The Importance of Saving Outside Your Retirement Plan

When planning for retirement, many prioritize maxing out their 401(k) or IRA. These accounts offer tax advantages and often an employer match, making them a cornerstone of retirement savings. However, an often-overlooked aspect of financial planning is the value of diversifying the types of accounts you save into. At Vaultis Private Wealth, we frequently encounter clients with substantial 401(k) or IRA balances but limited savings elsewhere. This can restrict their ability to craft a tax-efficient Lifestyle Distribution Strategy in retirement. By spreading savings across taxable brokerage accounts, Roth IRAs, and traditional retirement plans, you gain flexibility to minimize taxes and optimize your retirement income.

The Power of 401(k) Savings

Saving through a 401(k) is straightforward. You choose a percentage of your paycheck to contribute, up to $23,500 in 2025 (or $31,000 if you’re 50 or older, or $34,750 if you’re aged 60 to 63, thanks to the SECURE 2.0 Act’s higher catch-up contribution rules), and deductions happen automatically. Many employers offer a match, boosting your savings effortlessly. This consistent, behind-the-scenes approach allows individuals to build significant retirement nest eggs over time. However, relying solely on a 401(k) can limit your options when transitioning from earning a paycheck to funding your retirement lifestyle.

Why Diversify Account Types?

Diversifying account types creates options to minimize taxes and optimize your Lifestyle Distribution Strategy in retirement. Each account type has unique tax implications and access rules, which can be combined strategically to meet your cash flow needs. Consider these key accounts and their roles in a diversified plan:

• Traditional 401(k)s and IRAs
  Distributions from these accounts are taxed as ordinary income, with marginal 2025 rates for married couples filing jointly ranging from 10% to 37% (for example, 22% for income between $96,951 and $206,700, or 24% for income between $206,701 and $394,600, with the top 37% rate applying to incomes over $751,600). Additionally, Required Minimum Distributions (RMDs) begin at age 73, requiring withdrawals of approximately 4% of your account balance annually, based on the prior year’s December 31 value. These withdrawals can push you into higher tax brackets, particularly if RMDs exceed your spending needs.

• Taxable Accounts
  Taxable accounts provide unparalleled flexibility, with no age restrictions on accessing funds. You pay taxes annually on dividends, interest, and realized capital gains, but these are often taxed at preferential rates: qualified dividends and long-term capital gains face 0%, 15%, or 20% rates, depending on your income (for example, 15% for married couples with taxable income between $96,951 and $583,750 in 2025). You can also access your principal (basis) tax-free. For instance, to generate $40,000 from a taxable account, you might have $10,000 in dividends taxed at 15% and sell investments for $30,000 with a $20,000 basis, resulting in only $10,000 of taxable long-term capital gains.

• Roth IRAs
  Roth IRAs stand out for their tax-free growth and distributions, provided you meet two conditions: you’re at least 59½, and the account has been open for five years. Unlike taxable accounts, you avoid annual taxes on earnings, and unlike traditional IRAs, there are no RMDs. Contributions in 2025 are limited to $7,000 (or $8,000 if 50 or older), subject to income limits. Because Roth IRAs grow tax-free, it’s often strategic to preserve these funds for later in retirement or for years when your tax bracket is high, using them to supplement income without increasing taxable income.

Crafting a Tax-Efficient Lifestyle Distribution Strategy

In retirement, your focus shifts from saving to generating income to support your lifestyle. A Lifestyle Distribution Strategy involves combining income sources, such as Social Security, pensions, rental income, or part-time work, with withdrawals from your investment accounts. The goal is to meet your cash flow needs tax-efficiently while minimizing your overall tax burden.

To illustrate the power of diversification of account types, consider a common retirement scenario. Imagine you need $100,000 to supplement your Social Security and pension income. If you withdraw this entirely from a 401(k) or IRA, the full amount is taxed as ordinary income, potentially pushing you into a higher tax bracket, such as 22% or 24%. Now consider a diversified approach: $40,000 from an IRA (taxed as ordinary income), $40,000 from a taxable account (with, say, $10,000 in dividends and $10,000 in capital gains taxed at preferential rates, typically 15%), and $20,000 tax-free from a Roth IRA. This strategy reduces your taxable income by blending income sources with different tax treatments, keeping you in a lower bracket and minimizing your overall tax burden compared to the IRA-only approach. This flexibility becomes even more critical when considering mandatory withdrawals.

RMDs add another layer of complexity. If your 401(k) or IRA is your only significant account, large RMDs could force withdrawals beyond your needs, reducing your ability to control your tax bracket. A diversified portfolio allows you to draw from taxable accounts or Roth IRAs in years when RMDs inflate your income, preserving tax efficiency.

Building a Diversified Savings Plan

To achieve flexibility in retirement, diversify your savings now. Continue contributing to your 401(k) to capture any employer match, up to the $24,000 limit (or $32,000 if 50+). Also prioritize:

• Taxable accounts for their accessibility and favorable tax treatment on capital gains and dividends.

• Roth IRAs for tax-free growth, through direct contributions ($7,000 or $8,000 if 50+) or Roth conversions from traditional IRAs, strategically timed with your advisor to manage tax implications.

By diversifying your savings, you create a robust framework for retirement. You’ll have the flexibility to navigate tax brackets, RMDs, and unexpected expenses while optimizing your income. At Vaultis Private Wealth, we view retirement planning as a strategic process of aligning your unique mix of assets with your lifestyle goals. Spreading savings across account types isn’t just about saving more—it’s about saving smarter to minimize taxes and maximize your retirement freedom.

Disclaimer

This article is provided for informational and educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security or financial product. The information presented is general in nature and does not take into account your specific financial situation, objectives, or needs. Past performance is not indicative of future results, and all investments carry risks, including the potential loss of principal. Tax laws and regulations are subject to change and may vary based on individual circumstances. Please consult a qualified financial advisor or tax professional before making any investment or financial planning decisions. Vaultis Private Wealth is not responsible for any actions taken based on the information in this article.

529 Plans: A Guide to Education Savings

As the cost of education continues to rise, many families are looking for effective ways to save for their children's future. One popular option is the 529 plan, a tax-advantaged savings vehicle designed specifically for education expenses. In this guide, we'll explore what 529 plans are, how they work, and strategies to maximize their benefits.

What is a 529 Plan? A 529 plan is a state-sponsored investment account that allows families to save for education expenses with tax advantages. These plans are named after Section 529 of the Internal Revenue Code and are designed to encourage saving for future education costs. An account owner, typically a parent or grandparent, opens the account on behalf of a beneficiary (the future student).

Key Features of 529 Plans:

1. Tax Advantages: Earnings in 529 plans grow tax-free, and withdrawals for qualified education expenses are also tax-free at the federal level. Many states offer additional tax benefits for contributions.

2. Flexibility: Funds can be used for a wide range of qualified education expenses, including tuition, fees, books, supplies, and room and board for college. Since 2018, up to $10,000 per year can also be used for K-12 tuition expenses.

3. Control: The account owner maintains control of the funds, not the beneficiary. This includes the ability to change the beneficiary if needed.

Contribution Rules:

1. No Income Restrictions: Unlike some other savings vehicles, there are no income limits for contributing to 529 plans.

2. Gift Tax Considerations: Contributions are considered gifts for tax purposes. In 2025, you can contribute up to $19,000 per beneficiary annually without triggering gift tax reporting.

3. Superfunding Option: You can front-load up to five years of gifts at once, contributing up to $95,000 (or $190,000 for married couples) in a single year without incurring gift taxes, provided you make an election on your tax return.

Distribution Rules:

1. Qualified Distributions: Withdrawals for qualified education expenses are tax-free and penalty-free. These include:

• Tuition and fees

• Books and supplies

• Room and board (if enrolled at least half-time)

• Computer equipment and internet access

• K-12 tuition (up to $10,000 annually)

• Apprenticeship programs: Funds can be used for the beneficiary's participation in certain registered apprenticeship programs

• Student loan repayment: Up to $10,000 (lifetime limit) can be used to repay qualified student loans for the beneficiary 

2. Non-Qualified Distributions: Withdrawals for non-qualified expenses are subject to income tax on the earnings portion, plus a 10% penalty. Exceptions to the penalty include:

• Death or disability of the beneficiary

• Receipt of a scholarship by the beneficiary

• Attendance at a U.S. Military Academy

Funding Strategies:

1. Front-Loading: If financially feasible, consider making a large upfront contribution to maximize potential tax-free growth. Front-loading allows more time for investments to grow in the market, potentially leading to greater returns over time. This strategy can be particularly effective when you have access to lump sums, such as bonuses, stock options, or inheritances.

2. Automatic Contributions: Set up regular, automatic contributions from your bank account or paycheck to ensure consistent saving. This "set it-and-forget it" approach helps make saving a habit and integrates education savings seamlessly into your budget. Even small, regular contributions can add up significantly over time.

Investment Options: 

529 plans typically offer a range of investment options, including:

1. Age-Based Portfolios: These automatically adjust the asset allocation based on the beneficiary's age.

2. Static Portfolios: These maintain a consistent asset allocation over time.

3. Individual Fund Options: Some plans allow you to create your own portfolio from a selection of mutual funds.

Additional Features and Considerations:

Who Can Contribute? While the account owner maintains control of the 529 plan, anyone can contribute to it. This means parents, grandparents, other relatives, and even friends can all contribute to a child's education savings. This flexibility makes 529 plans an excellent tool for collective family saving efforts.

Flexibility in Beneficiary Designation: One of the key advantages of 529 plans is the ability to change the beneficiary. The account owner has the power to transfer the benefits to another qualifying family member without incurring penalties. For example, if you have multiple children and the older child doesn't use all the funds (perhaps due to scholarships or choosing a less expensive education path), you can change the beneficiary to a younger child. This flexibility ensures that the education savings can be used efficiently within the family.

New Roth IRA Conversion Option: Recent legislation has introduced an exciting new feature for 529 plans. Starting in 2024, account owners can convert a portion of unused 529 funds to a Roth IRA for the beneficiary. This option provides a valuable alternative for funds that aren't needed for education expenses. Here are the key details:

• Lifetime Limit: Up to $35,000 can be converted over the beneficiary's lifetime.

• Annual Limits: Conversions are subject to the annual Roth IRA contribution limits. For 2025, this limit is $7,000 (under 50).

• Account Age: The 529 account must have been open for at least 15 years.

• Contribution Timing: Only contributions (and earnings on those contributions) made at least 5 years before the conversion are eligible.

The ability to transfer excess funds to a Roth IRA can jumpstart the beneficiary's retirement savings, offering long-term financial benefits beyond education.

529 plans offer a tax-efficient way to save for education expenses, with flexible investment options, and now, potential retirement savings benefits. Whether you're a parent, grandparent, or someone else looking to support a child's education, a 529 plan can be an excellent choice. The ability to change beneficiaries and the new Roth IRA conversion option add even more flexibility to these already versatile savings tools.

By understanding the rules, employing smart funding strategies like front-loading or automatic contributions, and taking advantage of the plan's flexibility, you can maximize the benefits of these powerful savings vehicles. Remember, while this guide provides a general overview, tax laws and specific plan details can vary by state. It's always wise to consult with a financial advisor or tax professional to determine the best strategy for your individual situation.

Disclosure:

The information provided in this article is for general informational purposes only and should not be considered as personalized financial advice. This content does not take into account your individual circumstances, objectives, or needs. While we strive to provide accurate and up-to-date information, tax laws and regulations are subject to change, and specific details of 529 plans may vary by state. Before making any financial decisions or implementing strategies discussed in this article, we strongly recommend consulting with a qualified financial advisor, tax professional, or legal counsel. They can provide personalized advice based on your specific situation and help ensure compliance with current laws and regulations. The author and publisher of this article are not responsible for any actions taken based on the information provided herein. Investment involves risk, and past performance is not indicative of future results. Please carefully consider your financial situation, risk tolerance, and goals before making any investment or financial decisions.