Become a Retirement Account Expert
Help your clients build a retirement plan that works as hard as they do. Let BlackRock assist as you put your clients in the right plan. Use our tools to help your existing clients plan for the next phase of life and become a retirement expert to attract new clientele.
Choosing the Right 401(k)
Help your clients decide whether a Roth or a Traditional 401(k) is right for them. The main difference is the tax treatment, earnings in both grow tax deferred, however they are treated differently at withdrawal. Traditional 401(k) allows you to defer paying taxes until retirement. While the Roth 401(k) allows your client to pay taxes on contributions and, later, withdraw the assets federally income tax-free, provided the withdrawal is "qualified."
Start the Discussion
Retirement Goals, Income & Taxes
When you meet with your clients make sure you cover all the bases. Start the discussion with what their retirement goals are. Where do they see themselves at retirement? What assets, liabilities and income needs may they have at that point in their lives?
Make sure you actively discuss taxes no matter where they are in life. For example, if their taxes will be lower in the future, due to a lower income, deferring taxes maybe an option. If, however, taxes may be higher due to higher income, paying them off now may be the best move. Since the future of taxes is uncertain, it is wise to help your clients diversify their tax exposure. This can help them optimize their after-tax income.
|Teaching the Differences of Traditional & Roth IRAs|
|Traditional IRAs||Roth IRAs|
|Contributions||Pre-tax contributions reduce current taxable income.||After-tax contributions do not affect current taxable income.|
|Withdrawals After Age 59½||Taxed as current income||Tax-free for investors who have had the account for at least five years.|
|Required Minimum Distributions||April 1 of the year following the year the owner attains age 70½ or separates from service, whichever is later.|
Clients can invest in a traditional 401(k) through payroll deductions or by converting money from other retirement accounts into a traditional 401(k). They can invest in a Roth 401(k) through payroll deductions or intra-plan conversions of "qualified" distributions from a traditional 401(k).
Required Minimum Distributions (RMDs)
Both traditional and Roth 401(k)s have RMD requirements beginning at age 70½. If you are still working at age 70½, you may delay taking RMDs from both until you separate from service.
- Inform your clients the main difference is that "Qualified" withdrawals from a Roth 401(k), will be exempt from federal income tax, while all withdrawals from a traditional 401(k) are taxed at ordinary income rates. Both are subject to premature penalties when money is taken out before 59½ or separation of service.
- In order to make a "qualified" withdrawal, two conditions must be met:
1. Have had a Roth 401(k) for at least five years. The five-year minimum holding period begins Jan. 1
of the year you first contribute money to a Roth 401(k), regardless of when during the year the contribution is actually made.
2. Be at least age 59½, disabled or deceased.
- If you elect to make a non-qualified withdrawal from a Roth 401(k), any earnings withdrawn, but not the contributions themselves, are subject to federal income tax. For example, if 20% of your current Roth 401(k) balance is earnings, 20% of any non-qualified withdrawal would be subject to income tax.
What is a better fit for your clients?
A traditional 401(k) may be better if your client:
- Needs a lower tax bill now.
- Their employer does not match contributions to the Roth 401(k).
- Their plan does not allow loans against Roth 401(k) balances.
A Roth 401(k) may be better if your client:
- Expect their income tax rate to be higher in retirement than it is now.
- They can afford to make the full Roth 401(k) contribution.
- It is likely they will not need the entire 401(k) for retirement income. With a Roth 401(k) they can roll into a Roth IRA without additional tax implications, allowing the avoidance of RMDs and preserve assets for a beneficiary who can "stretch" the money tax-free. Five-year holding period from 401(k) does not transfer to IRA.
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Sources: BlackRock; Internal Revenue Service
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