In a recent exclusive New York Stock Exchange interview, TheStreet host Conway Gittens discussed retirement savings options with Retirement Daily expert Robert Powell.
Gittens got straight to the point and clarified some questions many Americans have on the topic.
“Explain to me some of the retirement savings options, because a lot of people are starting to scratch their heads,” Gittens said. “It's like an alphabet soup: 401(k), Roth IRA, all these numbers, all these letters.”
“But there are tax implications not only for the money you're contributing, but also for when you're ready to retire, the money you're going to withdraw,” he continued. “So can you talk a little bit about how those different plans work, especially when it comes to taxes?”
Powell suggested four types of retirement accounts to think about.
“There would be the taxable account in which you could invest in stocks, bonds and mutual funds. And the money that comes in is after taxes,” he said. “And then when it comes out, it will be taxed in some way or taxed along the way.”
“So if you're investing in, say, a CD that could be taxed as current interest (income as ordinary income), you could do that,” he added.
A certificate of deposit (CD) is a savings account offered by banks and credit unions that allows people to deposit money at a fixed interest rate over a period of time.
“It could be that if you have stocks in your taxable account and you buy and sell them, they could be taxed as capital gains as you go along,” Powell added.
Powell then discussed other retirement savings options facing many Americans.
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More retirement savings options, including IRAs and 401(k)
Powell explained the tax considerations for other ways people can achieve their retirement savings goals.
“The other type of account that many people are familiar with would be an IRA or a 401(k),” he said. “Usually it's money coming in before taxes and then going out after taxes.”
“So you get a tax deduction in many ways for putting money into a 401(k) plan. It grows tax-free,” he explained. “And then when you withdraw the money, it's taxed as ordinary income.”
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How Roth IRAs and HSAs Play a Role in Retirement Savings Efforts
Powell focused on Roth IRAs as an important option.
“People need to think about a Roth IRA, where the money comes in after taxes,” Powell explained. “It grows tax-free. And then when you withdraw the money in a few years, it will be a tax-free or tax-free event.”
Powell added another savings account to the mix of considerations.
“The last account I should mention, because many employers now offer this to their employees, would be health savings accounts,” he said.
“And these are really unique because the money comes in before taxes,” he added. “It's growing tax-free. And then, if it's used for qualified medical expenses, it's also tax-free on withdrawals.”
Powell summarized the conversation with some more relevant ideas.
“So, four different types of accounts. And I would recommend that people have money in each of these deposits, because when retirement comes, one of the things that you have to make sure that happens is that you have the ability to create what is called tax-efficient income,” he said.
“What is the income that will result in the least amount of taxes depending on where the money comes from, whether it's your Roth account or your taxable account or your IRA or your HSA?” she asked.
“And what typically happens to a lot of people is they save almost exclusively in their 401(k). And then when they get to retirement, they think they could have a million set aside for retirement,” Powell explained.
“But what actually happens is you can only really have $700,000 set aside because $300,000 of that money will be taxed as ordinary income when it leaves the account,” he said.
Powell then suggested that the advantage of having separate accounts is a key focus.
“If you had maybe saved in a traditional 401(k), along with a Roth, then you might at least have the option of being able to withdraw some money tax-free in retirement, as well as money from your traditional 401(k). ) and perhaps reduce your overall tax burden over the course of your retirement,” Powell said.
“Which is ultimately the goal.”
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