by Jean Miller | Estate / Trust Tax - Individual, Estate Planning - Individual, Healthcare, News, Retirement, Tax Planning - Individual, Tax Preparation - Individual
As the clock winds down to the end of the year, there are a few last-minute money moves to make in order to lower your tax bill.
Maximize Your 401(k) and HSA Contributions
While tax deductible contributions can be made to traditional and Roth IRA accounts until April 15 of 2020, the deadline for 401(k)s and HSA accounts is December 31 of this year. You can contribute up to $19,000 to a 401(k), 403(b), most 457 plans, and federal Thrift Savings Plans (plus $6,000 in catch-up contributions for those who are 50 or older). As for HSA accounts, the maximum contribution for 2019 is $3,500 for individuals and $7,000 for family coverage. And if you’re 55 or older you can contribute an additional $1,000.
Start Thinking About Retirement Contributions for 2020
Retirement contributions to 401(k)s have increased for 2020. Individuals can contribute $19,500 next year, and those 50 or older can contribute an additional $6,500. If you prefer to spread out your contributions evenly throughout the year, you’ll need to adjust your monthly contribution amounts by January.
Take Advantage of Your Flexible Spending Account
Funds in a flexible spending account revert back to the employer if not spent within the calendar year. Some companies might provide a grace period extending into the new year, but others end reimbursements on December 31.
Prevent Taxes on an RMD with Charitable Donations
After seniors reach age 70 ½ they must take a required minimum distribution each year from their retirement accounts (an exception to this rule is a Roth IRA account). Seniors who aren’t dependent on this money for living expenses should consider having it sent directly from the retirement account to a charity as a qualified charitable distribution, effectively preventing the money from becoming taxable income.
Consider a Roth Conversion
Because withdrawals from traditional IRAs are taxed in retirement while distributions from Roth IRAs are tax-free, you might think about converting some funds from a traditional IRA to a Roth IRA. Just be sure this move doesn’t tip you into the next tax bracket. You’ll need to pay taxes on the initial conversion, but the money will then grow tax-free in the Roth IRA.
Take Stock of Losses
Sell any losses in stocks for a deduction of up to $3,000, but be aware that purchasing the same or a substantially similar stock within 30 days of the sale would violate the wash-sale rule. If that happens your capital loss would be deferred until you sell the new shares.
Meet with a Tax Advisor
If you’re unsure whether or not you’re ending the year in a favorable tax bracket, check in with an advisor who can identify actionable steps to reduce taxable income through retirement contributions or itemized deductions.
by Pete McAllister | Accounting News, IRS, News, Retirement, Tax, Tax Planning - Individual
Depending on where you are in life, trying to anticipate your financial needs in retirement and determining how exactly to get to that point could feel like a daunting task, or even a task that doesn’t need tackling yet. In fact, according to a study completed by The Alliance for Lifetime Income, only 28% of non-retired Americans have attempted to estimate their retirement income. Not as intimidating as it sounds, read on to learn how to estimate those needs.
Start with Your Current Income
If you’re living within your means and not depending on credit cards to maintain your lifestyle, using your paycheck as a benchmark is a sufficient starting point. This, of course, excludes contributions to a traditional 401(k) account as well as health insurance premiums that are deducted from your gross pay. A common and simple approach, then, is to set your desired annual retirement income at 60% to 90% of your current income. However, it doesn’t take a financial expert to note potential flaws with this approach. What if, for example, you plan to travel extensively during retirement? Planning for 60% to 90% of your current income might not be enough to fulfill your jet setting goals.
Forecast Retirement Expenses
Your annual retirement income should be more than enough to meet your daily living expenses. Keep in mind that the cost of living will increase over time, and insurance and health care could fluctuate. Having said that, some common retirement expenses to estimate include:
- Food and clothing
- Housing (mortgage, homeowners insurance, rent, property updates, repairs, etc.)
- Utilities
- Transportation (car payments, insurance, maintenance, gas, repairs, public transportation)
- Insurance (medical, dental, life, etc.)
- Health care costs not covered by insurance (deductibles, copayments, etc.)
- Taxes
- Debts and loans
- Recreation such as travel, hobbies, and dining out
What to Do with Your Projected Retirement Income Needs?
A standard rule of thumb when talking about estimating retirement income needs is to have 25 times your anticipated annual expenses saved up by the time you retire. This is assuming you’re planning for a 30-year retirement. Theoretically, you could then withdraw 3% to 4% of your nest egg each year.
If you’re lacking additional sources of protected lifetime income, such as pensions or annuities, you may need to tap into savings in order to bridge the gap between social security checks and what you’ll need to live on. You could also buy a simple income annuity to cover part of that funding gap. These payments continue for life, thereby removing some of the guesswork of estimating retirement income needs and providing peace of mind.
by Daniel Kittell | News, Retirement, Tax Planning - Individual
“Set it and forget it” is a common approach when it comes to a workplace 401(k), yet it likely will play a substantial role in the financial security of your future. Consistently contributing to your 401(k), and learning how to manage it, will set you on the course to living golden in your retirement years. Below are some tips to help you make the most of your workplace 401(k).
Contribute to the Match
Employers often match contributions up to a certain point, which means you’re getting free money for participating in the program. You should contribute at least up to this point. Beyond this, a typical rule of thumb is to add about 15% to your 401(k) plan each year, including company contributions (i.e. if your company matches 3%, plan to contribute 12%).
Boost Your Investment Savvy
Expense Ratio? Risk Tolerance? Whether you’re going it alone or recruiting the help of a financial professional, you need to have a basic knowledge of investing. Before filing away the information sent to you by your plan, be sure to read through it and look up any terms you don’t understand.
Get Help with Account Management
Of course, having a basic understanding of investment terms will take you only so far. If your investment knowledge is shaky, it might be worth it to recruit the help of a professional. Some 401(k) plans even offer free advice from a professional, or they will provide model portfolios to follow.
Save with a Target Date Fund
The simplest approach to a 401(k) plan is to allocate savings to the target date fund with the date that corresponds to the year closest to the year you reach age 65. With this low maintenance approach, the fund automatically adjusts as you get closer to retirement.
Learn to Rebalance
If you’re not partaking in the target date fund, you will need to perform routine maintenance on your 401(k), which is what “rebalancing” means. Provided you have a mix of stocks and bonds, you will have to buy and sell assets as they move up or down in value. Generally, participants have the option to automatically rebalance through your plan’s website, typically with a quarterly or annual rebalancing.
Rethink Withdrawals
Though you may be able to take a loan from your 401(k), they usually have to be paid back within five years, with interest. The risks of borrowing from your 401(k) come when you lose your job or change employers, because the loan will be due almost immediately. If you can’t repay the loan, you’ll be taxed and burdened with a 10% penalty for early withdrawal. Not to mention, by taking out a loan on your 401(k), you are shortchanging your retirement savings in a way that could be extremely difficult to catch up.
Mix It Up
Your 401(k) should be only one prong in your retirement plan. Your home and other assets, funds from a side hustle, and other investment accounts like an IRA might be additional prongs that make a complete picture of your financial future. Spreading your assets over multiple income streams will yield better returns, so if you switch jobs at some point, consider whether rolling your 401(k) into your new employer’s plan makes the most sense for your situation, or if you should put those funds into an IRA, which may give your more investment options.
by Stephen Reed | Accounting News, News, Retirement, Tax, Tax Planning - Individual
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 [email protected] and we’ll schedule a time to talk.
by Pete McAllister | News, Retirement, Tax Planning - Individual
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.
