I recently read the results of a study by Ramsey Solutions with 10,000 millionaire participants. The study revealed that these millionaires did not receive any inheritance from parents or family members, and they had mainstream jobs like teachers, engineers, accountants, attorneys, or management. A large portion of them, 8 out of 10, invested in their company’s 401(k) plan.
Maximizing your company’s retirement plan is an excellent way to save, invest, and build wealth. For one thing, it’s easy! Money goes directly into your account before you receive your paycheck. This places saving for the future at the top of your financial to-do list. Most plans offer diversified options that coincide with an anticipated retirement date. They even allow you to make up for missed time if you are 50 or older through increased contribution limits.
For too many investors nearing retirement, this isn’t enough. They are making a final dash. They want and need to save more than the 401(k) plan will allow. Or, they may wish to have access to their money without the restrictions found in qualified retirement accounts.
This can be accomplished by investing in a non-retirement account. In other words, the account is titled in an individual name, joint name, or the name of a trust. The benefit is that you have complete control over how much you invest, when you invest, when you withdraw money, and even how you will pay taxes.
These accounts qualify for capital gains treatment, which opens a world of possibility. For example, you can apply tax-loss harvesting, where the sale of appreciated assets is offset by selling an asset with a loss, eliminating or reducing taxes.
You can donate appreciated assets to a qualifying charity and claim the gift on your itemized tax return, avoiding capital gains taxes altogether.
You can even gift the asset with a low tax basis to a family member who may be in a lower tax bracket and would not lose as much to taxes when they sell the asset.
In short, preparing for retirement is more than just putting money into your retirement account. Non-qualified accounts increase flexibility and put you in the driver’s seat.
