How Do IRAs and 401(k)s Fit into Estate Planning?
Investing for retirement represents one of the most important financial decisions you can make to secure your family’s future. The earlier you begin, the better positioned you’ll be. Retirement accounts offer both growth potential and potential tax advantages that can accelerate your progress toward financial goals.
Understanding 401(k)s and IRAs
According to J.P. Morgan, “a 401(k) is an employer-sponsored plan that lets you contribute some of your paycheck to save for retirement.” A key advantage is employer matching – many employers will match your contributions up to a specified amount, making it wise to contribute at least enough to capture the maximum match available.
An IRA differs in that you typically establish it independently. Both accounts come in traditional and Roth varieties, each with distinct characteristics and benefits.
Traditional vs. Roth Accounts
Both traditional and Roth accounts allow you to defer taxes on investment growth while funds remain invested.
Traditional Accounts
- Contributions to traditional 401(k)s reduce your current taxable income automatically
- Traditional IRA contributions may be tax-deductible, potentially lowering your tax liability
- You can contribute to a traditional IRA even without a tax deduction, provided you have earned income
- Withdrawals are taxed as ordinary income
Roth Accounts
- Contributions use after-tax dollars
- Withdrawals are tax-free if they qualify as “qualified distributions” or return your contributions
- Roth IRA contribution limits may be reduced or eliminated based on income level
- Roth 401(k)s don’t have income-based contribution restrictions
Key Differences
401(k) plans offer higher annual IRS contribution limits compared to IRAs. You may also maintain multiple accounts simultaneously – both a 401(k) and an IRA with various account types.
Early withdrawals before age 59 1/2 typically incur a 10% penalty tax, though exceptions exist.
For assistance with retirement planning, estate planning, or elder law concerns, contact The Stegall Law Firm to schedule a consultation. We are here to help.
