Breaking down the best tax-free income vehicles when planning for retirement

September 19, 2021

Winnie Sun, Sun Group Wealth Partners Managing Director, joined Yahoo Finance Live to break down the best tax-free, low-tax income vehicles for retirement.

Video Transcript

SEANA SMITH: Welcome back to Yahoo Finance. We want to welcome in Winnie Sun Managing Director of Sun Group Wealth Partners, as part of our retirement series brought to you by Fidelity Investments. And Winnie, it's great to see you again. Let's just start big picture when it comes to retirement and the outlook. Because we talked about more and more people starting to retire or retiring as a result of COVID.

What does it look like now? What does this picture look like a year and a half into the pandemic?

WINNIE SUN: Seana, you're absolutely right. You know, a year and a half in the pandemic, I think many people are looking at their current work situation and wondering how much longer they can do this. Many people don't want to go into the office. Many are working from home, juggling home and kids and everything else. And so we're seeing definitely an uptick in interest, of not only retiring, but for the younger generation retiring early.

SEANA SMITH: When you talk about retiring early, it's key obviously to set yourself up for success when you do retire. I know you're focusing on CAP strategies for either a tax free or a low tax income in retirement. What are the best vehicles to do this.

WINNIE SUN: So Seana, that's a dream, right? When we're about to retire that what we're looking on paper on our financial statements is what we're going to be keeping. And there were tax free sort of is the number one goal. So for many of our clients, that's what we're looking at.

If we can maximize their Roth 401(k), that is what I say sort of the unsung hero, if you will, of your retirement plan because monies that you contribute to that will grow to be 100% tax free if you can hold it beyond age 59 and 1/2. However, one of the best things about the Roth 401(k) is it's kind of non-controversial, in that doesn't matter how much you earn even if you're at the high tier, you can contribute to that plan. So that's one of my favorite avenues of saving for retirement.

SEANA SMITH: And if you do use that avenue, the Roth 401(k), then I guess what should people be investing in? Is it ETFs? Is it mutual funds? Is there the best way to approach this type of investment?

WINNIE SUN: So Seana, it depends on what sort of investments you have at your disposal in your company's plan. So we know that 70% plus Americans have this sort of 401(k) at work, the Roth 401(k). Now oftentimes you'll have mutual funds. You'll have ETFs. I really like to have a balanced approach.

But it has to make sense for you. For example, if you're much more skittish and you're a little bit more nervous about the market, maybe you have a higher degree of fixed income in your portfolio or even maybe in cash reserves. Although I'm not a big fan of cash reserves because you can't keep up with inflation returns.

But you want to make sure it meets your investment criteria. Personally, I like to see you know a good percentage of growth equity. So that way you have a potential for greater gain. And don't forget, because it's a Roth 401(k), you don't have to worry about capital gains in the portfolio as well. So let's take advantage of it and try to give you the most amount of growth as we can.

SEANA SMITH: And if it's not the Roth 401(k), you also have the option of the Roth IRA. I guess in what situation then would you recommend this?

WINNIE SUN: So I love the Roth 401(k) and as well as a Roth IRA. Now the difference with the Roth IRA, Seana, as you know, is there are some income limitations. So generally if you earn too much, there are thresholds where the IRS will prohibit you from making a direct contribution to the Roth IRA. However, how it stands right now, currently there is still the option of the backdoor Roth IRA if your income exceeds that threshold.

That being said, this is your personal account, your personal IRA. So you can definitely do both your 401(k) at work as well as your IRA personally. And so both can be Roth.

But the Roth gives you a lot of flexibility. You can choose how you want to invest in it. You can pick certain names, investments that you're more passionate about to kind of also piggyback on that Roth 401(k) at work.

SEANA SMITH: And then one more avenue that you highlighted in your notes over here is the investment property. I know it doesn't always make sense for everyone. But if you are thinking about maybe putting your money into an investment property, maybe what are some of the key things that you need to recognize or key things that you need to tick off in order for that to make sense?

WINNIE SUN: Well, Seana, that's kind of the scenario where a lot of people are interested in investment property, right? They're saying this could be passive income, another form of income towards my retirement. But some of the things you want to think about is, when it's passive income, this also means a lot more work.

Because you have to make sure that you're looking at property that, number one, fits your needs, is in the area that you know is of high demand, and be aware that you may or may not be designed to be. So you just got to make sure that that's something that you are prepared for. And if there's changes, if you lose your tenant, how are you going to pick yourself up.

And if there's periods of time where there's a vacancy, you've got to plan for those things as well. So it's not completely passive income. It can certainly balance your overall portfolio out. Well, a lot to think about. I would definitely do a lot of research before you jump there.

SEANA SMITH: All right. Winnie Sun, great to speak with you, Managing Director of Sun Group Wealth Advisor.