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 Jean Miller | Accounting News, Financial goals, News, Retirement Savings
One of the easiest ways to start saving for retirement is through a Roth IRA, and some would say it’s the smartest move a beginner saver can make. A Roth IRA could be a better choice than a 401(k) or a traditional IRA for a few key reasons.
Roth IRA: A Primer
A Roth IRA is an individual retirement account (IRA) that permits qualified withdrawals on a tax-free basis provided specific conditions are reached. The greatest distinction between a Roth IRA and a traditional IRA is that Roth IRAs are funded with after-tax dollars. While the contributions are not tax-deductible, this account offers tax-free growth and tax-free withdrawals in retirement. As long as you have owned your Roth IRA account for 5 years and you’re age 59 ½ or older, you are allowed to withdraw your money without owing federal taxes. In 2021, you can contribute up to $6,000 to a Roth IRA ($7,000 if you are age 50 or older and eligible for catch-up contributions). This is lower than the limit for a 401(k) but it’s still a sizable amount to help keep you on track for a secure retirement.
Roth IRA Advantages
- No RMDs. Unlike 401(k)s and traditional IRAs, which are subject to required minimum distribution (RMD) withdrawals after age 72 (and penalties if you fail to make the withdrawals), there are no RMDs with Roth IRAs, so you can withdraw funds on your own schedule.
- No time limit. You may invest money into your account for as many years as you have earned income that qualifies. This includes wages, salaries, commissions, and bonuses from an employer. If you are self-employed or in a business partnership, this would include net earnings from your business, less any deduction authorized for contributions made to retirement plans on the individual’s behalf and further reduced by 50% of the individual’s self-employment taxes. Funds pertaining to divorce, such as alimony, child support, or in a settlement, may also be contributed.
- No employer-plan restrictions. Regardless of whether you are covered by an employer’s retirement plan, such as a 401(k), you are still eligible to contribute the maximum annual amount to a Roth IRA as long as you don’t exceed the IRS’s income limits. For 2021, those with modified adjusted gross incomes (MAGI) below $140,000 (single filers) or $208,000 (married filing jointly) are eligible.
- No Impact on Social Security. Whereas distributions from a 401(k) or traditional IRA contribute to determining if your Social Security benefits are taxed (that happens once income hits a certain limit), Roth IRA distributions do not. This means that your Roth IRA withdrawals will never affect your Social Security checks.
- No taxes for heirs. You may pass your Roth IRA on to your beneficiaries, and their withdrawals will be tax-free. (If you inherit a Roth IRA, you are required to take RMDs, but they are tax-free as long as the original account owner held the account for at least 5 years.)
Before You Invest in a Roth IRA
An important element to keep in mind is the 401(k) match. If your employer matches 401(k) contributions, make sure you take full advantage of this free investment money before investing in a Roth IRA.
by Daniel Kittell | Accounting News, News, Retirement
Legislative passages in 2020, including the SECURE Act, which made changes to beneficiary distributions, and the CARES Act, which included a waiver of required minimum distributions (RMDs), helped to expand the playing field for savers. These two factors, combined with the lowest tax rates in recent history, make for a potentially optimal time for Roth conversions, and many Americans have jumped on board. Is it the right move for you?
The Difference Between Traditional and Roth IRAs
- Traditional IRA or 401(K): enjoy a tax deduction upon contribution but pay taxes upon withdrawal
- Roth: no tax-deduction upon contribution but enjoy tax-free growth and no additional taxes upon withdrawal
The decision comes down to whether to pay taxes now or later. If only a crystal ball existed in which future tax rates could be known.
What Is a Roth Conversion?
A Roth IRA conversion is when an investor transfers money directly from a traditional IRA or 401(k) to a post-tax account such as a Roth IRA. The move is considered a distribution, and thus is taxed in that year. Due to today’s historically low tax environment, Roth conversions are having their moment in the sun.
Advantages of Converting to a Roth IRA
An essential benefit of converting to a Roth IRA is the potential for lower taxes in the future. While it’s obviously not possible to predict future tax rates, you can likely estimate if you’ll be earning more money, and thus, land in a higher tax bracket. If such is the case, odds are typically in your favor to pay less taxes in the long run than you most likely would with the same amount of money in a traditional IRA. Additionally, contribution withdrawals are tax-free (withdrawals from earnings are not tax-free). However, avoid using a Roth IRA like a bank account as any withdrawn funds today, however small, can impact your future savings.
Transferring to a Roth also means you won’t be required to take minimum distributions (RMDs) once you reach age 72. If you’re able to keep the funds in the account, you can watch it grow tax-free, and you would have the option to pass the money to your heirs.
Disadvantages of Converting to a Roth IRA
The biggest deterrent for a Roth IRA is the potentially immense tax bill. If, for example, an investor has $100,000 of pre-tax dollars in a traditional IRA and falls within the 24% tax bracket, the investor would owe $24,000 in taxes, due upon their next quarterly tax bill. Additionally, if the investor is under age 59 ½ and uses the IRA funds to pay the tax bill, they’ll also pay a 10% early withdrawal penalty on that distribution. In other words, be sure you have the liquid assets to cover the tax bill as a result of the conversion.
To Convert or Not to Convert?
If your taxes rise due to government increases, or you begin earning more money and land in a higher tax bracket, a Roth IRA conversion could save you substantial money in taxes in the long run. However, there’s a potential for a hefty tax bill that can be complicated to calculate, especially if you have other IRAs funded with pre-tax dollars, so if you think it might be a good move, it’s best to consult with a tax advisor on your specific circumstances.
by Pete McAllister | Accounting News, COVID-19, News, Resources, Retirement, Tax, Tax Planning - Individual, Tax Preparation - Individual
The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress at the end of March provides direct economic assistance to Americans during the COVID-19 pandemic. In the bill, certain provisions allow people to withdraw from their retirement accounts, including their 401(k)s and IRAs, without the usual early withdrawal penalty. Individuals must have been directly affected by coronavirus – through personal, spousal, or dependent diagnosis or furloughed, laid off, or reduced hours from their job to be eligible for the fee-free withdrawals.
While pulling from retirement funds seems like a simple and fast fix, it may not be the best option based on an individual’s circumstances. Those who stand to suffer the most amid the pandemic are those who are nearing retirement and those already in retirement. The unexpected ups and downs, current unemployment, and new potential health costs in this unprecedented time leave many Americans wondering how they’ll be able to retire comfortably in the current economic climate.
Consider these Options to Counteract the Effects of COVID-19 on Retirement Funds
Keep Current Costs Low
Take a look at current expenses and determine if anything can be eliminated or reduced. Any unused subscriptions? Are you paying for the right amount of insurance? Consider shopping around for lower rates. Can you negotiate any current bills – cell phone, credit cards, internet, anything with an interest rate, even your cable? Hold off on any major home or equipment upgrades and work with what you already have before adding on another expense.
Use Your Home
Assess your risks for taking out a second mortgage or a reverse mortgage. If your mortgage is already paid off, look into home equity loan options. A cash-out refinance may also be available if you’re still paying the mortgage. Over one-third of Americans have their wealth tied up in their homes, so it may be worth it to see if downsizing your home is an option. If so, it might be possible to pay for your smaller home in cash and use the remaining proceeds from the sale of your old for any outstanding debts or liabilities as you near retirement. The location of your home should also be considered – the cost of living can vary significantly from state to state, so moving to a new state or country may bring you more bang for your buck.
Plan for the Long-Term
Health care and long-term care can be an extreme cost for senior citizens. Assisted living and nursing home facilities usually top $60k+ for just one year. Long-term care insurance is costly but can help prepare you and your loved ones to pay the necessary costs. With Americans living longer each year, it’s worth it to plan on trying to stretch your retirement savings to last until age 90. Calculate how much you (and/or a spouse) would need with the assumption you’ll live to be 90. It’s also worth looking at final expense insurance, which could help cover final expenses at the end of your life. Planning for the event in advance can take the financial stress off family members left behind, whether it’s through final expense insurance or setting up a savings account with the express purpose of paying for any final expenses.
While we’re in a global pandemic, everything isn’t all doom and gloom. COVID-19 has hit the country, and our bank accounts hard, but people will bounce back after this economic crisis – much like investors after other recessions in our nation’s history.
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.
