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Myth: My 401(k) is enough for retirement

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Consider how tax diversification can help your savings strategy.

You’ve been socking money into your 401(k) regularly for a number of years, always saving to the level of your employer’s match.

“For a long time, the rule of thumb has been to save as much as you can,” says Matt Dickerson, advanced markets consultant in Advice Delivery at Thrivent. “And there are people who have done well with that, saving as much as they can in their 401(k).”

Are you only saving only in your 401(k)? Is that really enough?

It’s a good start, says Dickerson. But what most people don’t consider, he says, are the tax ramifications they may experience when they are eligible to start taking money out of their 401(k).

“For some people it may work out using just their 401(k), and it’s certainly better than nothing,” Dickerson says. “But it could be even better if people would focus more on where they are putting their dollars. I’m not talking about saving more dollars, because you may be able to maximize what you’re already saving. But instead, look at the bucket(s) you’re putting your dollars into to give you more flexibility in retirement.”

Essentially, it’s about controlling your taxes in retirement, rather than having taxes control your retirement. Dickerson explains that if you’re putting all your dollars into a traditional 401(k), it’s going in pre-tax. “And it feels good to not pay taxes on it today,” he says. “But at some point, you’re going to have to pay ordinary income tax on it.”*

One strategy to consider is make sure you take advantage of your full employer match, if you have one, with your 401(k), he says. Then, if you still have dollars you can save for retirement, consider looking at an account, such as Roth IRA if you’re eligible, where contributions are made with after-tax dollars and would grow tax-free.**

Tax diversification is a very important part of people’s financial strategy to help give them more flexibility and control down the road,” Dickerson says. “And there are many options to consider.”

It’s about positioning the money you’re saving to be more tax-efficient and potentially increase your total spendable income when you need it most.

Learn more

Find out more about creating a tax-diversification strategy for retirement by contacting your financial advisor.

*Withdrawals made prior to the age of 59 ½ may be subject to a 10 percent federal tax penalty.

**Distributions of earnings are tax free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least 59-1/2; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary. Non-qualified distributions of earnings prior to age 59-1/2 may incur a 10% premature distribution penalty and are taxable.

Thrivent and its financial professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.