As of the end of 2022, Americans held approximately $37.8 trillion in retirement plans and accounts ($26.3 trillion in employer-sponsored plans and $11.5 trillion in IRAs). These accounts have been around a long time, IRAs and 401(k)s were both initially established in the 1970s.
If they were collectibles, they’d be approaching vintage status.
Most of us enjoy the allure of new and shiny gadgets, so it’s easy to overlook the enduring benefits of these well-established tools like IRAs and 401(k)s. While your priorities may not be entirely centered on preparing for retirement, is important to understand these tools.
Why are retirement plans and accounts so popular?
Let’s explore the power of these retirement plans and accounts to understand why so many Americans leverage them to save for retirement.
If you would like more information on choosing between pre-tax, and after-tax options such as Roth IRAs or 401ks, please see this blog on the subject.
The Power of Disciplined Saving and Investing
Most employer plans deduct money from every paycheck and invest it into a market-based portfolio. Because the money is “out of sight, out of mind,” it never feels like you had it in the first place, reducing the temptation to spend it on something else.
This automatic process fosters consistent saving and investing over time.
Tax-Favored Investing
A non-retirement account owned individually or jointly usually incurs taxable income in the form of dividends and capital gains annually. Studies suggest that paying taxes on investment income could reduce annual investment returns by up to 1.5%.
Retirement plans and accounts avoid this annual “tax drag,” as they do not pass through taxable income each year.
Additionally, retirement accounts offer either a tax deduction upfront (traditional contributions) or tax-free distributions in retirement (Roth contributions), providing a potential advantage over non-retirement investment accounts.
Compounding Returns
Long-term investing can transform a modest amount of money into a significant sum. For example, $10,000 invested annually for 40 years at an average return of 8% would grow a total investment of $400,000 into $2,797,810.
Starting contributions to a retirement plan at a young age and maintaining consistency throughout your career can yield substantial rewards.
Employer Matching Incentives
Most company-sponsored plans offer matching contributions to encourage employee participation. It makes sense to contribute at least the minimum amount required to receive all available matching dollars. However, at Master’s, we strongly advocate contributing the maximum allowable amount to your plan.
The IRS sets maximum contribution limits for all retirement plans and accounts. Here is a link to the 2025 contribution limits.
Catch-Up Contributions
For individuals over age 50, additional catch-up contributions are allowed. For 2025, these include:
- $7,500 in a retirement plan.
- $1,000 in an IRA.
New for 2025, individuals turning 60, 61, 62, or 63 can take advantage of a “Super Catch-Up” provision, which increases the standard catch-up amount of $7,500 to $11,250.
If you fall within that age range, talk with your plan provider about utilizing this opportunity.
Flexibility and Financial Goals
We recognize that retirement planning is not your only financial goal. You might not be able to fully maximize contributions to your retirement plan or account. However, using these accounts to the greatest extent possible can provide significant financial flexibility for you and your family in the future.
As always, the team at Master’s is here to help. We’d be delighted to discuss an appropriate retirement strategy tailored to your needs.
