Don’t go it alone with your 401k – Pros know what’s changing and what isn’t
Fifty years after the groundbreaking Employee Retirement Income Security Act (ERISA) was signed into law in September 1974 and paving the way for the creation of workplace 401(k) accounts, there are a plethora of retirement planning options available.
“That little rule that came out in the 1970s has turned out to be a tremendous advantage to the average American who no longer has a pension,” said Nicholas T. Norvell, CFP, senior vice president and senior portfolio manager, Courier Capital, an affiliate of Five Star Bank. “There are (few) pension plans out there now, so we’re really responsible for our own wellbeing and our own retirement.”
Part of that responsibility hinges on employee contributions to retirement accounts. We’re approaching the time of year when the Internal Revenue Service announces updated contribution limits and rules for retirement accounts for the upcoming year. In 2023, the 2024 limits were made available on October 23.
“I don’t foresee any major rule changes, but what I would like to see is contribution limits increase according to the cost of living right now,” said Jeffrey Jones, a financial advisor at Sage Rutty and Company, Inc. “They typically only increase $500 for the max contribution for an IRA.”
The current employee contribution limit for a 401(k) is $23,000 per year (up from $22,500 in 2023) and the current catch-up contribution (for those 50 and older) is $7,500 (the same as it was in 2023).
Catch-up contributions are savings opportunities in the tax code that allow people aged 50 and older to increase their tax-advantaged contributions to IRAs, 401(k)s, and HSAs (starting at age 55).
“Catch-up contributions are very helpful for people who have had a lot of family-oriented expenses, like daycare, early on in their lives and once the kids are older they have some additional cash flow they can use to boost their retirement savings,” Jones said.
Jones notes that catch-up contributions are not the right fit for everyone though.
“It’s all dependent upon where they are in their life, what their financial plan says and what their cash flow is like,” Jones said. “It’s not a recommendation to just put the extra 7K in when you turn fifty if it’s not going to allow you to have your normal standard of living items. Every case is different, and your plan should be very specific to you.”
There is a major change in store for catch-up contributions on the horizon, according to Clara Sanguinetti, a financial advisor at Brighton Securities, who explains that, in 2026, the catch-up contribution limits will be adjusted due to provisions in the SECURE Act 2.0 (signed into law in December 2022).
“For certain earners, like if you’re earning over 145K a year, the catch-up contribution in your employer plan has to be made on a Roth basis,” said Sanguinetti, about the forthcoming changes. “Today you can put your catch-up contribution in your traditional 401(k), but come 2026 if you’re earning over 145K, you have to put your catch-up contribution in a Roth 401(k) or 403(b).”
Sanguinetti believes that Roths — retirement savings accounts where contributions are made with after-tax dollars — are an excellent tool to add to your retirement planning toolbox for reasons that include flexible withdrawal rules, no required minimum distributions and growth potential.
“I believe Roths, in general, are extremely underutilized and the main reason is people don’t know about them; they don’t understand them,” Sanguinetti said. “So, in a way, this change that is coming up is not necessarily a bad thing.”
Sanguinetti is a strong proponent of education when it comes to retirement savings. She was not exposed to the tools available in the United States in her native Argentina and remains thankful a colleague sat her down and helped her open a 401(k) when she started her first job here in her early twenties.
“It takes a village,” Sanguinetti said. “Don’t assume your kids, grandkids, nephews, nieces or even your friends’ kids know what a Roth IRA is. You can start contributing to a Roth the moment you have a Social Security number. They’re babies with Roth IRAs and I feel like that’s very powerful.”
Courier Capital’s Norvell stresses the importance of working with a professional when it comes to retirement planning because everyone’s finances, circumstances, priorities and goals are so unique and, within that uniqueness, changes are bound to happen.
Additionally, a professional will help you stay on top of the many rules and contribution limits for various retirement account options and ensure you don’t miss out on opportunities, so you’re in the best position possible to meet your retirement goals.
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“Have a game plan, have a mantra and have an idea of what [retirement planning] is going to look like, but know it’s going to change,” Norvell said. “The nice thing is, there are a lot of different options out there.”
Norvell particularly likes having a 401(k) with employer match, as well as a Roth IRA as primary savings vehicles for retirement. Individuals can contribute to a traditional and/or Roth IRA even if they participate in an employer-sponsored retirement plan.
“I think it’s one of the best things around because you put after-tax money into it and all the growth inside that Roth is tax-free,” Norvell said. “There are no required distributions, there’s the tax-free growth and you can pass it onto someone else. So, if you’re younger, a Roth IRA is a great idea, especially if you’re not a high earner.”
Caurie Putnam is a Rochester-area freelance writer.
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