How the SECURE Act Could Affect Your Retirement

The House of Representatives recently voted to approve the Setting Every Community Up for Retirement Enhancement or SECURE Act, which would expand access to retirement savings programs for part-time workers and people employed by small business owners.

If the SECURE Act Passes…

If the bill passes the Senate, which it’s expected to do, it will be placed on President Trump’s desk. If signed into law, the SECURE Act would implement the most significant changes to retirement plans since 2006.

The bill aims to entice non-savers to participate in workplace retirement programs, such as a 401(k), so some of the provisions include:

  • Raising the age that American workers must start withdrawing from retirement savings, known as the required minimum distribution age, from 70 ½ to 72. This is to reflect the fact that more Americans are working longer, and in this vein, the bill also stipulates more years for people to contribute to retirement accounts.
  • Increasing tax incentives for small business employers to offer retirement plans by increasing the tax credit for new plans from the current cap of $500 to $5,000, or $5,500 for plans that automatically enroll new workers.
  • Allowing part-time workers to participate in 401(k) plans. The current minimum requirement for part-time employees is 1,000 hours in a 12-month period, but the SECURE Act would amend this requirement to 500 hours, effective January 2021. However, this isn’t mandatory, so it would be at the discretion of the employer.

The SECURE Act would also permit parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses. Parents could also withdraw up to $10,000 from 529 plans to repay student loans.

What Does the Federal Reserve Say?

According to the Federal Reserve’s annual study, only 36% of Americans feel that their retirement savings are on track, while 25% of Americans have no retirement savings to speak of. Part of this is due to the fact that, because of the cost and complexity of putting retirement savings plans in place, many small businesses don’t offer such plans to their employees. The SECURE Act aims to incentivize small business owners to offer retirement plans by making it easier for small businesses to implement multi-employer retirement plans—where two or more employers join together to offer a plan. This would potentially give small businesses access to lower cost plans with better investment options, thereby possibly giving millions more workers an opportunity to save at work.

In short, this legislation is important because it would remove some barriers that have kept American workers from saving for retirement, specifically through employer-provided plans and incentives. If you have questions or would like to talk about how the information in this article may impact you personally, please reach out to me at sreed@mkrcpas.com and we’ll schedule a time to talk.

How to Stop the Paycheck to Paycheck Cycle

According to a 2017 study from Career Builder, nearly 78% percent of people live paycheck to paycheck, with little to no money left over after financial obligations are paid. This means that nearly 8 out of 10 workers may not be able to handle even a $500 emergency. Here’s how to break the paycheck-to-paycheck cycle.

Build a Budget

Yes, this tired old budget thing is rearing its head again, but every financial plan needs to start here. You simply must know where your money is going. Start by creating a simple spreadsheet in Google Docs, which can be shared if you have dual contributors to your household income. If you’re ready for something a bit more sophisticated, Mint.com is a great online tool for budgeting. It will even send you notices and alerts, creating a more personal budgeting experience.

In order to know where your money is going, you need to also track your spending. Document every single purchase for two to four weeks. You’ll be surprised at how seemingly insignificant purchases can quickly add up. Typically, this exercise helps consumers to be more mindful of how they’re spending.

Establish and Emergency Fund

If you approach saving by promising to set aside whatever’s leftover after your financial obligations are paid, you’ll never make a dent in creating an emergency fund, let alone heftier savings goals. Funds intended for saving should come before any other spending. Aim to initially save the equivalent of one month’s paycheck.

Quick fix: put saving on autopilot. If your company offers a 401(k) plan, make sure you’re participating in it. You can also set up an automatic transfer on paydays to have some money automatically transferred from your checking account into a savings account.

Pay Down Debt

Nothing perpetuates the paycheck-to-paycheck cycle like having debt looming over your head. Control and monitor your spending by discontinuing the use of credit cards until you’ve paid them off. To streamline this process, you can consolidate your debt by transferring all your credit onto one card. While you’re focused on paying off debt, avoid taking out any kind of loan. If you can chip away at your debt while simultaneously building up an emergency fund, you can use that fund to pay for any unexpected expenses that may crop up instead of relying on credit cards.

Examine Your Lifestyle

Sometimes fixing the paycheck-to-paycheck cycle is as simple as taking a hard look at your lifestyle and making adjustments where necessary. Is your monthly car payment too high? Does your monthly mortgage payment exceed 28% of your monthly gross income? Are you paying for subscriptions or memberships you don’t use? You get the idea. Examine your monthly costs and find ways to scale back.

Stop Treating Raises and Bonuses as Fun Money

If you’re stuck in the paycheck-to-paycheck cycle, upticks in earnings such as raises, bonuses, and tax returns should be stashed away in savings, not spent on wants and splurges. Likewise, you shouldn’t rely on bonuses as part of your budget. These earnings should be used to increase your emergency savings or retirement funds.

If you have questions or would like to talk about how the information in this article may impact you personally, please reach out to me at jmiller@mkrcpas.com and we’ll schedule a time to talk.

Anyone Can Save More for Retirement: Here’s How

You don’t need a high-bracket income when it comes to saving more for retirement. What you need, regardless of income level, is discipline. The following tips can help average workers save more and build the kind of wealth that will support them after leaving the workforce.

Automate the Process

A lot of employers offer the option of diverting a percentage of your paycheck directly into your 401(k) account. This takes the guesswork and mental energy out of saving for retirement and puts the process on autopilot. And employers will often match your contribution up to a certain percentage.

Contribute to an IRA

If you don’t have access to an employer-sponsored account, or want something in addition to your 401(k) account, you might think about opening an individual retirement account. You can contribute up to $6,000 per year ($7,000 for those 50 years and older) to an IRA. Keep in mind, while single employees are able to contribute the maximum to a 401(k) and an IRA in the same year, married couples may have some limitations if both participate in a work-sponsored plan. The rules may also be slightly different for a Roth IRA account.

Be Resourceful

Part-time gigs and side hustles are more popular than ever thanks to the internet and smart phones. If you’re diligent with saving the earnings from a secondary income, it can grow over time. You can also use the funds from side gigs to pay off debt, which will open up your budget to allocate more for retirement savings. For example, bringing in an extra $100 a week equals out to $5,200 a year. From selling your possessions on eBay or Facebook Marketplace to offering a service such as dog walking, car detailing, or tutoring, the possibilities of earning extra income are dependent upon your time, talents, and abilities, but the monetary results have real potential to make an impact on your financial future.

Take Control

According to a 2016 study by U.S. Bank, nearly three out of five American families don’t utilize a budget, but a planned budget can cut down on excessive spending and keep your finances in check on a weekly or monthly basis. Impulse buys (no matter how large or small), add up, as do regular dinners out, pressure to keep up with the Joneses, and unforeseen expenses that crop up here and there. Without a budget and a plan for dealing with the unexpected, it won’t take long for your financial grip to unhitch, sometimes leading to seemingly unsurmountable debt. And debt has the power to undermine your retirement savings potential, either temporarily or for much longer.

With free online budgeting plans, myriad ways to earn some extra income, and a commitment to saving, almost anyone can make saving for retirement an attainable goal.

Financial Regrets: A Tale as Old as Time

Mismanaged money, investment duds, a blown budget (or no budget), bad habits, the proverbial hole in your pocket. If financial regrets weren’t a thing, we wouldn’t need the Dave Ramseys of the world, but there’s a difference between splurging on an artisan cup of coffee and making a financial blunder that could have ramifications for years to come.

Some red flags that you’re about to jump into a bad financial decision include needing to justify your rationale, a lack of thorough research and homework, depending on a payment you haven’t received, falling for a too-good-to-be-true scheme, and not paying attention to that internal tugging known as instinct. You might say that you’re effectively ignoring these red flags if you’re tempted by any of the following common financial mistakes that could cause long-term consequences.

Taking a Loan from a 401(k)

Yes, you usually have five years to pay it back, and yes, it’s your money after all, but those who borrow from their 401(k) usually reduce or suspend contributions while they’re repaying the loan. This means they’re going months or even years without contributions, missing out on investment growth and company matches. Not to mention the interest on the 401(k) loan. It’s also a gamble because if you leave your company, the loan must be repaid within 60 days.

Claiming Social Security Early

Waiting until age 70 to tap into your Social Security is your best bet, but it’s generally recommended to wait at least until your full retirement age (currently 66-67). The earliest age to withdraw benefits is 62, but your monthly check would be reduced by approximately 25% for the rest of your life.

Making the Minimum Payment on Credit Cards

With mounting interest costs, it can take years to pay off credit card debt, especially if consumers continue to spend with credit cards while only paying the minimum payment. If possible, transfer the balance to a lower-rate card, and always try to pay more than the minimum payment due. Even a small increase in monthly payments can save you on interest.

Not Saving for Retirement

Unless you’re fresh out of college, you should start saving for retirement yesterday. Don’t think you can wait until you start making more money. According to Morningstar, and assuming a 7% annual rate of return, someone who starts saving for retirement at 25 years old would need to save $381 a month to hit $1 million by the time they turn 65. Compare that to someone who starts saving for retirement at 35 ($820 a month) or 45 ($1920).

Foregoing Professional Advice

Do you have a valid will? Have you legally appointed beneficiaries for your retirement accounts? Financial advisors will help with this as well as anything from taxes and insurance to retirement savings and estate planning.

Refraining from Investing

Sure, there’s risk involved, but by diversifying your investment in a mix of large, small, domestic, and foreign stocks, you reduce the possibility of getting hit with a big loss. Perplexed on where to begin? See “Foregoing Professional Advice” above.

And while your nest egg should keep growing after retirement, most financial planners recommend decreasing risk by gradually pulling away from investing in stocks.

Falling for Scams and Raw Deals

According to the FTC, Americans lost a collective $765 million to telephone, text, mail, email and face-to-face scams in 2015. Requests to wire money; or pay fees before receiving anything; or provide personal information, bank information, or sensitive financial information should be met with extreme skepticism. If you suspect a scam, conduct a quick Google search with any information you have on the product or company, including key words like “scam” or “review”. If your suspicion is confirmed, be sure to file a complaint with the FTC and your local consumer protection office.

Tax Season Madness: Last-Minute Tips

March Madness is upon us, and while that term often refers to college basketball, if you’re like the majority of Americans, it can also apply to tax season. The IRS tax deadline will be here before we know it, and while it might be late in the game to do much about lowering your tax bill or increasing your return, here are a few tips to help make your 2019 tax return as smooth, painless, and advantageous as possible.

Max out your traditional IRA

This is the easiest way to lower your tax bill after the end of the calendar year, and you can make contributions for the 2018 tax year until the April 15 tax deadline. Contributions top out at $5,500, or $6,500 for those 55 years and older, and it’s all deductible on your 2018 tax return. Contact me to see if this strategy will work for you.

Beware of common mistakes

It seems obvious, but common blunders include social security numbers with mixed-up digits, missing signatures, and bad bank account numbers. These mistakes could cost you, literally, so double and triple check your personal information.

To itemize or not to itemize?

Due to the Tax Cuts and Jobs Act, which nearly doubled the standard deduction, itemizing deductions is now obsolete for millions of taxpayers. Unless your financial situation has changed drastically, if you didn’t itemize in the past, you won’t need to do it now. The standard deduction for 2018 is $24,000, so unless your itemizable deductions top that number, itemizing isn’t worth it.

Contribute to your HSA

HSA funds can essentially act as an addendum to your retirement savings because funds can be invested and carried over year after year.

Can’t pay? File anyway

If you owe the IRS money, your unpaid balance will result in a penalty of 0.5% of the unpaid balance per month or partial month. However, failure to file will cost you a lot more: a monthly penalty of 5% of the amount owed. So even if you can’t pay, file your return or request an extension. Read on to find out what to do when you can’t pay the full balance.

Set up an installment plan

The IRS might not have the best reputation, but the agency will work with taxpayers who show that they’re trying to pay their taxes. An installment plan allows you to make monthly payments up to 72 months until the balance is paid in full. This requires a setup fee, but it’s less if you arrange for direct debit from your bank account, and interest on your unpaid balance will still apply.

Request more time if necessary

You can file for an extension before April 15 with Form 4868 for automatic approval, which will give you until October 15 to file your tax return. Keep in mind this extension is just for filing and doesn’t include an extension for payment on taxes owed. If you don’t pay by April 15, your bill will be subject to interest and penalties. However, you can request a 120-day grace period from the IRS to come up with the payment, but you’ll still owe interest and other fees on the balance until it’s paid off.

Possible Drawbacks to Early Retirement

Many workers dream of retiring early. Not everyone has a choice in the matter, but if you do, there are some disadvantages and challenges to be aware of. Even if you can afford to retire early, you might not want to.

Here are some disadvantages to be aware of when it comes to early retirement.

Finances

Savings in a traditional IRA or 401(K) can’t be withdrawn without penalty before age 59 ½, so in order to retire earlier, you’ll need to have enough savings in a traditional bank or brokerage account to cover your costs until then. As for social security benefits, you’re allowed to start claiming benefits at 62, but that’s before full retirement age, so claiming early could result in a permanent reduction in benefits (i.e. if your full retirement age is 66 and you claim benefits at 62, you’ll reduce your payments by 25%).

Healthcare

Medicare eligibility doesn’t kick in until age 65, so retiring earlier than that means having to absorb the cost of health insurance independently. If you retire with just a few months to go before Medicare kicks in, you have the option of obtaining short-term coverage, which helps pay for catastrophic medical events but doesn’t typically cover preventive care or pre-existing conditions. If you’re looking at a longer stretch between retirement and Medicare eligibility, you’ll need to shop around for major medical insurance. These plans are the most comprehensive for early retirees and cover a broad range of medical care, from doctor visits to major surgery.

Mental Health

Early retirees can have a difficult time adjusting to an unstructured schedule. With high levels of energy and drive, and a strong desire to still be productive, they risk sinking into boredom and depression as they progress deeper into retirement. Increased anxiety, dementia, and cardiovascular disease have all been linked to health risks of early retirement as well. For this reason, it’s a good idea to keep an open mind about returning to work should you start to feel that early retirement wasn’t as fulfilling as you’d hoped.

Be Prepared

Though there are some things to think about before retiring early, with careful planning and goal setting, you can make it work. It’s best to begin saving consistently (and early) – in a Roth IRA or traditional 401(K), but also in a nontraditional retirement plan so that you can have access to those funds before age 58 ½. Financial planners advise to save 30% of your income, as opposed to the conventional target of 10% or 15%. And transfer all tax refunds and bonuses into your nest egg as well. In short, cutting out your daily coffee house latte isn’t going to get you to early retirement.