Wednesday, June 19, 2024

5 Hacks To Maximize Retirement Savings

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Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation.

Retirement is supposed to be the best time of your life, but if you don’t have enough money saved, it could end up being the worst. Financial troubles can make even the most eager retiree regret hanging up their hat. What you hope will be an endless vacation can quickly turn into an endless nightmare.

If you think you’re too young to start thinking about retirement, you’re wrong. The earlier your start saving for it, the better off you will be. If you want to enjoy your golden years, you need to maximize your retirement savings—and start planning how you will do so now!

A qualified estate planning attorney and CPA will need to guide you with advice specific to your situation. That said, I’ve rounded up several useful “hacks” that come up over and over when I’m working with my real estate investor clients. I hope some of them will help you make the most of both your retirement savings and your retirement.

Related: How Social Security Works If You’re Self-Employed

5 Essential Tips for Retirement Savings

Hack #1: Don’t Take Early Withdrawals

If you take distributions from your traditional IRA or 401(k) account before you turn 59, not only will you have to pay taxes, you’ll also have to pay a 10% penalty. Talk about a double whammy.

If you want to avoid penalties and taxes, you should do everything in your power not to take early withdrawals. Plus, the longer you keep your money in the account, the more your investment can grow. That’s called a win-win!


Hack #2: Don’t Touch Your Roth IRA Earnings

With Roth IRAs, the rules are a bit more complicated. Since Roth IRAs are funded with post-tax contributions, you can withdraw the money you have contributed at any time with zero penalties or taxes.

Withdrawing earnings is another story. If you are younger than 59.5 or have had your Roth account for less than five years, you’ll have to pay the 10% early withdrawal penalty AND pay taxes on the earnings—again with the double whammy.

Related: Using a Solo 401k To Invest in Real Estate: How Does It Work?

So, while it’s perfectly acceptable to dip into your Roth IRA contributions to pay for an emergency, you should keep your mitts off your earnings unless it’s absolutely necessary.

Hack #3: Convert to a Roth IRA

If you have money in a traditional IRA or 401(k), the smart move is to convert your accounts to Roth IRAs.

With a traditional IRA, Uncle Sam will force you to start taking required minimum distributions (RMDs) once you turn 72, whether or not you need the money. Since traditional IRAs are funded with pre-tax money, you’ll have to pay taxes on your RMDs, even if you don’t want to take them.

How do you get out of taking RMDs? Convert your account to a Roth IRA. Unlike traditional IRAs, you are never required to take distributions from your Roth account, so you can let your investments grow as long as you want.

Weirdly enough, if you have a “designated” Roth 401(k) account, you’ll also be subject to RMDs. Luckily, you can roll your Roth 401(k) funds into a Roth IRA when you hit 72.

When you convert to a Roth IRA, you’ll have to pay taxes on the amount of money you convert, but it’s worth the cost. Investments in Roth IRAs grow tax-free, and you won’t be taxed if you decide to take distributions.

Related: Retirement Planning: Why Business Trusts May Be a Smarter Choice Than an LLC

envelope with cash and change falling out labeled Roth IRA in permanent marker with glasses on a desktop

Hack #4: Keep Your Distributions ASAP (as Small as Possible)

If you have your money in a traditional retirement account, you’ll have to pay taxes on any distributions you receive. While it might be tempting to take out more than you need, you need to be strategic about your withdrawals. If you take out too much money in one year, you can end up in a higher tax bracket, which will cost you even more in taxes.

Related: Understanding Self-Directed IRAs: A Look at Some Frequently Asked Questions

Hack #5: Generate Passive Income Through Rentals

One of the most underused retirement strategies is investing in rental properties. If you’re a BiggerPockets reader, you probably already knew this. What you may not know is that retirement savings tools like the solo/self-directed 401(k) and self-directed IRA (SDIRA) let you invest in real estate and grow your nest egg tax-free.

That means you can use your real estate investing know-how and strategic connections to find the best real estate opportunities. Once you’ve scored some great deals, you can rent those properties out to develop passive income streams that can flow into your retirement savings with the tax benefits afforded you by checkbook control (meaning, you, the account owner, have complete control over how you invest).

Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisors regarding your specific situation.

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How have you structured your retirement savings accounts? Why? What questions do you have about maximizing your savings?

Join the discussion below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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