There are some very basic things you can do to set yourself up for retirement later in life. Consistently saving and investing will take you a long way toward your goals. But making the most of your retirement savings might require you to make some moves in your accounts from time to time. And if you've put off some of those moves, you may be wondering if you missed the opportunity.
The good news is it's not too late to do at least a few things you may have been sitting on. Here are three plays you can do to make the most of your savings.
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1. Roll over your 401(k)
If you have a 401(k) from an old job, you may benefit from executing a 401(k) rollover to an IRA. Most 401(k) plans charge high fees and offer limited investment options. If you roll over your holdings into an IRA, you'll be able to get rid of most, if not all, of those fees, and open the door to many more investment choices.
You can roll over a 401(k) to an existing IRA or a new IRA. If your current employer allows it, you may be able to roll over the funds directly into your new 401(k). That may be worthwhile if you regularly execute the backdoor Roth. It could also be useful if you plan to retire early and take advantage of the rule of 55, which allows you to access 401(k) assets penalty free after separation from service.
2. Mega-backdoor Roth IRA
The mega-backdoor Roth IRA was on the chopping block last year, but it managed to skate by, as the bill that would close the backdoor got held up in Congress. Legislators could look to end this loophole soon, but you may be able to take advantage until then.
The mega-backdoor Roth IRA is only available if your employer's 401(k) plan offers non-Roth after-tax contributions and in-service rollovers or withdrawals. It takes advantage of the total contribution limit for 401(k) plans, which is $61,000 in 2022 plus an additional $6,500 in catch-up contributions if you're age 50 or older (so, $67,500). In other words, the combined contribution from your pre-tax or Roth contribution, employee match, and after-tax contributions can equal up to $67,500.
Once you make an after-tax contribution, you need to roll it over into a Roth account. That can be within the 401(k) or in a separate Roth IRA. Keeping the funds in the tax-deferred account in the 401(k) will create an additional tax burden when you look to withdraw. If you roll over just the after-tax contribution, you won't owe any additional taxes on the rollover, and then the funds can grow tax-free in a Roth account until you're ready to withdraw them in retirement.
3. Roth conversions to minimize your future tax burden
If you have lots of money sitting in pre-tax retirement accounts like a 401(k) or IRA, you may want to get that money into a Roth account when it's most advantageous.
Someone retiring in their early 60s with significant pre-tax savings should take advantage of the years before they need to start making required minimum distributions and collecting Social Security benefits.
Social Security maxes out at age 70, and required minimum distributions start at age 72.
Withdrawals from a traditional IRA or 401(k) can become much more of a tax burden after you start collecting Social Security because there's a threshold at which Social Security benefits become taxable. On top of that, many retirees may be able to keep their income below the threshold to pay 0% taxes on their long-term capital gains, but that becomes more difficult as required minimum distributions come into effect.
The way to reduce your required minimum distribution is to convert your traditional IRA to a Roth IRA when you're able to achieve a low tax rate. You may also be able to take advantage of a downturn in the market to move assets when they're lower in value. Roth IRAs don't have any required minimum distributions, and withdrawals do not impact your taxes. Thus, paying the taxes in your 60s can save you a lot more in taxes down the road.
Never stop planning
Everyone loves a set-it-and-forget it retirement plan, but if you want to truly maximize your retirement savings, ensure you have enough to fund your lifestyle in retirement, and maybe leave some for your heirs or charity, you may have to take action. These three retirement plays will help you keep more of your money, and it's probably not too late for you to make them.
