A 401 (k) plan is a great way to save for retirement if your employer offers it. After all, investing in one is not difficult because the money is taken directly from your salary. You can save by using dollars before tax, so depositing money into your account is much cheaper. Your employer can even match some of your contributions, which is a huge benefit because you literally get free money.
But just because a 401 (k) is the right choice for investing in retirement doesn’t mean there aren’t flaws. And one of the big drawbacks is that once you have accumulated all your retirement savings in 401 (k), your Social Security benefits may be taxed more. That’s why.
Allocations from 401 (k) are calculated as income in determining whether your Social Security benefits are taxable
If you learn more than 401 (k), it is likely that most or all of your retirement income will come from this account along with your Social Security benefits. Unfortunately, if you use large distributions from your 401 (k) to supplement your Social Security retirement income, the number of inspections by the Social Security Administration may decrease.
This can happen because Social Security benefits are partially taxed when your income exceeds $ 25,000 as a single person or $ 32,000 as a married co-tax administrator.
However, the calculation does not include all income – only half of your social security benefits and 100% of other taxable income. There may be a problem with “other taxable income” in this category. See, distributions from your 401 (k) are taxed as normal retirement income, so they are counted as taxable income in determining what (if any) portion of social security checks you will lose to be taxed.
Since the average social security benefit replaces only about 40% of your pre-retirement income, you will likely depend heavily on your investment accounts to supplement your benefits. And if most or all of the extra money comes out of your 401 (k) because it’s the main account you’ve contributed to, you’ll quickly find income in excess of the thresholds on which some of your benefits will be taxed – especially because those thresholds on which benefits are taxed , are not indexed to inflation, so they do not increase as wages and prices rise.
What You Should Do Instead of Increasing Your 401 (k)
First of all, you always want to contribute enough to your 401 (k) to achieve all the employer matches. You will also want to find out if your employer offers a Roth 401 (k). If they do, you can deposit money by depositing dollars after taxes and exiting the market without taxing retirement, so all of your Roth distributions will not be considered income in determining whether your Social Security benefits are taxable. You will receive all the benefits associated with a deposit to a workplace account, in addition to the traditional 401 (k) disadvantage.
But if your employer doesn’t offer a Roth 401 (k), you may want to contribute enough to a traditional 401 (k) to get employer compliance, and then put in extra money in a Roth IRA (assuming you’re eligible to contribute to one according to their income).
While investing money in a Roth means that contributions cost a little more when you make them because you invest with dollars after tax, when you retire you will be able to withdraw as much money from a Roth IRA as you want without paying taxes on distributions. or taxing more of your social security income. In other words, you may be able to avoid federal taxes on most or all of your retirement money.
Since you live on a fixed income, some count a little, the fact that you can get a portion of your retirement money from Roth to limit your Social Security benefits taxes can have a big impact on your financial security as a retiree.