• U.S. citizens ought to vary their retirement savings to protect against potential alterations in taxation.
• Financial planner Georgia Lord indicates that adaptability during one’s senior years is crucial.
• READ MORE: 'Major misconception' leading Americans to lose out on retirement funds

A 401(k) serves as an essential tool for employees to accumulate savings for their golden years.

However, Americans should refrain from investing all their savings in their employer-sponsored plans, warns financial planner Georgia Lord.

Tax regulations evolve frequently, making it essential to diversify your retirement accounts for greater adaptability when you withdraw funds in the future, she explained, thus preventing potential unexpected increases in your tax liability.

Most retirement accounts hold either tax-advantaged, tax-free, or taxable money.

"It's crucial to distribute your funds among various account types according to their tax implications, ensuring that when you need to withdraw from these investments, you have adequate coverage," she explained to Sport.Bangjo.co.id.

Just as experts suggest diversifying your investment portfolio, Lord, a financial advisor from Corbett Road Wealth Management, suggests diversifying the retirement accounts you own.

A conventional 401(k) is a 'tax-favored' account where employees contribute funds before taxes are deducted.

This enables you to postpone tax payments on your income while employed, allowing you to steadily accumulate savings over time.

Once you retire, you'll owe taxes on these funds, yet it’s likely that your taxable income will decrease compared to what it was when you were employed.

Roth IRAs and Roth 401(k)s are categorized as 'tax-free' because they consist of contributions made with after-tax dollars, which can lead to reduced taxes during retirement.

Lord suggested that if tax rates keep increasing, one might consider having some of their assets become tax-free during retirement.

'Taxable' funds encompass brokerage accounts that enable you to purchase or trade multiple types of investments, typically funded with money left over after taxes have been paid.

"We shouldn’t base our choices on current tax laws since they’re likely to evolve over time—particularly where the retirement of young people is concerned, as they have so many years left," she stated.

For example, The tax law from the Trump era, enacted in 2017, is set to expire soon. On January 1, 2026 – triggering significant alterations for millions of U.S. tax filers.

It’s challenging to predict the tax rates at the time of your retirement, how much income you’ll have during retirement, how much you’ll have managed to save, and what your standard of living might be, she noted.

Lord explained that by organizing a combination of tax-advantaged, tax-free, and taxable funds, you gain greater flexibility to reduce your total tax burden and remain below specific yearly income limits.

Diversifying your retirement accounts offers more options when you start making mandatory withdrawals, referred to as required minimum distributions (RMDs), during retirement, she explained.

Planning ahead reduces the likelihood of paying higher Medicare premiums or having a larger portion of your Social Security benefits taxed due to excessive earnings or withdrawals from your retirement funds, she noted.

Lord admitted that not every worker will be able to allocate funds to both their 401(k) and additional investment opportunities afterward.

'To start with, I would at least do the matching contribution in a 401(k),' she stated.

'So ultimately, it depends on whether you have the ability to save additional funds and which savings method would be most appropriate for you.'

For individuals with limited funds to invest, Lord suggests checking whether your 401(k) plan offers the option to set up a Roth account inside it.

This could assist you in expanding your options without needing to create an additional account.

'She stated that nearly all 401(k) plans offer the choice of including Roth contributions.'

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