Personal 401(k) Planning Lead Generation Campaign

The “Groundhog” 401(k): Hidden Strategies Used by Smart Investors

Have you ever seen a GROUNDHOG poking its head out of the ground?

What you see is a cute little groundhog poking his head out of his burrow. What you don’t see is the complex web of precisely engineered burrows — hidden from site. These “hidden strategies” are what allow the groundhog to live a comfortable, safe life. In this guide, you’ll discover why your 401(k) strategy should be “engineered” like a groundhog burrow, because there’s a lot more to it than what you see on the surface. Most high earners are already leveraging the power of their employer-sponsored 401(k) to save for retirement. They understand the well-publicized advantages: tax deferral, the “free money” provided by the employer match, and the “catch-up” provision after age 50. However, smart investors understand that there is so much more hidden beneath the surface of their 401(k) than just the visible benefits. If you have an employer, you’re most likely planning to max out your 401(k) employee contribution, as well as your employer match. If you’re self-employed, you’re probably figuring out which retirement plan is best for your own business. Yet when you research more ways to save, you might feel like you’re in the movie Groundhog Day because you find the same advice, over and over.

This special guide is designed to reveal additional “hidden” benefits of your 401(k) account that can help you supercharge your retirement plan. Whether you’re enrolled in a group plan or considering a solo 401(k) for your business, you’ve come to the right place. Some of the questions you might be asking yourself right now include: How can I make the best use of the available investments inside my retirement account? How do I coordinate my 401(k) with the rest of my financial plan? What more can I be doing to save for retirement? Are there more tax-efficient ways of saving and investing my money? IF THESE STRIKE A CHORD, KEEP READING…

STRATEGY 1: Supercharge Your Contributions

When it comes to funding your 401(k), the immediate tactic is to maximize your allowable employee contribution. If you’re reading this, you probably already are. Your plan may offer you the ability to contribute either after-tax dollars into a Roth or tax-deductible money into a Traditional 401(k). Your employer match, if available, is always Traditional. Concealed underneath is the idea that you could potentially add much more to your tax-deferred account. As you may already know, 401(k)s are a type of defined contribution (DC) plan. The annual limit to fund a DC plan for one person (including both employer and employee contributions) is much higher than your employee contribution cap.1 Some plans allow employees to add more retirement money until they reach this limit. If your 401(k) plan allows, you can contribute after-tax dollars to your plan to reach that upper threshold. They’re not tax-deductible, but they do grow tax-free as long as you obey the usual caveats. This strategy is sometimes referred to as a “Mega Backdoor Roth.”

Understanding how and when to supercharge your savings can give you a massive leg up. Critical questions to ask include: Am I eligible to supercharge my contributions? How can I balance current-year tax savings with my long-range goals? How do my 401(k) contributions align with the rest of my financial plan? What trade-offs do I need to consider if I want to supercharge my 401(k) account?

STRATEGY 2: Optimize the Investments in Your 401(k) PLAN

Your plan provider has already given you a standard menu of investments within your 401(k). Depending on your situation, you may benefit from advanced self-directed strategies that can increase the range of investments available to you, potentially reduce your tax bill, or improve the aftertax return of your overall portfolio.2 For example, if you already have investments that generate a lot of income, shifting them into your retirement account may create a more tax-efficient portfolio. Though it’s not the right move for everyone, taking control of your 401(k) can potentially help you maximize the benefit of this powerful retirement tool.

Critical questions to ask include: Is my 401(k) optimized to fit into my overall investing strategy? Do I have the right blend of tax efficiency and portfolio diversification? Are there opportunities to better optimize my investments within my 401(k)? Does my 401(k) plan allow me to control the investments inside? Have I discussed my 401(k) investments with a financial professional?

STRATEGY 3: Make Tax-Smart Moves For Your 401(K) PLAN

Average investors understand the “surface-level” basics of deciding between Traditional and Roth contributions. However, a hidden 401(k) advantage is using both types of tax-deferred accounts to create tax savings now, while generating tax-free income in retirement. If your plan allows it, you can convert your Traditional 401(k) to a Roth. Done in a tax-coordinated way, you may be able to convert portions of your Traditional account to a Roth without pushing yourself to a higher tax bracket. Done correctly, these Roth conversion opportunities can potentially help you create more tax-free income in retirement while still getting the benefits of tax savings now.

Critical questions to ask include: Can I convert my Traditional 401(k) to a Roth? What are the future tax consequences of my existing retirement accounts? Should I be “filling up” my tax bracket with taxable events such as Roth conversions that don’t push me into a higher tax bracket? Is there a better way to balance tax efficiency now and at my retirement?

BONUS STRATEGY: for Business Owners & the Self-Employed

Entrepreneurs already know that there are plenty of options to create a retirement account. These plans, SEP and SIMPLE IRAs, can be the right answer for some business owners. However, the solo 401(k) may allow you to set aside more money for retirement.3 You have the opportunity to create a Traditional or Roth account as well as make both employee and employer profit-sharing contributions. You’re also allowed to make solo 401(k) contributions for your spouse, as long as they work in your business. A 401(k) can potentially turbocharge the retirement income your business generates.

Critical questions to ask include: What kind of contributions do I plan to make to my retirement account? Have I discussed coordinating plans with my spouse who also works in my company? Do I understand the pros and cons of the various self-employment retirement plans available to me? How do I fit such a retirement plan into my overall financial plan? What is my best option to potentially maximize tax efficiency now and in the future?

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