by Stephen Reed | Accounting News, News, Retirement Savings
The IRS has made some changes for Americans saving for retirement with 401(k) and IRA accounts in 2022. We discuss these changes, as well as what’s staying the same, below.
Changes to 401(K)s
Contribution limits to workplace 401(k)s are going up in 2022. Workers will be able to contribute up to $20,500, which is a $1,000 increase over the contribution limits set in 2020 and 2021. This limit increase also applies to 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. However, the catch-up contribution limit for employees ages 50 and up will not be changing. That limit will remain $6,500.
The contribution limit for a SIMPLE IRA—a retirement plan intended for small businesses with 100 or fewer employees—will increase next year as well. Workers with this plan will be able to invest up to $14,000, up from $13,500. Just as with 401(k)s, though, the catch-up contribution limit for workers at least 50 years old will remain the same. This limit is $3,000.
Changes to IRAs
Unlike 401(k) contribution limits, the limit on annual contributions to an Individual Retirement Account (IRA) is not increasing in 2022. It will remain at $6,000. Likewise, the catch-up contribution limit will remain the same at $1,000. However, income limits for making deductible contributions to a traditional IRA are going up, as are the income limits for making any type of contribution to a Roth IRA.
Income limits for traditional IRAs in 2022 will change as follows:
- For single tax filers covered by a workplace retirement plan, the eligibility for full contribution limit is increasing from $66,000 to $68,000. The phase-out limit is increasing from $76,000 to $78,000.
- For married joint filers who are personally covered by a workplace retirement plan, the income limit for full eligibility is increasing from $105,000 to $109,000. The phase-out limit is increasing from $125,000 to $129,000.
- For married joint filers whose spouse is covered by is a workplace retirement plan even though you aren’t, the income limit for full eligibility is increasing to $204,000, up from $189,000. The phase out limit is increasing from $198,000 to $208,000.
Income limits for Roth IRA in 2022 will change as follows:
- Income eligibility for single tax filers and heads-of-household is increasing to $129,000 from $125,000. The phase-out limit will also be increasing—from $140,000 to $144,000.
- Income eligibility for joint filers will increase to $204,000 for full contributions. This is up from $198,000. Additionally, the phase-out limit is increasing from $208,000 to $214,000.
by Pete McAllister | Accounting News, News, Retirement Savings
No matter the reason for leaving a company, you need to decide what to do with your employer-sponsored retirement plan within 60 days of leaving. If you miss this deadline, you risk the plan being automatically distributed to you or moved to another retirement account. You have several options for your 401(k) plan, and we’ll go over them below.
Keep the Money Where It Is
First, your company should be clear about whether you can keep the funds where they currently are—in your former employer’s plan. Some employers approve this if you have at least a $5,000 balance. You might choose this option simply because you are familiar with the investment options, or because the fees are lower than your new employer’s plan.
Choose a Plan-to-Plan Rollover Option
Many employers offer a plan-to-plan rollover into their 401(k) or other qualified retirement plans. This move doesn’t acquire any tax consequences or penalties. As long as you like the investment options in the new plan, this rollover option can be an obvious choice to keep your savings momentum.
Keep in mind that if you move the money as a withdrawal from the old plan and deposit it to a new plan, rather than choosing the rollover option, your employer may withhold 20% of the sum for taxes. It is your responsibility to report this amount on your taxes for the year the distribution was made.
Roll the Money Over Into an IRA
A direct rollover into an IRA does not incur tax consequences or penalties, and there is an abundance of investment options to choose from—including stocks, bonds, mutual funds, and ETFs. If you typically move jobs intermittently, moving the money into a rollover IRA might be a good option. This way all of your 401(k)s and retirement plans can have one home.
One drawback to this option is that you will no longer be making automatic contributions, so that might curb your savings drive. However, rollover IRAs are commonly flexible, so moving your assets into a future employer’s plan might be an option.
Use the Money
Using the money for personal expenses is an option by taking a lump-sum distribution, but it will cost you. You will owe income taxes on it, and for workers under age 59 ½, you will likely pay a further 10% penalty. Depending on your tax bracket and state and local taxes, you could lose a significant amount of your retirement stash.
Employer Distribution
If your 401(k) balance is less than $1,000, your employer could release the funds via a lump-sum distribution, whether or not you requested it. If this happens and you are within 60 days of terminating your old plan, immediately roll the money into a new employer’s plan or a rollover IRA.
If your balance is more than $1,000 but less than $5,000, your plan administrator is required to move the funds into an IRA unless you specifically request another type of distribution.
In general, according to the Internal Revenue Service (IRS), if your savings is less than $5,000, your employer is permitted to distribute the funds from the plan without your authorization. You should be able to claim on your tax return any taxes or penalties your previous employer triggered when the distribution was made, but it might help to discuss this situation with a tax professional before you file.
by Daniel Kittell | Accounting News, Budget, News, Retirement Savings
If you’re in the market for a new house, you might be wondering if you can tap into your workplace 401(k) to cover the down payment. The short answer is yes, but there are definite disadvantages in doing so. Let’s take a look at some of the pros and cons to this approach.
Benefits of Borrowing from a 401(k) to Make a Down Payment on a House
- You’re borrowing from yourself rather than another lender, which means you might not be losing as much money on interest payments as you would if you acquire the funds through other means, like taking out a larger home loan to cover your down payment costs.
- The loan approval is typically hassle-free. Provided your workplace plan allows for loans, and you do indeed have sufficient funds in your 401(k), your credit score and other financial credentials shouldn’t impact your ability to borrow against it.
- The process is typically quick. Every plan is different and works on its own timeframe, but once you’ve decided to borrow from your 401(k), it’s usually just a matter of filling out a few forms to gain quick access to the funds.
- More money for a down payment may equal more options. Borrowing against your 401(k) plan will allow for a larger down payment, which will allow for wider options when it comes to mortgage lenders. It could also help you qualify for a better interest rate as well as help you dodge Private Mortgage Insurance (PMI).
A Note on PMI
PMI is customarily required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. The most common way to pay for PMI is a monthly premium that is added to your mortgage payment. Because it protects the lender and not the borrower, many home owners want to avoid this added expense, but some choose to see it as just another expense of owning a home.
Disadvantages of Borrowing from a 401(k)
- You are diminishing your retirement savings, both in its immediate drop in balance and its future growth potential. Most likely, the return on investment (ROI) you would gain by keeping your money invested would be greater than the ROI from the interest you pay yourself (or the appreciation on your house).
- Your budget will take a hit. You are required to repay the 401(k) loan, which means that a portion of your future paychecks will go toward repayment. That means less money at your disposal for other expenses, such as homeownership costs.
- You will be on a repayment deadline. Borrowers typically get five years to repay a 401(k) loan. Depending on the size of your loan, you could potentially face large monthly payments in order to meet the repayment deadline.
- Inability to repay the loan will result in penalties. Your loan will be treated as a withdrawal if you are unable to pay it back in full by the deadline, which means that you will owe income taxes on it. You will also be subject to a 10% penalty associated with early withdrawals unless you were older than 59 ½ when you took the money out.
- Beware of the cost of leaving your job before the loan is paid. If you quit your job or experience a layoff, the entire loan amount will need to be paid by the due date for filing taxes that year. This could result in a need to repay the loan quickly in order to avoid penalties.
by Pete McAllister | Accounting News, Business Consulting, News, Retirement
As a small business employer, signifying your commitment to employees’ long-term financial goals by offering a tax-favored retirement benefit is a solid way to draw in and retain valuable employees. Retirement plans may seem complex and costly, but there are straightforward and easily-enacted options available that are more affordable than you might think.
SIMPLE IRA
The Savings Incentive Match Plan for Employees (SIMPLE) is a tax-favored retirement plan in which both employees and employers contribute to traditional IRAs. As long as an employer has no other retirement plan in place and doesn’t employ more than 100 workers, they are eligible to institute a SIMPLE IRA. Essential aspects of this plan include:
- Tax credits: Employers may be eligible for tax credits of $500 for the first three years of the SIMPLE IRA plan in order to counterbalance the costs of providing and managing the plan.
- Contributions: Employers are required to either make a matching contribution of one to three percent, depending on circumstances, to participating employees, or contribute two percent of each participating employee’s compensation.
- Tax deductions: In most cases employer contributions are tax deductible to the employer.
401(k) Plan
A 401(k) is a defined contribution plan in which an employer contributes a certain amount of employee’s pay (as chosen by the employee) to the plan. Essential aspects of this plan include:
- Contributions: Unlike SIMPLE IRAs, employers are not required to match contributions. An employee’s contributions to a traditional 401(k) are typically made on a pre-tax basis, with taxes on contributions and earnings deferred until they are distributed, usually upon retirement. 401(k) plans tend to be more appealing to employers than IRA-based plans because the maximum contributions are generally higher.
- Roth 401(k): This is an option in which an employee contributes to the plan on an after-tax basis. Distributions and earnings may be made tax-free in retirement after meeting certain conditions.
- Administrative costs: Because 401(k) plans are more complicated to maintain than SIMPLE IRAs, the administrative costs tend to be higher.
- Non-discrimination testing: 401(k) plans are subject to testing requirements designed to ensure that contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees (in 2020, this is someone who earned more than $130,000 the previous year). Those who fall into the “highly compensated” group can establish a Safe Harbor 401(k) plan in order to avoid nondiscrimination testing.
SEP Plan
With a Simplified Employee Pension (SEP) plan, employees receive IRAs that are funded entirely through company contributions. Essential aspects of this plan include:
- Eligibility: SEP plans are more popular among smaller businesses with fewer employees, but employers of any size are eligible.
- Contributions: Employers who institute a SEP plan determine an amount to contribute each year, with a limit set by the IRS.
- Tax credits: Qualified employers may qualify for a tax credit of $500 per year for the first three years of the plan, and employer contributions are tax deductible on the employer’s tax return.
myRA
This Roth IRA plan invests in a U.S. Treasury retirement savings bond. Essential aspects of the plan include:
- Contributions: Employees contribute to their account on an after-tax basis through payroll deductions, a checking or savings account, or income tax refunds. Earnings and distributions are generally tax-free.
- Cost: Because employers don’t administer or make contributions to these accounts, the employer only needs to share the information about a myRA option with employees and set up payroll deductions when applicable.
by Stephen Reed | Accounting News, COVID-19, News, Retirement, Tax
Customarily, retirement savings plans such as 401(k)s are tough to withdraw from before age 59.5 without accruing penalties and tax withholdings, but the CARES Act, which was passed by Congress in response to the economic hit caused by the Covid-19 pandemic, temporarily eliminated such penalties. Now that you can more easily access assets that have been set aside for future use, should you?
Amended Penalties for Early Withdrawal
Recognizing that many Americans who live paycheck to paycheck would need access to funds in the face of lost income as a result of government shutdowns, Congress passed the CARES Act, which temporarily eliminates the 10% early-withdrawal penalty and the 20% federal tax withholding on early 401(k) withdrawals. Taxes on any withdrawn funds will still be applicable because the original contributions were pre-tax, but whereas those taxes are typically due within the same year as the withdrawal, the CARES Act permits the amount due to be stretched over a period of three years.
Be Aware of Potential Penalties
It may seem as though the vault has been unlocked, but before you decide to take advantage of the easily accessible funds, you should consider the potential ramifications of such a move. If the amount withdrawn isn’t returned within the three-year window (either in one lump sum or in multiple payments over three years), you will be responsible for paying income tax on the withdrawal. This could be a significant amount depending on the size of the withdrawal. It’s also worth remembering that for the amount of time the funds are out of your retirement savings, they discontinue making returns on your investment, which could result in potentially long-term consequences, including compound tax deferred growth benefits.
Remember the End Goal
If you are struggling in today’s economic downturn, the laxed rules and penalties to access retirement funds is tempting, but it’s important to keep the end goal in sight, which is retirement. The long-term impact to your savings, even when it’s paid back over time, may not be worth it. Unless you’re really struggling to make ends meet, the best move is to leave the money in your 401(k). Cashing out now, when the market reflects depressed values, means that you’d be selling low, which isn’t a recommended strategy.
