3 Reasons to be in Love with Your Retirement Accounts

During the month of love, here are three reasons we think you should be in love with your retirement accounts.

As we make our way through February, love is in the air. You can almost smell the romance. Or maybe it’s just the roses and the chocolates. Either way, it’s divine, and it gives us a great feeling, even during the cold February weather. This year, however, we aren’t focused on finding your perfect soulmate. Cupid has fired his arrow, and he’s decided that your ideal other half should be your retirement accounts.

Retirement accounts, such as employer-sponsored plans and IRAs, are a key financial tool for pre-retirees and retirees who want to save for their golden years and their post-career dreams. These accounts often offer several benefits and incentives that can help individuals achieve their long-term financial goals and give them a chance to check items off their bucket lists and spend more time with their families. Let’s go over the three main reasons that your heart should belong to your retirement accounts.

  1. Tax Benefits and Incentives

Retirement accounts provide a wide range of tax benefits based on the type of account selected by the individual, thereby helping them save for a successful future. One of the most significant tax benefits of retirement accounts is tax-deferred growth. This typically comes from traditional 401(k) plans and traditional IRAs, and it means that the money you contribute to your retirement account is not taxed until it’s withdrawn. Then, over the course of your career, the money you contribute to your account can grow tax-free, potentially allowing you to experience a greater amount of growth.

Contributing to a traditional, tax-deferred retirement account can also help you reduce your taxable income for the current year. In this case, the money you contribute is deducted from your taxable income, possibly helping you lower your tax bill and keep more money in your pocket or in those retirement accounts.

On the other hand, post-tax Roth retirement accounts can also provide tax-free growth and tax-free withdrawals in retirement. Typically, retirees who use Roth accounts will experience this perk, cutting their taxable income when it comes time to retire. Essentially, all contributions to Roth accounts are made on an after-tax basis, so the taxes on those funds have already been paid. The money is then available tax-free in retirement, meaning that you will no longer have to account for that income when tax planning, and you will have more certainty concerning your account’s balance.

  1. Compound Interest

Albert Einstein once called compound interest the eighth wonder of the world, and we tend to agree that it gives your retirement accounts an uncanny ability to grow your funds. Over the course of your career, you contribute to these retirement accounts that grow with compound interest, meaning that you aren’t solely earning interest on the contributions you make. You’re also earning interest on your growth and interest you’ve previously earned.

Just as an example, let’s say you contribute the maximum to your Roth IRA account, which in 2023 is $6,500. (Unless you are age 50 or older, in which case you can add in an additional $1,000 in what’s known as a “catch-up contribution.”) Though the contribution limits will be indexed to inflation beginning in 2024, we will simply say that you contribute this amount for 25 years. Despite only contributing $162,500, at an annual gain rate of 8%, compounding interest means your account’s balance could grow to more than $475,000. Moreover, you could continually see a greater level of growth as time progresses and you achieve larger balances. This can be monumentally helpful in the accumulation phase, potentially allowing you to see significant growth on your balances in a timelier manner.

  1. Potential for Financial Security

Perhaps the most important benefit of retirement accounts, including Roth accounts, is the financial security they have the potential to offer accountholders. By making consistent contributions to one or multiple accounts over the course of many years, it’s possible to grow the balances of those accounts to an amount that provides for you and sustains your quality of life in retirement. It can supplement income from Social Security, which, while often relied on as a primary source of income in retirement, rarely provides the necessary funds to maintain your lifestyle.

Using retirement accounts to help you fund your everyday expenses—and potentially your luxury expenses—in retirement can be a boon. A diverse portfolio of asset classes can offer a combination of protection, growth and income. We’d always recommend speaking with your financial professionals at Roth IUL to determine a mix of asset classes that can suit your needs and goals.

If you have any questions about your retirement accounts and how they can prepare you for a successful post-career life, please give Roth IUL a call! You can reach us at (800) 202-7398.