Written by Christopher Price

Retirement accounts have gotten so popular these days that everyone assumes they should know how to invest in them.  But it is not that simple, and the rules consistently change. Today we are going to talk about how to invest in your retirement account as of January 1, 2025

So first, what is a retirement account?

The term retirement account could be any kind of account that you are going to use in retirement. 

But that is not what we mean when you hear the term retirement account. We refer to the word retirement account as an account the IRS gave a special tax incentive. An incentive that will provide encouragement to invest and save for retirement. Some of the most common are Traditional IRAs, 401(K)s, and Roth IRAs. FYI, there are many more. But for today we will stick to those. 

The First and most popular way to move money into a retirement account is called a Contribution.

To an individual investor, an IRA and a 401(K) have the same purpose and work the same way with only small differences. In reality, there are huge differences. The first one is how much you can contribute. For 2023, an individual can give $6,500 to their Traditional IRA and an additional $1,000 if they are 50 or over. There is no income limit, but if you have a retirement plan at work and your Modified AGI is over $83,000 (single or Head of household) your IRA contributions will not be tax deductible.

If you have a 401(K) you can contribute $22,500 and if you are over 50 an additional $7,500. This entire amount is not taxed.  Also, most 401(K)s allow you to give after-tax contributions. These are contributions that are invested after you pay federal taxes.  With after-tax contributions, you may be able to invest over 60k in your 401(K) a year. 

The rules for contributing to a Roth IRA are the same as a Traditional IRA with one exception. If you make more than $153,000 MAGI (single) you can’t Contribute to a Roth IRA.

Have you ever wondered if you could move from one retirement account to another retirement account without losing the tax incentive? 

There are two ways to do this. This first one is called a Transfer. This is when you will be moving from like accounts to like accounts. For instance, if you move a Traditional IRA to a Traditional IRA as one transaction, the IRS will not have an issue. What this means is you are not stuck to an IRA you don’t think is best for your future. You can move them as many times as you feel you need. Now there may be investments inside your IRA that you can’t move, but that is a topic for another day.

The third way is called a Rollover. If you were to look at the investments available in your 401(K) you have at work. You will notice that most of them are geared toward growth, not income and you have a limited number of options. So, what do you do in retirement when you need more options? Well, this is when a Rollover comes into play. The IRS lets you move your 401(K) money to an IRA without paying taxes. Once in an IRA, you have the flexibility to invest how you see fit.

Lastly and most interesting is called a Recharacterization. This is when we want to move a Traditional retirement account to a Roth retirement account. What makes this most interesting is that Recharacterization will allow you to take advantage of the Roth rules without worrying about the contribution limitations. It will also give you the freedom to “change your mind” on how you want to be taxed in the future. We have a video dedicated to explaining when and why you would recharacterize your retirement account. 

Those are a few ways to invest in your retirement account. Follow us for more finance knowledge.

Representatives do not provide tax and/or legal advice.  Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice.  Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC.www.SIPC.org 1000 Corporate Drive, Floor 7 Fort Lauderdale, FL 33334     Telephone # (954) 938-8800

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