How the IRS Taxes Retirement Income

It’s important to know how common sources of retirement income are taxed at the federal and state levels.



Navigating taxes in retirement can be challenging. Your tax situation may differ from your working years due to income and tax bracket changes. Required withdrawals from retirement accounts and income from other sources can also affect your tax liabilities.

That’s why it’s crucial to know how common sources of retirement income are taxed. Having this information can help you develop a tax-efficient strategy for your retirement years. 

Is retirement income taxable?

Comprehensive retirement planning involves considering various sources of income and understanding how they are taxed at the federal and state levels. But thankfully, there are several types of income the IRS doesn’t tax. For example, life insurance proceeds, long-term care insurance payments, disability benefits, muni bond interest, and alimony and child support are generally not taxable. Additionally, earned income in states with no income tax isn’t subject to tax at the state level.

Related: Types of Income the IRS Doesn’t Tax

Still, your tax planning should consider the tax treatment of income from annuities, pensions, Social Security benefits, and retirement savings accounts. You will also want to assess tax liability from various investments, earnings, and proceeds.

Here’s a breakdown of some common retirement income sources and a brief description of their federal tax implications. (More below on state taxes on retirement income.)

How some income in retirement is taxed

Social Security Benefits: Depending on provisional income, up to 85% of Social Security benefits can be taxed by the IRS at ordinary income tax rates.

Pensions: Pension payments are generally fully taxable as ordinary income unless you made after-tax contributions.

Interest-Bearing Accounts: Interest payments are taxed at ordinary income rates, but municipal bond interest is exempt from federal tax and may be exempt from state tax.

Sales of Stocks, Bonds, and Mutual Funds: Long-term gains (held over a year) are taxed at 0%, 15%, or 20% capital gains tax rates, based on income thresholds. Net investment income tax (NIIT) factors in for some taxpayers. at a rate of 3.8%.

Dividends: Qualified dividends are taxed at long-term capital gains rates; non-qualified dividends are taxed as ordinary income based on your federal tax bracket.

Traditional IRAs and 401(k)s: Contributions to traditional IRAs and 401(k)s reduce your taxable income. However, withdrawals are taxed at ordinary income rates. Required minimum distributions (RMDs) start at age 73. Withdrawals before age 59 ½ are subject to a tax penalty.

Roth IRAs and Roth 401(k)s: Contributions to Roth accounts are not tax-deductible. However, withdrawals after five years following the first contribution are tax-free for Roth IRAs, including gains. Withdrawals before age 59 ½ are subject to a tax penalty.

Life Insurance Proceeds: Life insurance proceeds are generally not subject to tax when received as a beneficiary. However, surrendering a policy for cash may have tax implications.

Savings Bonds: Bond interest is generally taxable at ordinary income rates upon maturity or redemption but may be tax-free for education expenses if certain conditions are met.

Annuities: For annuities, the portion representing the principal is tax-free; earnings are taxed at ordinary income rates unless purchased with pre-tax funds.

Home Sales: Under the Section 121 home sale exclusion, primary home sale gains up to $250,000 ($500,000 for married couples) are excluded from income tax if specific ownership and use criteria are met.

the word tax on three blocks with the A tilted

Which states do not tax retirement income?

Crafting a tax-efficient retirement strategy requires careful consideration of various income sources and their tax implications. 

  • Seek professional guidance if you need help making decisions that maximize your retirement funds and minimize tax burdens.

Also, note that while this article focuses on federal taxes on different types of retirement income, it is essential to consider the impact of state and local taxes on your finances. (There are more than a dozen states that don’t tax retirement income.) 


Smart Ways to Handle an Inheritance

Here’s how to handle an inheritance like a pro. A bequest could change your life, but don’t quit your day job.





We’ve all heard stories about individuals who passed away quietly after a life of frugality, leaving a fortune to their unsuspecting heirs or, occasionally, a beloved pet.

The reality is a lot less riveting. According to the Washington Post, the average American has inherited only about $58,000 as of 2022, taking into account that most of us won’t receive any form of inheritance. The Federal Reserve also reports that from 1989 to 2007, on average, only 21%  of American households at a given point in time received a wealth transfer.

Complicating matters is the fact that many estate plans contain a smorgasbord of items, including real estate, investments, cash, retirement savings accounts and life insurance plans. It could take months to track down these assets and divide them among the estate’s heirs, and you could incur significant legal fees — particularly if the estate was large or your relative died without a will. There are also different rules for different heirs: Spouses, for example, enjoy some tax breaks and exemptions that aren’t available for adult children or other heirs.

For example, Brian Lee of Tacoma, Wash., got a crash course in estate law after his late father’s brother and sister died almost within a year of each other, in late 2015 and 2017. Neither of his father’s siblings had children when they died, so their estates were divided among their nieces, nephews and other surviving relatives. 

Lee ended up with a six-figure inheritance, but because his uncle died without a will, settling the estate took months and cost thousands of dollars in legal fees. Lee’s aunt had a will, with Lee as the executor, which made “all the difference in the world in terms of the process,” Lee says.

Here’s what you need to know in order to handle an inheritance like a pro.

What you’ll owe in taxes

Stocks: Unless your parents were fabulously wealthy, you won’t have to worry about federal estate taxes, but that doesn’t mean Uncle Sam has no interest in your inheritance. If you inherited stocks, mutual funds or other investments in a taxable account, you’ll be able to take advantage of a generous tax break known as a step-up in basis. The cost basis for taxable assets, such as stocks and mutual funds, is “stepped up” to the investment’s value on the day of the original owner’s death. 

For example, if your father paid $50 for a share of stock and it was worth $250 on the day he died, your basis would be $250. If you sell the stock immediately, you won’t owe any taxes; if you hold on to it, you’ll only owe taxes (or be eligible to claim a loss) on the difference between $250 and the sale price.

It’s a good idea to notify the investment account custodian of the date of death to ensure that you get the step-up, said Annette Clearwaters, a certified financial planner in Mount Kisco, N.Y.

Because of this favorable tax treatment, a taxable-account inheritance could be a good source of cash for a short-term goal, such as paying off high-interest debt or making a down payment on a house, said Jayson Owens, a certified financial planner in Anchorage, Alaska. If you’d rather keep the money invested, review your inherited investments to see whether they are appropriate for your portfolio. For example, you could sell individual stocks and invest the money in a diversified mutual fund without triggering a big tax bill.

Retirement accounts: If you inherited a tax-deferred retirement plan, such as a traditional IRA, you’ll have to pay taxes on the money. Spouses can roll the money into their own IRAs and postpone distributions — and taxes — until they’re 73. 

However, The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which took effect on Jan. 1, 2020, changed the inherited IRA rules for non-spouse heirs. Instead of taking required minimum distributions, based on their age and life expectancy, heirs must withdraw all assets from the inherited IRA or 401(k) within 10 years of the death of the owner. 

If you were fortunate enough to inherit a Roth IRA, you’ll still be required to deplete the account in 10 years, but the withdrawals will be tax-free. If you inherit a traditional IRA or 401(k), you may want to consult with a financial planner or tax professional to determine the best time within the 10-year window to take taxable withdrawals. For example, if you’re close to retirement, it may make sense to postpone withdrawals until after you stop working, since your overall taxable income will probably decline.

Real estate: When you inherit a relative’s home (or other real estate), the value of the property will also be stepped up to its value on the date of the owner’s death. That can result in a large lump sum if the home is in a part of the country that has seen real estate prices skyrocket. Selling a home, however, is considerably more complex than unloading stocks. You’ll need to maintain the home, along with paying the mortgage, taxes, insurance and utilities, until it’s sold.

Life insurance: Proceeds from a life insurance policy aren’t taxable as income. However, the money may be included in your estate for purposes of determining whether you must pay federal or state estate taxes.

Spending your windfall

Even a small inheritance can represent more money than you’ve ever received at one time. Go ahead and treat yourself to a modest splurge — a special vacation, for example — but avoid making costly changes in your lifestyle.

Brian Lee used his inheritance to pay off his wife’s student loans and a small credit card debt; the rest went into retirement savings. Lee says he wanted to honor the legacy of his uncle, a dedicated investor who worked for IBM in the custodial department for 30 years. Lee’s uncle spent most of his life in the same small house in Austin, Texas, and drove a 1967 Ford truck, but he was a wealthy man, with an estate valued at more than $3 million when he died. “There’s no way I would blow money someone spent a lifetime saving,” Lee says.

However, many people overestimate how long their newfound wealth will last. For this reason, consider stashing your inheritance in a money market account or CD account for six months to a year. You’ll earn interest on your cash, and your money will be safe while you assemble a team of professionals, which typically should include a fee-only planner, a tax professional and an attorney.

Your team can help you look for ways to fortify your finances. Paying off credit cards and student loans will relieve you of high-interest debt and free up cash for other purposes. If you haven’t saved enough to cover several months’ worth of expenses, use your windfall to beef up your emergency fund

Once you’ve got that covered, consider using your inheritance to increase retirement savings. Finally, if you don’t have an estate plan of your own, use some of the money to create one, including powers of attorney, health care directives, a will and, if necessary, a living trust. Your own heirs will thank you.


Five Ways to Catch Up on Retirement Savings

If you’re in your highest-earning years, you can make up for lost time.



You’ve no doubt heard from multiple sources (including Kiplinger) that the key to retirement security is to save early and often. Thanks to the value of compound interest, even small contributions to a 401(k) or other retirement savings plan when you’re starting out will add up significantly over time.

However, there’s math and then there’s reality. Young workers have multiple demands on their finances, from student loan payments to the rising cost of child care. It’s not unusual for individuals in their twenties and thirties to put their savings on hold, or limit the amount of their contributions, until those obligations begin to diminish and they reach their highest-earning years.

But just as it’s never too late to start strength training, it’s never too late to save for retirement. Here are some strategies you can use to turbocharge your savings. 

Catch-up contributions

The easiest way to ramp up your retirement savings is to make catch-up contributions to your 401(k) or other employer-provided plan. In 2024, if you’re 50 or older, you can contribute an extra $7,500 in addition to the $23,000 maximum 401(k) contribution, for a total of $30,500. If you have a traditional IRA or Roth IRA, you can contribute an additional $1,000 beyond the standard $7,000 limit for those younger than 50, for a total contribution of $8,000 in 2024.

If your employer-provided plan offers a Roth 401(k) — and most large plans do — consider dedicating at least a portion of your catch-up contributions to that account, especially if you already have a large balance in a tax-deferred plan. Although contributions to a Roth 401(k) are after-tax, withdrawals are tax-free as long as you’re 59½ or older and have owned the account for at least five years. And you can contribute to a Roth 401(k) regardless of your income level. 

By contrast, to be eligible to contribute the maximum amount to a Roth IRA in 2024, your modified adjusted gross income (adjusted gross income with certain deductions added back) must be less than $146,000 if you’re single or less than $230,000 if you’re married and file jointly. Contributions begin phasing out above those amounts, and you can’t put any money into a Roth IRA once your income reaches $161,000 if you’re single or $240,000 if you’re married and filing jointly.

In the past, you had to take required minimum distributions from Roth 401(k) plans when you reached the age that triggers RMDs for traditional IRAs and 401(k)s (currently 73). But the law known as SECURE Act 2.0, a broad package of changes to rules governing retirement and retirement savings plans, eliminated that requirement, effective this year. 

Starting in 2026, some workers who want to make 401(k) contributions may have to put some of them in a Roth 401(k), whether they like it or not. A provision in SECURE Act 2.0 will require workers age 50 or older who earned $145,000 or more in the previous year to funnel catch-up contributions to Roth 401(k) plans. The change was originally scheduled to take effect this year, but the IRS postponed implementation of the rule after plan providers and employers — particularly those who don’t yet offer a Roth 401(k) — said they needed more time to prepare. 

After-tax contributions

If you’ve maxed out on catch-up contributions (or you aren’t yet old enough to make them), you may want to consider making after-tax contributions to your 401(k), assuming your employer allows them. In 2024, you can save up to $69,000 in combined employee and employer contributions, or $76,500 if you’re 50 or older. 

Like contributions to a Roth 401(k) (or Roth IRA), contributions are after-tax, but earnings are only tax-deferred; you’ll pay taxes on them at ordinary income tax rates when you take withdrawals. Given that, you may be wondering why you’d use this strategy instead of simply investing extra savings in a taxable brokerage account (which we’ll discuss later).

Here’s why: With a strategy that has been dubbed the “mega backdoor Roth IRA,” you may be able to convert those after-tax contributions to a Roth IRA or, if your plan offers one, a Roth 401(k). Once the money is in a Roth, earnings will grow tax-free, and withdrawals will be tax-free as long as you’re 59½ and have owned the Roth for at least five years. And you won’t be required to take RMDs from the account. “That’s the promised land,” says Ed Slott, founder of “It’s way better off than a brokerage account.”

Now for the caveats, and there are quite a few. First, your plan must allow both after-tax contributions and what’s known as in-service distributions, which allow employees to withdraw funds from their plans while they’re still working. While the IRS permits after-tax contributions and in-service distributions, plans aren’t required to provide them. Only about one-fourth of companies allow after-tax contributions, although it’s more common among large employers. 

An even bigger hurdle is the IRS nondiscrimination rule, which limits the amount some high earners can contribute to their 401(k) plans. The IRS requires 401(k) plans to pass certain tests to ensure that the plan doesn’t favor highly compensated employees over lower-paid workers. Plans are subject to two anti-discrimination tests, one that measures pretax and Roth contributions by both types of employees, and a second that measures employer matches, profit-sharing and after-tax contributions. Because highly paid employees are typically the only workers who can afford to make after-tax contributions, it’s difficult for many companies — especially small and medium-size businesses — to pass the second test, says Ian Berger, an IRA analyst with 

These restrictions don’t apply to solo 401(k) plans, which are primarily used by self-employed business owners, Berger notes. Participation in a solo 401(k) plan is limited to the business owner (and in some instances, his or her spouse), so the anti-discrimination rules don’t apply. If your plan allows it — and not all solo 401(k) plans do — you can make after-tax contributions up to the maximum allowed and do an in-plan Roth conversion or roll over the funds into a Roth IRA. 

The mega backdoor Roth has been in the political crosshairs since news reports revealed that PayPal cofounder Peter Thiel used the strategy to shield billions of dollars in shares of a pre–initial public offering from taxes, potentially forever. Lawmakers have proposed prohibiting individuals from converting after-tax contributions to a Roth, but none of the initiatives have been enacted into law. 

Because the mega backdoor Roth is complex — and not for everyone — consider consulting with a certified financial planner who has experience working with high-income investors to determine whether this strategy is right for you. 

Brokerage accounts

senior woman having discussion with her agent about her retirement investment plan signing legal document

Taxable brokerage accounts are sometimes overlooked as retirement savings tools because they’re, well, taxable. But there are solid arguments for adding a brokerage account to your retirement toolkit, particularly if you’ve taken advantage of all of the available tax-advantaged accounts. 

Funds invested in a taxable account are unencumbered by early-withdrawal penalties, making them a good option for someone who wants to retire early (although if you’re behind on retirement saving, that may not be realistic). You don’t have to take distributions after you reach a specific age as you do with traditional IRAs. And unlike tax-advantaged accounts, taxable brokerage accounts don’t come with annual limits on the amount you can invest. 

Although gains on your investments are taxable, you can take steps to minimize the tax bill. As long as you hold investments in your taxable account for more than a year, gains will qualify for a long-term capital gains rate that’s likely lower than your income tax rate — the rate that applies to short-term gains for investments held in your account for one year or less. Most taxpayers pay 15% on long-term capital gains, and if your taxable income is low enough — in 2024, $47,025 or less if you’re single or $94,050 or less if you’re married and file jointly—you qualify for a 0% rate on long-term capital gains. (Single filers with taxable income of more than $518,900 and joint filers with income of more than $583,750 are subject to the maximum 20% rate; those with income that falls between the 0% and 20% thresholds pay the 15% rate.)

When determining how to invest funds in a mix of taxable and tax-advantaged accounts, you can lower your overall tax bill by using a strategy known as asset location. Exchange-traded funds are good choices for your taxable accounts, because many are index funds, which tend to generate less in capital gains distributions compared with actively managed mutual funds. Even active ETFs tend to be more tax-efficient than mutual funds because of the way they are structured.

Because interest payments from municipal bonds and municipal bond funds are often exempt from federal taxes — and in some cases from state and local levies — munis are also good choices for your taxable account. 

Meanwhile, other bonds and bond funds are better candidates for your tax-deferred accounts because interest is taxed at your ordinary income tax rate, which could be as high as 37% if you’re earning a high income. Sheltering interest-generating investments in your tax-deferred accounts will enable you to postpone paying taxes on that money until you retire and start taking withdrawals. 

Actively traded mutual funds that throw off a lot of taxable capital gains distributions are also better suited for your tax-advantaged accounts. Funds that offer the potential for a high rate of return, such as those that invest in small- and mid-capitalization stocks, are good candidates for your Roth accounts because you’ll be able to take advantage of long-term, tax-free growth. 

If your goal is to leave a legacy, a taxable account could provide an important component of your estate plan. On the day you die, your investments will receive what’s known as a step-up in basis, which means the cost basis of the investments — the amount you paid for them — will be adjusted to their current market value. If your heirs turn around and sell the investments, they’ll owe little or no tax on those appreciated assets. 

Health savings accounts

Health savings accounts are primarily viewed as a way to cover your unreimbursed medical expenses, but they also provide a tax-advantaged way to save for health costs in retirement. 

Contributions to an HSA are pretax (or tax-deductible if your HSA is not provided through your employer), funds grow tax-free, and withdrawals are tax-free as long as the money is used for eligible health care expenses. If you have an individual health insurance plan, you’ll be allowed to contribute up to $4,150 in 2024. For family coverage, you can contribute up to $8,300. If you’ll be 55 or older at the end of the year, you can put in an extra $1,000 in catch-up contributions.

To qualify for an HSA, your health plan must have a deductible of at least $1,600 for individual coverage or $3,200 for a family plan. The plan must limit out-of-pocket expenses to $8,050 for self-only coverage or $16,100 for family coverage. 

If you have enough disposable income to pay for your current health care expenses out of pocket and avoid taking withdrawals from your HSA, you can get the most out of your HSA’s triple tax advantage, says Nilay Gandhi, a certified financial planner and senior wealth adviser with Vanguard Group. As long as you invest at least a portion of your HSA funds in the stock market — an option that most large plans offer — the money will grow tax-free, and withdrawals will be tax-free as long as the money is used for qualified expenses.

You can use HSA funds to pay for medical costs that Medicare doesn’t cover, as well as monthly premiums for Medicare Part B and Part D and Medicare Advantage plans. You can also use distributions to pay a portion of long-term-care insurance premiums; the amount you can withdraw tax-free depends on your age. 

Once you turn 65, you can take penalty-free withdrawals for non-medical purposes, although you’ll pay taxes on the money (non-medical withdrawals before age 65 are subject to taxes and a 20% penalty). Unlike IRAs, though, there are no required minimum distributions for HSAs, so you can allow the funds to grow throughout retirement.


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Where You Should (and Shouldn’t) Keep Your Emergency Fund

Spoiler: The answer is not ‘under your mattress.’

Written by Toni Husbands, Liliana Hall

Edited by Kelly Ernst

Saving for unexpected costs can be just as important as saving for anticipated goals because if you aren’t prepared when life strikes, you might find yourself with high-interest debt. An emergency fund should be a reserve you can fall back on in case you find yourself in a precarious situation. 

Most experts suggest having at least six months’ worth of expenses in an emergency fund, but how much you should have depends on your individual circumstances. That said, where you should keep your emergency fund is less complicated: It should be out of sight and mind until you need it. 

Here are some of the best places to keep your emergency fund — and some places you should avoid. 

Where should you keep your emergency fund?

Experts recommend keeping your emergency fund in an account that’s liquid and easily accessible. It should be completely separate from your primary checking account so you aren’t tempted to use it in a non-emergency.

“If you’re someone who might not have as much discipline, but you’re trying to build that savings muscle, I recommend putting it out of reach, but still within reach in case of an emergency,” said Krystal Todd, a certified public accountant and the creator of The Cash Compass on YouTube and Instagram.

Additionally, you’ll want to keep it in a bank that’s insured by the Federal Deposit Insurance Corporation or with a credit union insured by the National Credit Union Administration. These accounts are federally insured for up to $250,000 per person, per account category.

You also don’t want to tie up your emergency fund with access restrictions or taxable events that are triggered when withdrawing your money. Long-term investment accounts, like retirement funds, can make it difficult or costly — in terms of fees, taxes or penalties — to access your money when needed. “It shouldn’t be invested,” said Jeremy Schneider, founder of the Personal Finance Club. “If it’s invested, it’s not your emergency fund.” 

The best places to keep your emergency fund

You should be able to access your emergency fund quickly if something unexpected pops up, like job loss, a home repair or other hefty expenses. An emergency fund helps you plan ahead so you can address an emergency without turning to high-interest credit cards or expensive payday loans. But while you want it on hand, you don’t want to keep your stash under your mattress — in today’s high-rate environment, that’s leaving money on the table.

High-yield savings account

High-yield savings accounts are interest-earning savings accounts often offered by online banks or online-only branches of larger banks. Without the overhead costs associated with brick-and-mortar branches, these banks can pass savings onto you in the form of higher annual percentage yields, or APYs. The best APYs available on high-yield savings accounts are as high as 5.35%. 

High-yield savings account APYs are variable and can change based on market conditions. However, in this current climate of rising rates on deposit accounts, keeping your emergency savings in an account that earns competitive interest only helps your bottom line.

Traditional savings account

Most financial institutions offer traditional savings accounts. If you already have a relationship with a bank, opening a traditional savings account with it can be very convenient. However, these accounts often pay very little interest on your savings. The national average annual percentage yield for a savings account is only 0.47%, according to the FDIC. Though your primary goal for an emergency fund should be accessibility and not interest growth, you can earn an even better return on your money by opting for a savings account with a higher yield.

Money market account 

money market account is similar to a high-yield savings account. It offers a higher interest rate than a traditional savings account but provides the accessibility of a checking account. Unlike most savings accounts, MMAs generally offer debit card access and check-writing privileges. If having easy access to your emergency fund means you’ll be tempted to use it for nonemergencies, though, an MMA might not be the best option for you. 

Where should you avoid keeping your emergency fund?

Checking account

Keeping your emergency fund in the same account as the funds you use for everyday finances is a bad idea for two reasons: It’s too accessible, and you aren’t tapping into the interest-earning potential other accounts offer. 

“By leaving funds in your normal checking account, they are more likely to be spent like normal savings and not be saved for emergencies,” said Nicole T. Strbich, managing director of financial planning at Buckingham Advisors.

The national average APY for an interest-bearing checking account is only 0.07%. So your earning potential doesn’t even come close to competing with some of the best high-yield savings accounts. 

Certificate of deposit

certificate of deposit is a deposit account that offers a fixed rate for a specific time, or term. In exchange for fixed growth, you agree not to withdraw your money before the term ends. The main benefit of a CD is that your money grows over time with a predetermined APY. Competitive one-year CDs, for example, can earn as much as 5.4% APY, which is higher than the average high-yield savings account. 

While a CD can be a great place to store extra savings, it shouldn’t serve as the primary savings option for your emergency fund. That’s because if you need to withdraw your funds before the CD term ends, you’ll pay an early withdrawal penalty (typically equal to a portion of the interest earned). Some more flexible CD types, like no-penalty CDs, could be better options but currently earn less interest than high-yield savings accounts.

Series I savings bond

Series I bonds are connected to the inflation rate. This savings option was all over the news in 2022 due to its record 9.62% interest rate. The current rate for the next six months is 5.27%. The interest rates for I bonds change twice a year, in May and November, so you can lock in this rate for the next six months if you open one before May 1, 2024.

Savings bonds are considered one of the safest investments, but they’re not the best place to store your entire emergency fund. You need to hold them for at least a year, and if you redeem them before five years, you’ll lose out on the previous three months of interest.

In your home

It’s never a good idea to keep money under your mattress or in your sock drawer because you’re missing out on two important things: insurance and the potential to earn interest. FDIC-insured banks and NCUA-insured credit unions protect your deposit for up to $250,000 per person, per account. If anything were to happen to your home, you wouldn’t have any way of getting your money back. Plus, you can’t earn a competitive yield when your cash is parked next to your favorite pair of socks.

The bottom line

Whether you’re just developing a strategy to build your savings or you have enough saved to float a year’s worth of expenses, selecting the best place to keep your money is a crucial decision. Keep your money close enough to access in an emergency, but far enough away to resist the temptation to dip into it.

This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.


How much Americans in their 40s have in their 401(k)s—and how to boost it

Published Tue, Apr 23 202411:08 AM EDT

Cheyenne DeVon

If you’re in your 40s and have over $40,000 saved for retirement, you’re ahead of most people in your age bracket. However, you may need to take some proactive steps in order to retire comfortably.

The median 401(k) balance for Americans ages 40 to 49 is $38,600 as of the fourth quarter of 2023, according to data from Fidelity Investments, the nation’s largest 401(k) provider. That means half of account holders in this age range have savings above this balance and half have savings below it.

Here’s how much Americans have in their 401(k)s by age, according to Fidelity.

For people in their 40s who hope to retire in their 60s, retirement is edging closer each year. However, they’re likely a long way off from their savings goals.

By the time you reach your 40s, you should aim to have three times your salary saved for retirement, according to Fidelity’s guidelines. If you earn $80,000 annually, you’d ideally have $240,000 saved for your post-work years.

Why Americans in their 40s haven’t been able to save more

Various factors have gotten in the way of this age cohort’s ability to boost their retirement contributions.

For one, when many people in their 40s were beginning their careers, they didn’t get a chance to benefit from reforms to the tax system, such as auto-enrollment, which automatically enrolls you into your employer’s 401(k) plan, and auto-escalation, which automatically ups your savings rate by a given percentage or dollar amount annually, says Anne Lester, a retirement expert and author of “Your Best Financial Life: Save Smart Now for the Future You Want.”

“They were not the beneficiaries of all of the reforms that have happened in the 401(k) system in the last 15 years,” she tells CNBC Make It. “Many Gen Xers have changed jobs, and maybe they’re now contributing, but they missed out on saving in those early years if they didn’t sign up themselves.”

On top of that, many people in their 40s may find themselves in the “sandwich generation,” covering expenses related to both child care and taking care of aging parents.

“It just takes a huge bite out of your wallet,” Lester says. “I think as people are inevitably allocating scarce and finite resources, you may find yourself contributing less than you should.”

How people in their 40s can boost their retirement savings

If you’re in your 40s and your retirement savings aren’t where you’d like them to be, there are a couple of ways to get on track.

First, gain a clear understanding of where your retirement savings stand and what factors are within your control. Despite your contributions, your overall account balance can be impacted by things such as market volatility.

On the other hand, your savings rate, which is the percentage of your income you allocate toward your retirement investment accounts, is within your control.

That’s why you should make sure you’re contributing enough to get your company’s full match, if available. Fidelity recommends aiming for a savings rate of 15%, including any employer match.

If you’re behind on your retirement savings, you may need to make some short-term sacrifices so that you can contribute even more in order to make up for any missed years, Lester says.

“I’m not saying it’s going to be easy,” she says. “If you’re in your 40s and have saved zero for retirement, you may be looking at a savings rate of 30-plus percent.”

But this doesn’t have to be done all at once. You can use features like auto-escalation to increase your retirement savings rate by a few percentage points each year until you reach your goal.

Additionally, as expenses related to things like caring for young children decrease, you can allocate that money toward your retirement.

“Those expenses will drop off at some point and then you’ve got to redirect that money into savings,” Lester says. “Mentally plan for that now so that you’re not feeling poor or deprived when you get that a little bit of extra money.”


10 Things You Should Know About Bonds

Bonds can be more complex than stocks, but it’s not hard to become a knowledgeable fixed-income investor.


When it comes to bond investing, there’s a lot more to know than the current interest rate on Treasuries.

Bonds have two primary roles: income – whether taxable or tax-free – and portfolio diversification. Much of the time, when stocks or other investments struggle, bonds hold their value.

Read on to learn some key concepts every bond investor should know.

1. It’s all about interest rates

The Federal Reserve has raised interest rates by more than 5 percentage points over the past two years. Why is this important to investors in bonds?

Bond prices certainly are linked to interest rates, but inversely. When interest rates overall are on the rise, older, lower-yielding bonds become devalued. Conversely, falling rates raise the value of older issues with higher coupon rates.

So remember this like it’s your mantra:

  • When interest rates rise, bond prices fall.
  • When interest rates fall, bond prices rise.

Rinse, wash, repeat.

2. What does ‘duration’ mean?

To dispel with some misconceptions, “duration” is not a rough estimate of how long it will take to reach your investing goal. Neither is it the number of years a bond issuer has gone without a negative credit event. And it doesn’t refer to the number of years before the borrower has to return your principal.

Rather, it’s a measure of a bond’s interest rate sensitivity. As a general rule, for every 1% increase or decrease in interest rates, a bond’s price will change approximately 1% in the opposite direction for every year of duration. 

Duration – roughly related to a bond’s maturity, or the average maturity of the bonds in a fund’s portfolio – tells you approximately how much the price of a bond, or a fund’s net asset value, would fall or rise depending on the direction of interest rates. A duration of 5.5, for example, implies that a fund’s share price would fall roughly 5.5% if market rates rise one percentage point over a 12-month period.

3. What’s the single biggest risk to bond returns?

A rising stock market that attracts investment assets at the expense of bonds or a growing government budget deficit can hurt returns on bonds, but nothing cripples them like the “I” word.

Indeed, nothing is as pernicious to a lender than inflation, which represents a double-whammy for bondholders.

After all, inflation both devalues the real worth of future interest payments and usually results in higher interest rates that detract from a bond’s current market value.

Recession talk makes bond investors nervous for good reason. Corporate bonds are at increased risk of default when the economy is contracting. It turn, that keeps a lid on bond prices.

4. What is an inverted yield curve?

Nothing gets recession talk started like an inverted yield curve.

A wild and volatile bond market, also known as an upside-down bond market, isn’t nearly as worrisome. It’s also not good when Treasury securities pay higher interest rates than corporate bonds or mortgages with the same maturity.

But an inverted yield curve is worse. When short-term Treasury notes pay a higher interest rate than long-term government notes and bonds, there be monsters ahead.

Inverted yield curves are usually taken as a warning that the economy is slowing and might go into a recession. Longer-dated maturities typically yield more than shorter ones; when that relationship reverses, it could be because investors foresee lower interest rates as the economy slows along with borrowing demand.

However, there are exceptions, and an inverted yield curve doesn’t always spell disaster.

5. What is the highest rating a bond can have?

The two most important agencies that rate the creditworthiness of bond issues are Moody’s and Standard & Poor’s.

The highest credit score for borrowers – be they companies or countries – is AAA. Both agencies use the same designation when it comes to the very best, most reliable debtors.

AAA ratings are precious and hard to earn. The government of Canada gets one. Pharmaceutical giant Johnson & Johnson also has a AAA rating. Amazon, however, even with its massive war chest and firehouse of free cash flow, gets a rating of A1 from Moody’s and S&P rates Amazon at AA-.

Famously, the U.S. lost its top-notch rating from Standard & Poor’s when the rating agency downgraded Uncle Sam to AA+ in August 2011, citing a high level of debt and weakened “effectiveness, stability and predictability of American policymaking” with regard to the debt load.

6. What is a bond’s yield to maturity?

Don’t mistake this for the interest rate on the bond when it is issued, or the interest rate the bond pays between now and the date it is scheduled to mature.

Yield to maturity is the total return, including a gain or loss in the bond’s price, that you can expect if you buy the bond today and keep it until it matures.

Rather, it’s a total return calculation.

Although the word “yield” is in the phrase “yield to maturity,” the figure also includes the future gain or loss in the bond’s value to bring it back to par.

7. Where do bondholders rank in case of bankruptcy?

If a company goes out of business and liquidates, bondholders have the first claim on whatever cash becomes available in the bankruptcy.

Anyone who does not own securities but is owed money by the borrower becomes a general creditor. General creditors might include employees, contractors and suppliers. Stockholders are last in line.

Everyone else – including shareholders, bankers with delinquent loans to the business, and the company’s suppliers – must get in line behind the bondholders.

8. What’s the minimum order my broker will sell me?

It’s a misconception that when you buy bonds from your broker, you must order in multiples of $1,000.

In fact, you can buy $25 “baby bond” units, and often those are better and more liquid than bonds with a face value of $1,000. The $25 units are simple to buy because they are listed just like stocks or ETF units.

9. When do low-rated, high-yield bonds do well?

High-yield bonds, also known as junk bonds, can have a legitimate place in a fixed income portfolio.

That’s especially true when the economy is so strong that even weak companies are profitable and paying their debts.

Junk bonds are often seen as more related to stocks than to other bonds, and they tend to do better when the economy is growing swiftly and stocks are rising.

10. What’s the deal with munis?

Municipal bonds are often known as tax-exempt bonds, but that doesn’t mean you always escape income tax on the interest.

Some municipalities issue both tax-free and taxable bonds because some buyers, such as pension funds and foreign investors, would benefit from the higher yield but do not get anything from a tax exemption.


Mental Health: Fortifying Your Emotional Resiliency

Life experience can make individuals more flexible and adaptable. Here are some strategies to bolster your emotional staying power.

By Lisa B. Samalonis

April 25, 2024

Mental Health and Well-Being

Many people over 50 struggle with difficult life experiences, including personal losses, chronic health conditions and/or professional and financial issues, among others. Research shows these challenges often provide wisdom and perspective and help people become more resilient as they age.

“Human struggles are increasing and becoming more debilitating. The pandemic remains in our rearview mirror and has caused a vast majority of Americans to claim their mental health has been negatively affected by a ‘constant stream of crises without a break over the last two years’,” notes Gina Vild, co-author of “The Two Most Important Days: How to Find Your Purpose and Live a Happier, Healthier Life” and a forthcoming book on resilience.

“We all face everyday struggles that affect our state of mind and our health.”

The World Happiness Report, an initiative of the United Nations, reveals that Americans are trending toward gloom with our worst showing since it was first released in 2012. Today Americans rank 19th, above Afghanistan but well below Finland. In addition, Americans struggle with increasing political divisiveness, Vild notes.

As Vild notes, “We all face everyday struggles that affect our state of mind and our health. We experience professional problems, divorce, conflicts in relationships, debt, miscarriage, infertility, relocation, and the death of those we love. It is especially challenging as we age and face a change in our appearance, make peace with dreams that never came to pass, watch our children grow up and leave the nest, and begin to lose neighbors and friends to illness, death and relocation.”

“The point is that no one escapes adversity,” she says.

Yet, because we struggle, we also strengthen our power to rebound. For example, Vild notes that she has personally — and consciously — cultivated this fortitude at different times in her life, most notably when she lost her parents within 72 days of each other when she was in her late 20s.

“Another was when at 59 I discovered through a devastating series of reveals my marriage wasn’t at all what I thought, and I chose to walk away at a time in my life when most are nesting and readying for the later years, comfortable with long cultivated security and familiarity,” she says.

What Is Resiliency?

Resilience is the process and outcome of successfully adapting to difficult or challenging life experiences, especially through mental, emotional and behavioral flexibility and adjustment to external and internal demands, according to the American Psychological Association.

“Resiliency often encompasses experiences of flexibility or adaptability, being able to problem-solve, not letting situations ‘ruffle your feathers’ and maintaining some semblance of optimism despite life’s difficulties and adversities,” explains Cynthia Shaw, licensed clinical psychologist and owner of Authentically Living Psychological Services in New York.

“We may be surprised when we are hit with overwhelming emotions of anxiety, loneliness, self-doubt and sadness.”

“It can be quite challenging to practice this during our midyears, as there are often many changes that can cause disruptions, invite self-doubt and shake our sense of inner peace,” says Shaw. “For example, the midyears is a time when children leave the home, we consider retiring and look toward the future with more questions. We may be experiencing a decline in health, dissatisfaction with what we have or haven’t accomplished in life thus far, and concern for what the latter portion of our lives might look like.”

In addition, the generation of people currently over 50 may be less adept at attending to their mental health. “We may be surprised when we are hit with overwhelming emotions of anxiety, loneliness, self-doubt and sadness. Being less aware of how to cope with such experiences, we may resort to behaviors and activities that are either fleeing or counterintuitive. For example, engaging in ‘retail therapy’ [and possibly spending money we don’t have]. This may lead to even less resiliency as we become frustrated with our current state of being, unsure of how to regain control,” she says.

Older People Cope Better

While older age may bring challenges, it also comes with experience. Recent research by Zhen Cong, PhD, director of the School of Public Health’s Climate and Health Initiative at the University of Alabama Birmingham, found older adults between ages 65 and 74 had better coping appraisals of negative outcomes than did younger adults.

“Older people also are more resilient to financial losses and stressful experiences than are younger adults,” reports Cong, a professor in the Department of Environmental Health Sciences.

Her research looks at why older adults are vulnerable or resilient to disasters. Cong explains that understanding the reasons behind resilience will help communities work together to build a disaster and climate-resilient society in a time with the population aging.

The Effects on Long-Term Mental Health

Physical ailments and chronic conditions play an integral role in resilience and these factors impact long-term mental health. For example, one recent study in the International Journal of Molecular Sciences, concluded that “physical resilience, such as preserved mobility and good physical function, is an important element in attaining high psychological resilience, because it positively influences a sense of self-coherence and self-efficacy, and boosts optimism and feelings of satisfaction with life.”

“Resilience is a learned skill, as necessary, I always say, as learning to tie your shoe and program your remote control.”

In short, if our health is not good and we don’t feel well, it’s hard to be resilient.

How to Cultivate More Resiliency

“Resilience is a learned skill, as necessary, I always say, as learning to tie your shoe and program your remote control. Rather than relying on the crutches of drinking, overeating and sabotaging relationships, we can choose to feel happy again and survive the burden of problems by choosing to thrive,” Vild says.

Here are some tips to put into action:

Forgive Others and Yourself

Suzy Welch, professor of management at the Stern School of Business at New York University defines resilience as grit plus forgiveness. If you are going to be resilient in your life, you have got to be forgiving of people you think have held you back and be forgiving of yourself for not doing something right, she says. “You can’t pick yourself up and try again if you are still holding on to anger and resentment.”

Attend to Self-Care

Self-care does not have come with a big price tag. It means caring for your whole self — what you think and how you feel. Good nutrition and exercise play a role here, too.

“It’s important to allow yourself to experience all emotions, as each emotion plays a function and isn’t objectively negative or positive (even though there are certain emotions we don’t enjoy all that much, like sadness). Creating space for your emotions is only one form of self-care. Additional practices can include spending time in nature, participating in a water aerobics class, joining a knitting group, or going for regular manicures,” explains Shaw.

Cultivate Presence

The benefits of being present to your life are always immense especially when you are grieving a loss or disappointment and trying to heal, says Vild. “You practice acceptance by being present to your life. Consider it a form of self-care that increases mindfulness, improves health, lowers blood pressure, boosts immunity and regulates sleep patterns. Being present also boosts inner calm, increases positive emotions, provides greater clarity, increases creativity and prods patience and tolerance — all factors necessary for resilience,” she explains.

Being present has social perks as well. Presence makes you more receptive to opportunities that will lead to a stronger social network. Things like meditation, tapping and Reiki can help increase your mindfulness, Vild adds.  

“Recognizing that you have choices in life is a definite way of improving resiliency.”

Develop Optimism

“While it’s important to make space for allowing yourself to experience your emotions, to practice resiliency, it can be helpful to invite balance by curating optimism,” Shaw says. “Being able to learn from experiences, practice gratitude, identify learnings from a situation and note the bright side is a sure way to develop resiliency.”

This sometimes means fighting the urge to stay in a negative headspace. “It is difficult to accept aging, physical and cognitive decline and life changes,” she says, but practicing mental flexibility or openness to possibilities in your future and learning to enjoy moments by incorporating mindfulness can make a difference on your outlook.

Seek Support

Friends and family members can offer support during the many changes occurring at this stage of life. Having trusted relationships can aid in building resilience, as well as increasing positive joined activities, Shaw adds.

Counseling from a professional (either in person or virtually) is also an option if more guidance is needed. Many insurance plans include behavioral health services and list affiliated providers on their websites.

Remember to Problem Solve

It is often helpful to remind ourselves of the tough things we have endured.

“When we are feeling stuck in life, it can be tempting to give up hope, surrender to the stuck-ness, and wallow in self-pity and frustration. Recognizing that you have choices in life is a definite way of improving resiliency,” advises Shaw. “Consider your options, make a pro and con list, identify what your values are and make efforts towards choosing and creating your next steps or achieving your next goals.”

Bring Beauty to Your Life

Surround yourself with things you love — flowers, people, art, music or anything that brings you joy. Indulge yourself without guilt, says Vild.

“My girlfriend surrounded her bed with flowering plants after her extensive cancer surgery. Another woman began painting as self-expression. Inhale and digest beauty and positivity,” she says. 


Hash Out the Inheritance Now, or Fight Your Family Later

Story by Ashlea Ebeling 

Death and money aren’t fun subjects to bring up over dinner. Yet families who make time for that awkward chat now can spare deep regrets and potentially millions in lost dollars.

More than $84 trillion in wealth has been, or is set to be, transferred by estates big and small between 2021 and 2045, according to Cerulli Associates. That wave of inheritance has brought a rise in lawsuits and other conflicts over family assets.

Sometimes the arguments are between one child who took care of Mom and another who didn’t. There are also the children from a first marriage who end up disinherited after the second.

Overall, about one-third of Americans say they don’t plan to have the inheritance talk with their family, according to a new study done by financial services company Edward Jones with consulting firm NEXT360 Partners and research firm Morning Consult.

“Shock and uncertainty don’t bode well for heirs,” said Caitlin DiMillo, a client adviser at Spinnaker Trust in Portland, Maine.

It is important for heirs to hear—when all those involved can still sit at the table—from the older generation why things have been put in place a certain way, no matter how uncomfortable they may be, she said.

Stephen Lane, a real-estate broker in Geneva, Ill., regrets not talking to his mother about her will. He’s still stewing about it nearly a decade after her death.

Lane says his mother had told his three daughters that she wanted them to have the family diamond rings, but didn’t put it in writing. The will left everything to her second husband.

His mother, a second-grade teacher who remarried after he and his older brother were grown, showed them where her will was stashed, but they didn’t push to see it.

“We probably should have pressed harder and said, ‘Show us the document, Mom. Is what you want done going to be done the way you want it done?’” said Lane, 62.

Blended families are a growing source of conflict in estate fights, and it is especially important for them to talk about wealth transfer, said Lena Haas, head of wealth management advice and solutions at Edward Jones. Resentment is common, no matter how assets are split among children from different marriages.

“This is not a one and done conversation. Family dynamics are constantly changing,” she said.

You can’t count on a new spouse to take care of your kids from your first marriage, but you can set up a trust or provisions in your will, and title accounts and real estate, to do so.

Adult children and their parents say they have found different ways to bring up the hard questions. Some start the conversations decades in advance.

Hash Out the Inheritance Now, or Fight Your Family Later

Talk early and often

Once parents feel their children are mature enough, it is time to start the talk, said Stephen DeFilippis, an enrolled agent and wealth manager in Wheaton, Ill. DeFilippis’s son, Troy DeFilippis, a 29-year-old financial adviser who works with his father, says his dad opened the books for him when he was 23 and joined the firm. He and his dad have a succession plan for their business, and he has talked to his mom and his sister about what they would get when his father dies.

“I know what he wants to leave this world with us getting. It helps me plan,” he said.

The topics to cover go beyond just dollar amounts, financial advisers said. The discussion can also address caregiving, charity and educational costs.

Many families avoid the discussion until a health scare or other life event makes it urgent and even more stressful.

Rebecca Shoval, director of operations for her family’s real-estate investment office, said her parents had included her in wealth transfer talks since they sold their insurance business and started diversifying. When her dad, then 72, was suddenly hospitalized during the pandemic, she and their estate planner were able to ensure everything was in order.

“As people age, it can take on a haunting air to talk about these things,” she said.

Time and place

Thanksgiving dinner, with its attendant tensions, is not the best choice for many families, said Joseph Coughlin, director of the Massachusetts Institute of Technology AgeLab and senior adviser to Next360 Partners.

“This is a conversation, not a confrontation,” Coughlin said.

Families who live far apart don’t always have a choice. Ann Herring, a director of executive education in Chicago, says the wealth transfer talk with her 94-year-old father who lives in Michigan has been ongoing for decades, in the form of an annual review during holiday visits. When her mother got Alzheimer’s, he made Herring power of attorney for both of them.

Now Herring is administering her late mother’s estate, and the talk with her father continued this Christmas. He shared revised passwords, and they broached the trickier subject of lifetime gifts to the family. Talking in person “makes it more friendly to try to not make it feel like a business transaction,” Herring said.

Giving while living

One way to avoid surprises: Give heirs all or part of their inheritance while you are still alive.

Doug Fogwell, a retired marketing executive in Winfield, Ill., says that once his parents were up in years, they sat down with him and his two sisters.

His parents chose to take him and his sisters, spouses and later grandchildren, on 23 all-expenses-paid trips, from camping in Indiana to snorkeling in Tahiti.

“They joked: ‘We’re just spending your inheritance,’” he said.

This is becoming more common. About 68% of people in the decade before retirement said they would prefer to distribute inheritance money before they die, the Edward Jones study found.

Fogwell’s father died in 2014, and there won’t be a lot to pass along after his mother, now 94, dies, Fogwell said. But he and his siblings have those memories and a family tradition of togetherness.

“It is a great legacy that they established that we’re passing on to our kids as well,” Fogwell said.

Write to Ashlea Ebeling at [email protected]