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Choosing between Roth and pre-tax contributions for retirement savings depends on how each impacts your taxes now and in retirement. Roth contributions are made with after-tax dollars, so both contributions and earnings can be withdrawn tax-free in retirement if done correctly. Pre-tax contributions, on the other hand, reduce taxable income now but are taxed upon withdrawal, including both contributions and earnings. Factors like your income, current tax bracket, future tax expectations, and retirement goals influence the best choice. A financial advisor can help evaluate these factors to determine which option aligns with your plan.

","

Understanding Roth Contributions

","

Roth contributions are made using after-tax dollars, meaning the money you contribute has already been taxed.

","

The biggest advantage of Roth accounts is that qualified withdrawals in retirement are tax-free, provided you meet certain criteria, such as holding the account for at least five years and being at least age 59½ at the time of distribution. This makes Roth contributions particularly appealing if you expect to be in a higher tax bracket during retirement than you are now.

","

Types of Roth Accounts to Consider

","

There are two main types of Roth accounts: Roth IRAs and Roth 401(k)s. Both account types allow you to grow your retirement savings tax-free. But you should note that you can only create a Roth 401(k) if you have access to a workplace plan. Here’s how they compare:

","

Roth IRA

","

A Roth IRA is an individual retirement account that you can open through a financial institution. These accounts allow for more flexible withdrawal rules and no required minimum distributions (RMDs), but contributions may be limited based on your income. For 2024 and 2025, the contribution limit for a Roth IRA is $7,000 for individuals under 50, and $8,000 for those 50 and older.

","

However, eligibility to contribute directly to a Roth IRA is subject to income limits. In 2024, single filers with a modified adjusted gross income (MAGI) of $161,000 or more are ineligible to contribute directly. For a married couple filing jointly, the limit is $240,000. Single filers who make less than that but more than $146,000 (more than $230,000 for joint filers) can only make a partial contribution.

","

Roth 401(k)

","

A Roth 401(k), only offered by employers, doesn’t have income restrictions. As of 2024, Roth 401(k) plans are also no longer subject to RMDs. Previously, RMDs started at age 73 or when you stopped working at that job (after age 73). In 2024, you can contribute up to $23,000, or $30,500 if you’re over 50 ($23,500 or $31,000 over 50 in 2025). Take note: Beginning in 2025, employees aged 60 to 63 will be allowed to make catch-up contributions of $10,000 or 150% of the 2024 limit, whichever amount is higher.

","

Understanding Pre-Tax Contributions

","

","

Pre-tax contributions are made using income that hasn’t yet been taxed, allowing you to reduce your taxable income in the year in which you contribute. This can be especially beneficial if you expect to be in a lower tax bracket in retirement than you are now, as you’ll defer paying taxes until you begin withdrawing funds.

","

With pre-tax accounts, such as traditional IRAs and 401(k)s, you’ll pay taxes on both the contributions and any earnings when you make withdrawals in retirement.

","

Types of Pre-Tax Accounts to Consider

","

The most common types of pre-tax accounts are traditional IRAs and traditional 401(k)s. Here’s a look at these two account types and how they stack up:

","

Traditional IRA

","

A traditional IRA is an individual account that you can set up through a financial institution. This account is appealing if you’re looking to reduce your taxable income now, though your contributions may not be tax-deductible if you or your spouse are covered by a retirement plan at work. For a traditional IRA, you can contribute up to $7,000 in 2024 ($8,000 if you’re 50 or older).

","

Traditional 401(k)

","

Offered only through employers, traditional 401(k) plans have higher contribution limits and may also include employer matching contributions, adding a significant boost to your retirement savings. For 401(k) plans, the contribution limit for 2024 is $23,000 for those under 50, and $30,500 for those 50 or older. It’s also important to note that pre-tax accounts have RMDs starting at age 73, meaning you must start withdrawing from your 401(k) a certain amount each year, which can affect your tax situation during retirement.

","

Roth vs. Pre-Tax Contributions: Key Differences

","

When deciding between Roth or pre-tax contributions, several factors come into play. Here are the key differences to consider:

","$46","

Frequently Asked Questions

","

Can I Contribute to Both Roth and Pre-Tax Accounts?

","

Yes, you can contribute to both a pre-tax traditional account and a Roth account, but the total amount you contribute must stay within the IRS contribution limits for each account type. For example, for 2024, you can split the $23,000 contribution limit for a 401(k) between a traditional 401(k) and a Roth 401(k).

","

Are Employer Matches in a Roth 401(k) Treated as Roth Contributions?

","

Employers can offer after-tax Roth matching contributions. They get added to current taxable income.

","

Bottom Line

","

","

When considering Roth vs. pre-tax contributions, it’s important to evaluate your current tax situation and your expectations for retirement. If you expect your tax rate to be higher in the future, a Roth account may offer the most long-term benefits. On the other hand, pre-tax contributions can reduce your taxable income now and provide more savings flexibility. Whichever option you choose, make sure you understand the tax implications and rules of each type of account, so you can make the most of your retirement savings.

","

Retirement Planning Tips

","$47","

Photo credit: ©iStock.com/South_agency, ©iStock.com/South_agency, ©iStock.com/Srdjanns74

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Many employees rely on 401(k) plans for retirement savings. But hidden fees in 401(k) plans, including administrative costs, investment fees and individual service fees, can significantly impact your retirement savings. Discuss fee structures with your plan administrator or financial advisor, who can help you optimize your investments. What Are Hidden 401(k) Fees? Hidden 401(k) fees […]

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","

What Are Hidden 401(k) Fees?

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Hidden 401(k) fees are costs associated with maintaining and managing your retirement plan that are not immediately apparent to plan holders. While 401(k) plans are an important tool for building retirement savings, these fees can significantly impact your account’s growth over time. Many fees are often embedded within the investment options and administrative processes, making them less visible. These are three common hidden 401(k) fees:

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Administrative fees cover the cost of managing the plan and are typically charged as a percentage of assets or as a flat fee per participant.
Investment fees are often the largest expense, and they include fees related to the mutual funds or exchange-traded funds (ETFs) within your 401(k). Reviewing the gross expense ratio vs. net expense ratio of each fund can help you manage these costs.
Individual service fees may be charged for specific actions, such as taking a loan from your 401(k) or making a withdrawal, and can add up over time if you frequently access these services.

","

Ways to Find Hidden 401(k) Fees

","

There are several ways to identify hidden 401(k) fees and gain a clearer understanding of their impact on your investments. Here are four common ones to consider.

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1. Examine Your Plan’s Fee Disclosure Documents

","

Employers and plan providers are required by law to provide disclosure documents that detail the costs associated with your retirement plan once a year. These documents often include an itemized list of administrative fees, investment fees and any additional charges that may apply.

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2. Review Account Statements Regularly

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Account statements provide a snapshot of your balance, contributions, and any deductions made over the specified period. Look for line items labeled as “fees” or “expenses,” which can indicate the charges applied to your account and help you calculate long-term costs against potential returns.

","

3. Use Online Fee Calculators and Tools

","

To further uncover hidden 401(k) fees, consider using online retirement calculators and 401(k) calculators designed to analyze retirement plan costs. These tools can allow you to input your account details and receive an estimate of the fees you’re paying. By comparing this information to industry benchmarks, you can determine whether your plan’s fees are competitive or if there are more cost-effective options available. Some calculators also provide suggestions for alternative investments or strategies to reduce fees, enabling you to optimize your retirement savings.

","

4. Consult a Financial Advisor

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Consulting a financial advisor can also be a valuable resource in identifying hidden 401(k) fees. Financial advisors have expertise in analyzing retirement plans and can offer personalized advice based on your unique financial situation. They can help you understand the fee structures of different investment options and provide guidance on selecting funds that align with your goals while minimizing costs.

","

How to Use Annual 401(k) Fee Disclosure Notices

","

","

Annual 401(k) fee disclosure notices are essential tools for understanding the costs associated with your retirement savings plan. These documents, mandated by the Department of Labor, provide participants with detailed information about the fees and expenses that may impact their 401(k) account. By carefully examining these notices, you can identify hidden fees that might otherwise go unnoticed, allowing you to make informed decisions about your investment choices and strategies.

","

Understanding the Components of the Notice

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The annual 401(k) fee disclosure notice is typically divided into three main sections: plan-related information, investment-related information and a comparative chart:

","

The plan-related section outlines the administrative and individual service fees charged to your account. This can include costs associated with recordkeeping, legal services, and loan processing.
The investment-related section provides details about the expenses tied to each investment option within your plan, such as expense ratios and management fees.
The comparative chart offers a side-by-side comparison of your plan’s investment options, helping you evaluate their costs and performance relative to one another.

","

To identify potential hidden fees within your 401(k) plan, focus on the investment-related information provided in the disclosure notice. Look for expense ratios, trading costs or revenue-sharing agreements between the plan provider and mutual funds. High expense ratios can significantly impact your investment returns over time, so it’s important to compare them across different options and consider lower-cost alternatives. Additionally, pay attention to any administrative fees that are deducted from your account balance, as these can add up and reduce your overall savings.

","

Once you’ve identified hidden fees through the annual 401(k) fee disclosure notice, you can take steps to minimize their impact on your retirement savings. Consider re-evaluating your investment choices and selecting options with lower expense ratios to maximize returns. You might also explore alternative retirement accounts, such as a Roth IRA vs a 401(k), which may offer lower-cost investment options.

","

Bottom Line

","

","

Knowing how much you could pay in hidden 401(k) fees is essential for maximizing your retirement savings and ensuring that your money works as efficiently as possible. To uncover hidden 401(k) fees, start by reviewing your plan’s annual fee disclosure, which details administrative, investment, and service fees. Pay close attention to expense ratios in the investment options, as these can often include less obvious costs. Additionally, consult your plan’s summary plan description (SPD) and ask your plan administrator for clarification on any unclear charges.

","

Investment Planning Tips

","$5a","

Photo credit: ©iStock.com/yacobchuk, ©iStock.com/maroke, ©iStock.com/DragonImages

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Because Medicare premiums are tied to income, converting a $235,000 retirement account to a Roth IRA has the potential to cause Medicare Part B premiums to increase. For many taxpayers, in fact, a single-year conversion of that magnitude could more than triple the amount of the monthly premium most Medicare enrollees pay for Part B coverage. However, that’s not certain. Much depends on the enrollee’s income level before the conversion and other details. And it’s possible to use some strategies that could reduce or even eliminate the premium increase while still taking advantage of the benefits of a Roth conversion.

","

If you’re contemplating converting retirement funds to a Roth account, consider talking over the implications with a financial advisor.

","

Medicare Premium Principles

","

Most people pay the same monthly premium to Medicare for Part B coverage. For 2024, this premium is $174.70 per month. It adjusts annually to reflect inflation and usage patterns that affect Medicare’s cost of doing business. Beginning in 2025, the standard premium is $185, an increase of $10.30, or $123.60 annually.

","

For higher-income enrollees, Medicare applies a surcharge to Part B and Part D premiums. This is called the Income-Related Monthly Adjustment Amount (IRMAA). The size of the surcharge varies according to income, using a specific income measure called Modified Adjusted Gross Income (MAGI), so that higher earners pay more. The surcharge also varies by filing status.

","

Brackets set up by filing status and income are used to determine IRMAA premiums. These brackets change annually, as does the Part B premium amount. For 2025, the Part B premium is $185. Here is a table showing IRMAA brackets for 2025:

","

IRMAA Premium Table for 2025

","

","

At the higher income levels, clearly, IRMAA packs a sizable financial punch. A single filer earning more than $500,000 will pay $628.90 per month or $7,546.80 per year, compared to the $185 monthly or $2,220 per year paid by someone earning $106,000.

","

An important wrinkle to the IRMAA regulations is that the adjustment is applied to the current year’s premiums using the enrollee’s MAGI from two years earlier. So an increase in income this year won’t result in higher Medicare premiums this year.

","

Also note that IRMAA also applies to Part D premiums. However, since these premiums are much smaller than Medicare Part B premiums, the financial impact of an IRMAA-hiked Part D premium is relatively minor.

","

A financial advisor can help you navigate Medicare and other retirement considerations. Use this free tool to match with up to three vetted fiduciary advisors.

","

An IRMAA Example

","

Since retirement funds transferred from a tax-deferred account to a Roth IRA are treated as ordinary income, converting a $235,000 IRA could significantly increase MAGI and result in higher Medicare Part B premiums. Assuming the taxpayer had $100,000 in MAGI before the conversion, they would pay the $185 unadjusted Medicare Part B premium without any conversion.

","

Adding $235,000 in converted funds to their MAGI for a total of $335,000 results in a significant increase in their Medicare premiums. This puts them in the second-highest income bracket in the IRMAA tables. Their Medicare Part B premium as calculated using the IRMAA table would now be $591.90, or $7,102.80 per year. That’s enough of an increase to warrant looking at ways to mitigate it. (Remember, the two-year income consideration may alter this estimated amount. Talk to a financial advisor for more specific guidance based on your situation.)

","

IRMAA Management Strategies

","

One way you may be able to mitigate the impact of IRMAA is to gradually convert the retirement funds to the Roth IRA, spreading the converted amount over several years. A common strategy is to convert just enough each year to bring the taxpayer’s income up to the top of the current bracket or the next bracket.

","

In this case, converting $33,000 in a single year would bring the income from $100,000 up to the top of the second-lowest income bracket, which goes from $106,000 to $133,000. That would in theory increase the Medicare Part B premium for 2025 by $74 to $259, a relatively modest amount compared to $591.90 if the entire retirement account were converted in a single year.

","

Other IRMAA management approaches use general-purpose income-reduction methods such as contributions to charity and Health Savings Accounts (HSAs). Any decrease in MAGI can potentially keep a Medicare enrollee from being moved into a higher income bracket on the IRMAA table and result in a smaller adjustment or no adjustment at all.

","

Remember, there may be significant tax implications of Roth conversions and other income-reduction strategies. Consider speaking with a financial advisor for professional guidance.

","

Bottom Line

","

Converting a $235,000 retirement account to a Roth IRA is likely to have some effect on Medicare premiums. These will show up mostly in Part B premiums, and at higher income levels the adjustments can be quite significant. Depending on the Medicare enrollee’s income from other sources, the impact of a $235,000 Roth conversion could more than triple the usual Medicare premium. By spreading out the conversion over several years and employing other methods of reducing income, however, an enrollee may be able to reduce or eliminate the Medicare surcharge.

","

Tips

","$6d","

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Choosing the right retirement withdrawal strategy can stretch your savings throughout your retirement years. Effective withdrawal strategies provide a structured way to balance your income needs while preserving your retirement savings. A financial advisor can work with you to create a strategy for your retirement plan. Why It’s Important to Choose a Retirement Withdrawal Strategy […]

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As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. 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","

Why It’s Important to Choose a Retirement Withdrawal Strategy

","

The right retirement withdrawal strategy can provide a steady income stream while preserving the longevity of your assets. This allows you the stability to maintain your desired lifestyle and the flexibility to adapt to changes in the market or your personal circumstances. A well-thought-out strategy can also help you to minimize your taxes in retirement and ensure you comply with required minimum distributions (RMDs), reducing the risk of costly penalties. Without a clear plan, you risk spending your retirement savings too quickly, leaving you without enough resources to cover living expenses, healthcare costs or unexpected financial emergencies.

","

4 Retirement Withdrawal Strategies Can Stretch Your Savings

","

Here are four common withdrawal strategies that can help make your savings last for a more comfortable retirement.

","

4% Rule

","

How does it work? The 4% rule is a popular retirement withdrawal strategy that involves withdrawing 4% of your total retirement savings during your first year of retirement. In subsequent years, you adjust the withdrawal amount for inflation, ensuring that your spending power remains consistent. This rule was developed based on historical market performance and is designed to help retirees avoid depleting their savings over a 30-year period.

","

Who should use it? The 4% rule works well for retirees who have a moderate risk tolerance and are comfortable maintaining a diversified investment portfolio. However, be prepared to adjust your spending during periods of extreme market volatility.

","

Fixed-Dollar Strategy

","

How does it work? The fixed-dollar strategy involves withdrawing a specific, predetermined amount from your retirement savings each year, regardless of market performance. This approach offers simplicity and predictability, making it easy to plan your annual budget. However, the fixed-dollar amount doesn’t account for inflation, which may decrease your purchasing power.

","

Who should use it? This strategy is best suited for retirees with stable income from pensions or Social Security who want a predictable supplement from their savings.

","

Total Return Strategy

","

How does it work? The total return strategy focuses on maintaining a diversified investment portfolio that creates an income stream in retirement through a combination of interest, dividends and capital gains. Retirees withdraw a certain percentage based on their portfolio’s total returns, adjusting the amount each year based on market performance. This strategy is more flexible and can help extend the life of your savings, but it requires active management and a higher risk tolerance.

","

Who should use it? It’s ideal for retirees who are comfortable with market fluctuations and are willing to adjust their withdrawals in response to investment performance.

","

Bucket Strategy

","

How does it work? The bucket strategy divides your retirement savings into three separate “buckets” based on time horizons: short-term, mid-term and long-term. The short-term bucket contains cash or low-risk investments to cover immediate expenses, while the mid-term and long-term buckets have higher growth potential. And, as you draw down funds from the short-term bucket, you replenish it with gains from the other buckets.

","

Who should use it? This strategy provides stability and growth potential, making it suitable for retirees who want to balance income needs with the potential for long-term investment growth.

","

How to Choose the Right Retirement Withdrawal Strategy

","

","

When it comes to choosing the right retirement withdrawal strategy, it can help to consider the factors that impact your financial needs and goals, such as:

","$80","

Bottom Line

","

","

Selecting a retirement withdrawal strategy is an important step that could help your savings last a lifetime. Make sure to prioritize your needs, like housing and healthcare, before wishlisting things like hobbies and vacations. Balancing your financial needs with your risk tolerance and different withdrawal strategies can help you develop a sustainable plan.

","

Tips to Help You Save for Retirement

","$81","

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