Navigating Retirement: 401(k), IRA & Social Security

In my extensive experience covering financial journalism for over three decades, a consistent piece of advice from personal finance experts and authors resonates universally: never rely solely on Social Security for your retirement income. This fundamental principle underscores the critical need for proactive and diversified retirement planning.

The Imperative of Diversified Retirement Planning

The landscape of retirement planning in the United States increasingly highlights a stark reality: the average Social Security monthly paycheck, while a vital safety net, is often insufficient to sustain a desirable post-career lifestyle. For instance, the estimated average monthly Social Security retirement benefit for January 2026 stands at approximately $2,071, translating to an annual income of $24,852. When juxtaposed with the U.S. poverty level for a two-person household, which is $21,640, this average benefit provides a mere $3,212 cushion above the poverty line—roughly 12.9%. This marginal difference underscores why American workers are increasingly seeking robust saving and investing options to supplement their retirement income, positioning Social Security as a smaller, foundational component of their overall financial strategy.

Unpacking the 401(k): A Foundation for Wealth Building

Among the most popular and effective avenues for retirement savings, the 401(k) plan stands out as an employer-sponsored program designed to facilitate long-term wealth accumulation. Participants elect to contribute a specific dollar amount or a percentage of their salary, which is then automatically deducted and invested into their retirement account. This systematic approach fosters consistent savings habits, forming a critical bedrock for future financial security.

Dave Ramsey's Endorsement of 401(k)s

Renowned personal finance author Dave Ramsey strongly advocates for the utilization of 401(k) plans. His extensive research, particularly "The National Study of Millionaires," reveals a compelling statistic: eight out of ten millionaires built their wealth primarily through their company’s 401(k). This finding reinforces the power of consistent contributions and compounding growth within these plans, demonstrating that even a "boring old 401(k)" can serve as a formidable vehicle for achieving substantial wealth and a comfortable retirement.

Key Advantages of 401(k) Plans

• Rising Contribution Limits: For 2026, the Internal Revenue Service (IRS) projects an increase in annual contribution limits, allowing individuals to contribute up to $24,500 to a 401(k). Those aged 50 and older can benefit from an additional "catch-up" contribution of $8,000, bringing their total potential annual contribution to $32,500.
• Employer Matching Contributions: A significant incentive offered by many employers is the matching contribution, where the employer contributes a certain amount for every dollar an employee saves, often up to a specified percentage of the salary. This matching acts as an immediate, guaranteed return on investment, substantially boosting savings. While optional for employers, it represents a powerful growth accelerator when available.
• Pre-Tax Contributions: Contributions to a traditional 401(k) are typically made with pre-tax dollars. This mechanism reduces the individual's taxable income for the year, potentially lowering their current tax liability and offering immediate tax savings.
• Portability and Flexibility: Funds contributed to a 401(k) are fully vested to the employee. Should an individual change jobs or if an employer closes operations, these accumulated funds can be rolled over into an Individual Retirement Account (IRA) or another employer’s plan, preserving their tax-deferred status and maintaining continuity in retirement planning.

The Roth IRA: Tax-Free Growth in Retirement

While 401(k)s provide a robust foundation, Individual Retirement Accounts (IRAs), particularly Roth IRAs, offer distinct advantages, primarily the benefit of tax-free withdrawals in retirement. This appealing perk makes Roth IRAs a favored option for many financial advisors and individuals seeking to mitigate future tax burdens.

AARP's Perspective on Roth IRA Benefits

AARP, a leading advocacy group for older Americans, highlights several compelling reasons to consider a Roth IRA. Contributions to a Roth IRA are made with after-tax dollars, meaning that once an individual reaches 59½ years of age and the account has been open for at least five years, all qualified withdrawals—including earnings—are entirely free of both taxes and penalties. Furthermore, unlike traditional IRAs, Roth IRAs do not impose Required Minimum Distributions (RMDs) at age 73, allowing the balance to continue growing untouched for a longer period. This feature is particularly beneficial for estate planning, as assets left to heirs can also be withdrawn tax-free, provided the account is depleted within a 10-year timeframe.

Navigating the 401(k)-to-Roth IRA Conversion: AARP's Cautions

Despite the attractive features of Roth IRAs, the decision to convert a traditional 401(k) to a Roth account requires careful consideration, as outlined by AARP. While the prospect of tax-free withdrawals in retirement is enticing, the conversion process comes with immediate financial implications that warrant thorough understanding.

Potential Drawbacks and Financial Implications

• Immediate Tax Liability: A primary drawback is the requirement to pay income taxes on any pre-tax dollars converted from a traditional 401(k) to a Roth account. This can result in a significant and immediate tax bill, making the strategy potentially costly in the short term. Financial experts generally recommend paying this tax bill with funds from outside the 401(k) to avoid depleting the account balance, thereby maximizing its future tax-free growth potential.
• Impact on Tax Bracket and AGI: A large conversion can substantially increase an individual's taxable income, potentially pushing them into a higher tax bracket. This shift can result in a higher tax rate being applied not only to the converted amount but also to other earnings for that year. Moreover, such a conversion increases one's Adjusted Gross Income (AGI), which has broader financial repercussions.
• Higher Medicare Part B Premiums: An elevated AGI resulting from a Roth conversion may trigger higher Medicare Part B premiums. For instance, in 2026, while the standard monthly premium is $202.90, individuals with an AGI above $109,000 and couples above $218,000 could face monthly premiums ranging from $284.10 to $689.90. Importantly, Medicare's high-income surcharge is typically based on tax returns from two years prior, meaning a conversion today could silently elevate future premiums.
• Increased Taxation of Social Security Benefits: A higher AGI from a Roth conversion also increases the likelihood that a portion of Social Security benefits will be taxed. The IRS determines Social Security taxation based on "provisional income," which includes AGI, any tax-exempt interest, and half of Social Security benefits. If provisional income exceeds certain thresholds (e.g., $25,000-$34,000 for single filers or $32,000-$44,000 for joint filers), up to 50% of benefits may become taxable. Exceeding higher thresholds (e.g., above $34,000 for individuals or $44,000 for couples) can lead to as much as 85% of benefits being taxed. Withdrawals from a 401(k) used in a Roth conversion directly contribute to these income thresholds, potentially increasing the taxable portion of one's Social Security benefits.

In conclusion, while the allure of tax-free withdrawals in retirement is significant, the decision to convert a traditional 401(k) to a Roth IRA must be made with a comprehensive understanding of the immediate tax burdens and the downstream effects on AGI, Medicare premiums, and Social Security taxation. Consulting with a qualified financial advisor is paramount to strategically navigate these complexities and ensure that such a conversion aligns with individual financial goals and overall retirement planning objectives.