Retirement Plan Update, Q1 2022

Market Recap:

After enjoying a spectacular finish to 2021, 2022 has brought about several daunting challenges for investors: namely, the Federal Reserve’s more aggressive policy moves to combat inflation and the Russian invasion of Ukraine.  The devasting effects of the Ukraine crisis are far-reaching, but for this update, we’re focusing on the implications on the economy.  Supply shocks in commodities caused by the war in Ukraine have exacerbated already high inflation.  This creates an even bigger problem for the Federal Reserve as they seek to balance taming inflation and supporting economic growth. 

The Fed moved forward with raising the fed funds rate in March and signaled that there will be seven more rate hikes throughout the rest of 2022. They have also begun to lay the foundation for reducing their massive $9 trillion balance sheet.  Markets don’t like uncertainty and this has certainly been an uncertain time.  Historically, the Fed has a poor track record of combatting inflation by raising rates without causing a major slowdown in the economy.  The volatility, though, is a buying opportunity for retirement plan participants contributing each pay period. 

What is the Roth Option? 

Many retirement plans also offer a Roth option within the plan.  But what is the Roth option?  How does that compare to the traditional option?  First, the difference is that Roth contributions are made after-tax so you pay tax on those contributions this year.  The big deal about the Roth option, though, is that the earnings grow tax-free until you retire and beyond. That means when you draw out those funds in retirement you don’t have to pay tax on that money. Because there are no taxes due, the IRS also doesn’t require you to take an RMD, giving investors flexibility to let that money continue growing tax free if they don’t need it.

When comparing the Roth option within a retirement plan to a Roth IRA, the retirement plan option allows an investor to contribute more. In 2022 both traditional and Roth allow contributions of up to $20,500 per year, or, for investors over 50 up to $27,000 per year. Alternatively, IRA contributions are limited to $6,000 per year, or for investors over 50 $7,000 per year.  The other big benefit of Roth retirement plan contributions is there is no income limit as there are for Roth IRAs.  So even higher income investors can contribute into the Roth option of their retirement plan if they choose.

If you have any questions don’t hesitate to reach out to your plan’s advisor.