When considering your retirement, specifically as it relates to a retirement account, it is good to know there are two keys to creating more wealth from the same starting point, with the same amount of resources. One offers a tax deferral now and the other offers tax deferred compounding so there are no tax implications later. For those that work for a company that offers a 401(k), it is a good idea to put away even a small amount of money into the account, as many companies offer a 401(k) match to those employees that invest even part of their salary. In most cases, it can also reduce your taxable income, which means you’ll pay taxes on less income overall.

For those that don’t work for a company that offers this benefit, as an individual you can open an IRA (Individual Retirement Account) – either Traditional or Roth. With Traditional IRAs, you deduct contributions from your taxable income now and pay taxes on withdrawals later. With Roth IRAs, you contribute post-tax dollars and get tax-free withdrawals later.

IRAs and 401(k)s were designed to encourage Americans to save their own money for retirement. The incentives were two-fold. The first was granting people an income tax deduction for their contribution. The second was the power of tax deferral. Taxes on investment earnings and income are not due until the money is withdrawn in retirement where it is taxed as ordinary income (premature distributions may result in a penalty). This allows all of your contributions, growth, dividends and interest to work for your retirement accounts growth.

Even small amounts contributed regularly can grow to substantial amounts when you start at an early age. If you are 25, and you contribute just $25 a month to an IRA or 401(k) that earns an average of 8% a year, by the time you are 65, your balance could be more than $350,000.

The maximum contribution an individual can make to an IRA in 2020 was $6,000 per year. If you were older than 50, that number increased to $7,000 per year. For 401(k) plans, the maximum in 2020 was $19,500, but if you were older than 50, it was $26,000. Since your taxes are based on your income, investing in your retirement with a tax deferred IRA or 401(k) can reduce the amount of income tax you owe. If you are considering investing in a tax deferred retirement account, your accountant can provide more specific tax benefits as it relates to your overall financial status.

Retirement investment accounts can be the most significant assets you will draw from during your retirement. It is important to be familiar with your investments and keep account information current. It is also important to find a trusted professional that you can work with to set goals for your retirement and make a plan that you are comfortable with.

If you already have an investment account, you should be reviewing it annually for performance and to ensure all account information is updated. You should also review your beneficiary designations, as major life changes, such as marriage, divorce, a child’s birth or the death of a designated beneficiary could have occurred.

When you die, the assets of your retirement account will be distributed based on beneficiary designations, not your will or other estate-planning documents. Thus, you should also check to make sure there are primary and contingent beneficiaries on the account. Many young adults designate beneficiaries like their parents or siblings when they begin a job, but sometimes fail to update those beneficiaries when they get married.

As life changes, you may find that your retirement withdrawal strategies will need to be adjusted. Perhaps you have purchased investment property or a business that will increase your retirement portfolio. Building a strategy for retirement will evolve as opportunities arise, and as your financial situation changes, so be sure to stay on top of your accounts.

You may even find that you can benefit from rolling over your traditional IRA accounts into a Roth IRA. You would have to pay income taxes on the taxable amount of the conversion, but those taxes can be paid with funds outside the IRA. That will preserve the IRA’s value and reduce your tax liability and/or taxable estate in the future.

Investing in your future is a strategy, not a chance of luck, and is paramount in achieving your goals for retirement and the legacy you leave your loved ones.

Mario J. Giammarco, Jr., Senior Vice President                 Herold and Lantern Investments, Inc.

(718) 720-1600                  www.heroldlantern.com

The information contained herein was obtained from reliable sources however neither Mario Giammarco, Jr. nor Herold & Lantern Investments, Inc. can guarantee its accuracy.  This information is provided as an educational resource and not as a recommendation of an account type or investment strategy.  Mario Giammarco is Sr. Vice President of Investments and a Financial Advisor at Herold & Lantern Investments, Inc. and Herold Advisors, Inc.