified?’ Most people haven’t put much thought into that, because they haven’t thought about what the taxes will be when they start to withdraw their retirement funds.” In an article he penned for The Network Journal, Hausman explains that one of the biggest investment mistakes he sees is investors overfunding their tax-deferred accounts.

In fairness, there’s a reason why so many people put their money in a 401(k), traditional IRA, or similar retirement account, as it is easy and often what industry advice tells them to do. However, while many people get hung up in the chance to save on taxes and tax-deferred growth, there is never a discussion on the exit strategy from said plans.

“Unfortunately, what consumers don’t realize is how that money is going to be taxed when they add in the rest of their retirement income – Social Security and a pension if they have one. They may think their tax brackets will be lower in retirement because their incomes will be lower then. The reality is that most people don’t want to see their incomes dramatically drop when they retire,” Hausman explains. Many people may not have access to the itemized deductions that helped lower their tax bills in the past, either.

While there is no ideal solution that matches every situation, one technique that Hausman suggests is what he calls “filling the top of your bracket..” An example is someone who is married and in the 25% tax bracket, with an adjusted gross income of $130,000, but that bracket actually goes up to $153,100. The temptation to convert $20,000 to a Roth IRA is clear, but instead, what you should do is fund your 401(k) up to your company match, and then, if your company offers a true Roth 401(k), put it in a regular investment account.  As a result, you need to be clear when talking to your financial professionals that they are not so hung up on saving you on taxes (a noble endeavor) that they miss the big picture. A holistic approach will ultimately help you get the most out of your earnings.

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