| You know how retailers like Starbucks have these "secret menus" that you can get something unique from if you ask really nicely? The thing is though, that so-called "secret menu" is just some pre-optioned customizations made popular by coffee enthusiasts, and you can kind of do the same thing with your 401(k), except instead of coffee enthusiasts making these options available, it was, well... some lawmakers. So, what are some of those hidden features? 1️⃣ Rule of 55: Technically, the age at which you're supposed to be able to withdraw from most US retirement accounts penalty-free is supposed to be 59.5. On the record, that's true, but also not. There's an exception to this rule, and it states that if you leave a job the year of your 55th birthday or thereafter, you can access the funds in that employer's 401(k) penalty-free. And yes, it's real, it's on the IRS's official list of exceptions. 2️⃣ Roth 401(k) deferrals: The Roth cousin of your traditional 401k comes with many benefits. - Here's how it works: With a Roth 401(k), you are contributing after-tax money into the account, which means that your contributions are made with money you've already paid taxes on. So when it's time to withdraw those funds in retirement, you get the tax benefit of owing no taxes. Usually, Uncle Sam will tax you only once.
- How to decide which to go with? Consider your current tax situation and your anticipated tax situation in retirement. Generally speaking, you'll want to choose a traditional 401(k) if you expect your tax rate to decrease in retirement and the Roth option if you expect it to go up.
- A Roth 401(k) also boasts a contribution limit that's $14,500 more than a Roth IRA (Individual Retirement Account) in 2022.
3️⃣ Self-directed accounts: Like most things, retirement investing and their subsequent accounts come with the necessary evil of rules and regulations we must follow to make the game, if you will, fair for everyone. Although those guidelines and limitations are there mostly to help, they can also limit us in a bad way too. That's where self-directed accounts come in, and they essentially remove the governor from the engine of retirement investing, allowing you to truly open it up. That means, with a self-directed account, you'll no longer be limited to typical investment vehicles (i.e., a menu of say 20-35 mutual funds), and would have access to things like ETFs, crypto, real estate, commodities and precious metals, or even foreign currencies if your brokerage firm has these options available. 4️⃣ Roth Conversions: In a Roth account, you contribute your after-tax money and pay no taxes when it's time to withdraw. 401(k)s, on the other hand, allow you to deduct your contributions today, but you'll pay taxes when you withdraw. And well, sometimes we change our minds, and that's why Roth conversions exist. You can convert your traditional 401(k) to a Roth, and pay the necessary taxes on that so you pay no taxes later when you withdraw from it. - Why would you do that, though? Because in the future not only would your balance likely be higher resulting in more taxes, but if you suspect you'll be in a higher tax bracket later in life, it might make sense to take a smaller hit now rather than a heftier one later.
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